Tag Archives: Relational Contracting

When to Use Collaborative Contracts

In this blog we will explore when we should, and should not, pursue collaborative contracts.  We must remind ourselves that collaborative contracts are not binary structures involving either zero collaboration at one of the spectrum, versus an incorporated joint venture or alliance at the other end.  Collaboration can take many forms and is a scalable concept that must be tailored to the activity at hand.

Motivation

“Virtually all of the collaborative projects out-performed most defence projects” – UK NAO Good Governance ‘Measuring Success Through Collaborative Working Relationships’ (2006).

Firstly, we only pursue collaborative relationships where the benefits outweigh the costs.  That is, we have a motive for collaboration.  Cost and benefits though need to be considered in as broad as terms as possible and not just in terms of contract price.  Collaborative benefits may include:

  • improved prospects for repeat business
  • continuous improvement and innovation opportunities
  • increased likelihood for supplier participation
  • enhanced satisfaction for all employees
  • improved flexibility
  • less time wasted on disputes and issues management

Similarly, we also need to explore the ‘hidden costs’ associated with collaboration, which may include:

  • increased time and effort in tender evaluation and tender development
  • increased efforts in relationship monitoring and cultural alignment
  • supplier lock-in
  • increased likelihood of opportunistic behaviours.[1]

In summary, we first need to craft a robust business case when considering collaborative endeavours and ensure this business case is continually evaluated.

Means

Where collaboration is able to realise superior benefits,  then we should explore whether we have the means to engage in collaborative ventures.  We should ask ourselves if we have the right culture, appetite to risk, and internal capabilities to realise collaborative benefits.  The United Kingdom National Audit Office offers the following ‘gold standard’ for enabling positive working relationships. 

UK National Audit Office Gold Standard for Sustaining the right Cultural Environment[2]

The Australian Department of Defence Capability Acquisition Sustainment Group, in their Collaborative Contracting Better Practice Guide, also provides guidance to help ‘buy-side’ organisations gain insight into their ability to pursue collaborative outcomes through the use of a contract maturity model, which asks the following questions:

  1. Suppliers favour your organisation because it “always keeps its promises”, treats suppliers fairly, promotes trust, and minimises the cost of doing business.
  2. Both parties openly discuss “interests and desired outcomes” throughout the procurement lifecycle commensurate with the strategic importance of the relationship.
  3. Each contracting party understands the other’s goals and how to help achieve and quantify them
  4. The contract is viewed as a tool to plan and track business relationships
  5. Procurement practitioners are viewed as valued facilitators and integrators of stakeholder interests

Asking yourself, ‘do I have the capacity and capability to achieve these gold standard or contract maturity model outcomes’ will help you understand whether collaboration is the right step for your organisation.  If the answer is no, then leaders can take remedial action. Future blogs in this series will explore strategies to shift organisation capabilities and culture to better enable collaborative outcomes.

Opportunity

With the means and motive for collaboration established we now explore whether the right opportunities exist for collaboration.  The opportunities for collaboration will be driven by the commercial model, geography, and market power of buyers and suppliers.  Collaboration will only work where both buyers and suppliers are committed.  Opportunities for collaboration may be limited in the following circumstances:

  • A transactional environment where buyers and suppliers operate on a ‘take it or leave it basis’.
  • Inflexible governance arrangements exist (especially in the public sector) which inhibit the full range of relational outcomes. This is especially the case where compulsory competitive tendering rules are too onerous.
  • Key leaders and managers are unavailable to support collaborative outcomes.
  • Pre-existing and inflexible contract structures prevent the full range of collaboration outcomes. An example of this would be ‘government to government’ contracts such as Foreign Military Sales.

Even where some of these adverse features exist, there still may be opportunities to engage in some level of collaboration. 

When not to use collaborative contracts

Collaborative contracts should never be used where an organisation lacks the means to effectively implement them.  This may stem from an inappropriate organisational culture or lack of commercial maturity.  If an organisation is mostly ‘transactionally’ based, where disputes and issues are normally resolved by resorting to ‘lawyers at twenty paces’, then that organisation will be unlikely to engage in effective collaborative relationships. 

