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$30B of Waste in Iraq….We're not in TCE Anymore Oliver…

The Wartime Contracting Report came out today and announced $30B in waste in Iraq, and focused on the fact that there was a lot of graft and corruption taking place. Is this a surprise?

A chat with Tim Cummins at IACCM leads me to think not….In military contracting environments, there is often a lot of urgency in getting it done and the people you are contracting with are sometimes in question. The commission talks about what constitutes sufficient rigor required around outsourcing contracts, and the fact that contracting mechanisms simply don’t work well in such an environment. These contracts are often based on simple cost and speed consideration – without proper thought to the resources or the government involved.

But the same thing is happening to major corporations. Many ill-thought through outsourcing decisions occur because of time pressures, market volatility, and inappropriate review. And very often the challenge is that there is so much bureaucracy and review – and too many people involved, not too few. And of course the nature of high risk markets is such that standard procurement approaches often can’t operate in the markets they are operating in. Nor do the people know what to do.

In a recent blog, Tim Cummins head of IACCM noted that“they don’t do SAP in Mongolia”….it is that type of stuff where people are having to go in to different environments and trying to use traditional methods to it.

Another great metaphor is that of young kids today who struggle to read and write, because they are glued to their computers and video games. They often don’t know what to do if their computer fails. In an environment where there is a platform of standardization which is not able to keep pace with the business that people are trying to transact, people just don’t know what to do. Tim’s observation on the Wartime Contracting Report is that we don’t lack people for compliance, but we do lack people with the authority and judgment required to make appropriate decisions. To set a set of standard compliance elements in an environment where relationships are complex and there are major parameters that deviate is insane.

Michael Cavanagh also wrote a book called “Second Order Project Management” where he talks about complex projects. He recognizes that there is a very different set of skills and characteristics required. The traditional project manager is NOT equipped to deal with them – because they are trained to do things and professionalization has acted against the project management community. This standard operating mode has pushed project managers into a rigid methodology to an environment where things are complex and the first order mechanisms are not appropriate. It is not that that first order have no value – but when you make the transition from things that are seen through traditional methods and traditional compliance techniques which require governance to one where risk and uncertainty are high, they break down. Similarly, it is not that ERP systems have no value – but you have to understand the limitations and ERP does NOT represent a platform for the management of change and variation. It is rather something to prevent change and variation. If you look at the use of procurement systems by companies – most of the time they just want to settle on the process, not the outcome.

Tim has been working on a project on The Future of Contracting, and has been interviewing some very senior people in organizations. Most are complaining that they are not seeing current contracting strategies meeting the needs of their business. These people see substantial need for change, in terms of an ability to improve communication, and a need to manage volatility and risk. There is too much focus on compliance. For example, one senior executive from a major oil and gas company noted that “of course we have a relational clause in our contracts….it is called force majeure!” This individual perhaps didn’t recognize that a clause that stated you would be excluded form the contract in the midst of a disaster doesn’t really equate to a commitment to the relationship! Similarly, most of the major technical terms in contracts, including Consequential Damages, Termination for Convenience, Force Majeure, and others are just driving compliance, and don’t really work towards a new way of thinking about how to manage and respond in an environment of increased risk, increased volatility, and change. The old mechanisms of “Transaction Cost Economics” sought to minimize the cost of doing business through standardized routines and compliance, but this no longer works…Oliver Williamson operated in a very different world that the post 9-11 global recession situation we are faced with today. What companies need is an ability to react to change more readily, and the current forms of contracting really don’t cut it or enable the types of commitment and relationships that are required to integrate the network.