As we previously discussed, we therefore need to ask ourselves some very hard questions about our internal capabilities and the means to engage in collaborative ventures.  This could involve benchmarking the commercial maturity of the organisation through tools such as the International Association of Contract and Commercial Management  (IACCM) Capability Maturity Model or undertake a collaborative contract skills assessment under Supplier Relationship Management processes.  Organisations may also rely on performance scorecards to benchmark their relationships and skills in collaboration.

There is also an overwhelming temptation to pursue collaborative contracts to mask systemic failures in an organisation. When facing failure, the allure of collaboration may be seen as a quick fix.  Simply sticking a partnering charter on an existing contract and hoping for the best will unlikely create value.  Positive relationships and collaboration are necessary but not sufficient for success. That is, organisations must still make sure they address the key hygiene factors before they attempt collaborative contracts. This includes ensuring the following are addressed:

  • A clear and shared organisational vision
  • Leadership commitment
  • robust commercial skills
  • A mature Project Management framework

The evidence is clear that collaboration can deliver fantastic benefits both between and within organisations.  We need to ensure we implement collaborative contracts for the right reasons and understand what barriers exist to successful implementation. Future blogs will explore collaborative contract case studies of where things have gone well and where things have failed.


[1] Hikan Hakansson and Ivan Snehota, ‘The burden of relationships or who’s next?’, (11th IMP Conference Proceedings, Manchester, 7-9 September 1995), 522-36.

[2] UK NAO “Driving the Successful Delivery of Major Defence Projects: Effective Project Control is a Key Factor in Successful Projects” HC 30 Session 2005-2006 p7.

Collaboration? Why it’s elementary my dear Watson!

It seems that collaboration is everywhere nowadays.  Whether it is Ed Sheeran and Justin Bieber producing a number 1 single, designer Tommy Hilfiger and Formula 1 driver Lewis Hamilton delivering exclusive clothing lines to Apple putting CarPlay into a variety of cars.  Everyone seems to be doing collaborations.  But are they all as successful?

Recently, I put on my detective cap like the famous fictional British detective Sherlock Holmes to find out whether individuals and organizations are achieving success including whether they are using updated methods to improve collaboration.

The short answer is no, unfortunately, and a change is long past due!

It seems that most practitioners are forgetting that collaboration really is ‘elementary’ but are omitting a couple of important details.  They are still focusing only on both the financial and non-financial benefits. Not much is written in detail about the best ways to collaborate to get desired results.

Isn’t that what we all want?  If we prioritize financial gains only, haven’t we blindsided ourselves?  I made a similar point in my recent article published in the International Association of Contract and Commercial Management (IACCM) Contracting Excellence Journal.

It’s discouraging that although ISO44001:2001 Collaborative Business Relationships Standard offers an extremely well structured approach for establishing and maintaining collaborative business relationships and provides high level guidance on the process, the standard still does not offer much to help readers design a collaborative contract that gets results for all parties.

My experience is that despite the best intentions of an organization and the individuals within it to collaborate, without the motive, opportunity and means to collaborate, the chance of success is unfortunately very low. This becomes clearer if you take a closer look behind three words: motive, opportunity and means.

Motive (the why)

Prior to any collaboration you need a compelling reason for why either buyer or seller needs to collaborate.  Motive reveals why by highlighting the costs and benefits both on an individual basis (e.g. financial reward such as a bonus) and group basis (e.g. reduced costs and improved profitability).

For example, buyer and seller may want to collaborate to mitigate uncertainty in the scope of the commercial arrangement, or to review constantly changing and evolving technology.  This is then reflected in the commercial terms of the contract to ensure that both buyer and seller end up with a fair distribution of risk and reward with the arrangement being perceived as neither too generous nor too punitive.  Moreover, the benefits of collaboration could be linked to personal financial rewards.

Regardless, both buyer and seller should be clear about the reason why they want to collaborate, because a good motive is the cornerstone to our overall collaborative approach.

Opportunity (the what and the when) provides opportunities for buyers and sellers to collaborate through various events, forums and activities such as formal scheduled meetings, supplier forums, innovation or hackathons, etc.

The opportunity to collaborate needs to be part of the everyday culture for both individuals and organizations, but simply having both the motive and the opportunity is not enough to deliver collaboration.  Unless collaboration meetings are formalized as part of our daily, weekly, or monthly working routines, such opportunities will be first to go when schedule and resource pressures occur — and they almost certainly will.

Means (the who and the how) provides detailed guidance on who and how to collaborate when individuals and organizations are brought together through an opportunity.

The means refers to providing the right tools, including policies, guidance and processes so that people will naturally collaborate — assuming they have been given the right motivation and opportunity.

It could be as simple as ensuring the collaboration meetings have specific terms of reference (scope and limitations of collaboration) and standardized agendas. This should ensureeveryone is clear about the roles and responsibilities of each individual and organization.  This includes whether a meeting is co-chaired, whether either buyer or seller has an ultimate decision right — and, if there are disputes, how are these resolved?

The means can be even more complicated.  Examples could be determining the financial arrangements due to changes in scope, realization of risks, or sharing of cost reductions due to the successful implementation of continuous improvement and innovations.

In my experience, especially in very procedural and hierarchical organizations, if the means are not specified, you will not get the full benefits of a collaborative approach.  I’ve summarised this in Figure 1.

collaboration-diagram-1.jpg

Figure 1 : Motive, Opportunity, and Means of Collaboration

So, where does this leave us?

Successful collaboration continues to deliver benefits for both buyer and seller alike resulting in the need for more effective and efficient collaboration in our commercial arrangements.  We need to understand the fundamentals even though various policies and practices including guidelines and standards help us with this challenge.

Accordingly, I suggest that we think carefully about the commercial arrangements, and their underlying collaborative architectures to ensure there is motive, opportunity and means to collaborate.  After all, at the end of the day, collaboration should be ‘elementary my dear Watson!

Collaborative Contracting – An Introduction

In this blog we explore what collaborative contracting is and how collaborative contracts differ from transactional contract approaches.  The term ‘collaborative contract’ is a relatively recent term that has evolved from many decades of research, practice, and experiences with ‘relational contracts’, a term coined by Stewart Macaulay and Ian MacNeill in the 1960’s.[1]  In this discussion, substance is far more import than form and it immediately becomes apparent that there are no substantive differences between relational contracts and collaborative contracts, thus we can treat the two terms as synonymous.

The importance of collaborative contracting should not be understated. As business relationships increasingly demand greater agility and organisations face increasing complexity, contracts that attempt to exhaustively deal with all risks and opportunities are unlikely to be successful. The 2016 Nobel Prize in Economics was awarded to Oliver Hart for his pioneering studies into ‘incomplete contracts’, recognising the significant limits of conventional approaches as follows:

“It may be extremely costly to write a contract that specifies unambiguously the payments and actions of all parties in every observable state of nature.” [2]

Several definitions of collaborative contracting are available and they all place emphasis on parties working together to achieve common goals. The Australian Department of Defence, Capability Acquisition and Sustainment Group Collaborative Contracting Better Practice Guide offers a useful definition by capturing the most common themes of collaboration:

“Collaborative contracting is where parties work together to achieve common outcomes. Collaborative contracts are underpinned by parties working together in good faith, focussing on fixing problems and not blame, managing risk equitably and jointly where appropriate, promoting transparency, and avoiding disputes.”

It is important to recognise that there is no magical threshold by which a transactional contract suddenly becomes a collaborative one, and vice versa. Rather, there will be features and relationships in commercial dealings that lie upon the spectrum of collaborative contracting approaches, with discrete ‘one-off’ contracts at one end of the spectrum[3] and highly integrated alliance contracts or joint ventures at the other end of the spectrum. There will always be some level of relationship or collaboration though in all commercial dealings as observed by Eisenberg:

“Discrete contracts – contracts that are not relational – are almost as imaginary as unicorns”.[4]

We should also recognise that collaboration is not just an activity between buyers and suppliers. ISO 44001 Collaborative Business Relationships highlights the fact that collaboration also occurs within organisations (internal collaboration) and this is equally important to drive the necessary enterprise collaborative behaviours.  Furthermore, collaboration does not just apply to acquisition activities. Collaboration applies to the complete ‘strategic lifecycle’ of organisations[5] which includes sustainment, research and development, and disposal. This latter perspective is of importance since the scope of collaboration may need to adjust throughout the contract lifecycle.

To effectively frame the comparison between transaction and collaborative contracts, we need to explore the features of transactional contracts. Transactional or classical contracts place an emphasis on arms-length relationships, risk allocation (typically to suppliers), a focus on price competition, several liability, and reliance upon litigation to settle disputes. These forms of contract are often best suited for one-off, short term activities that do not require flexibility. These forms of contract also attempt (often unsuccessfully) for completeness, whereby the contract attempts to cater for all plausible eventualities. What then are the features of a collaborative contract?

Whilst the term ‘collaborative contracting’ is partly self-defining, there are several features that often apply to collaborative contracts as follows:

  1. senior executive commitment and strong leadership;
  2. joint decision making;
  3. partnering charters;
  4. equitable risk allocation and sharing (e.g. target cost or gainshare/painshare remuneration);
  5. no blame/no-liability frameworks;
  6. transparency and open book financial reporting;
  7. fair and timely dispute resolution processes;
  8. agility and flexibility; and
  9. shared systems.[6]

A key issue here is that it is not just the contract terms and conditions that contribute to collaborative outcomes but also the broader commercial relationship including leadership, culture, attitudes, environment, and systems applicable to the activity at hand. Focussing on the contract alone will not likely drive the desired collaborative behaviours. In particular, leadership is of paramount importance as identified by the United Kingdom National Audit office:

Every case study ranked leadership as the most important factor in developing collaborative relationships.[7]

When exploring the use of collaborative contracting, it is not necessary to pursue all the elements listed above, noting that collaboration is not a binary construct, collaboration exists across a spectrum. We should never treat collaboration as “all or nothing”.  For example, a transactional or classical contract may adopt some partnering principles as well as timely and equitable disputes resolution process, akin to ‘neo-classical contracts’.[8] The more radical features such as no blame/no liability frameworks would only be pursued for highly collaborative relationships.

As we have seen, driving the right behaviours is not just an exercise in drafting suitable terms and conditions within the head contract. Achieving a collaborative framework requires a far more holistic view to ensure that parties have a mutual understanding of the desired end-states and a shared vision of success. This requires cultural alignment and leadership to drive the right outcomes. The effort and time required to achieve this alignment should not be underestimated.

Future blogs in this series will explore when and when not to pursue collaborative contracting and provide relevant case studies of how collaborating can drive superior outcomes.

[1] Stewart Macaulay, ‘Non-contractual relations in Business: A Preliminary Study’ American Sociological Review 28 (1) (1963), 55-67.

[2] Grossman, Sanford J., and Oliver D. Hart. 1986 ‘The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy’ 94(4): 691-719, 695

[3] Ian McNeill ‘The New Social Contract’ (1980).

[4] M. Eisenberg ‘Why there is No Law of Relational Contract’ 94 Nw. U. L. Rev. 805 (2000)

[5] ISO 44001:2017  Collaborative Business Relationship Management Systems – Requirements and Framework (2017) p vii

[6] Adapted from CASG Better Practice Guide ‘Collaborative Contracting’ (2017).

[7] UK NAO Good Governance ‘Measuring Success Through Collaborative Working Relationships’ (2006) p 8.

[8] Ian McNeill ‘Contracts: Adjustment of Long-Term Economic Relations Under Classical, Neoclassical, And Relational Contract Law’, 72 Nw. U. L. Rev., 854-905 (1977-78).