Will Purchasing Be Replaced by Agile Contracting and Relationship Management?

I had the opportunity to visit with Tim Cummins and Katherine Kawamoto from IACCM, who came by the SCRC offices yesterday to chat.  We spent some time catching up on recent events in the news, and also had the opportunity to exchange ideas based on a recent webinar we ran with Shell, in which we discussed some of the outcomes of our recent study published in the Journal of Strategic Contracting and Negotiation (JSCAN).  In the webinar, one of the questions I asked was whether purchasing would someday be replaced by contract and relationship management?   Tim shared some fascinating thoughts with me yesterday as we debated this question.

Tim noted that “Contracts are a framework for the management of change  – which helps the parties to understand how to work together.”  They are the framework for notifying for the need to manage change. Such a high proportion of agreements fail because they are imprecise about the nature of requirements, or the nature of the requirements change, and the structure isn’t there to manage the change!  The response may be “I don’t understand what you want and isn’t affordable!” which creates a huge amount of contention in that space. IACCM is helping its members to think about how to adopt new contract structures, using agile techniques developed in software industry.

Agile contracting is challenging.  The premise is that the parties can only commit to points of certainty! So when we are both dealing with an environment of uncertainty, and we use an agile contract, I am making a firm commitment to a very distinct and defined point of certainty, beyond which we just don’t know what will happen.  But we can then establish a conscious review to set the next target and next goal based on our view of the world at that point.

The problem with agile is that it doesn’t work with current revenue and budget recognition issues, that dominate most Fortune 500 companies.  We are used to a world where we say it will cost X for a project and we put it into the budget – even though it is unrealistic!   People are more comfortable dealing with a budget, and will commit to it, even though common  business sense dictates that things will change – but business results call for this change of model.  The only common approach available is in Aerospace, where they will use a “rough order of magnitude” contract – which is an educated ballpark estimate of costs that allow the parties to commit to move forward.  Construction contracts have also begun using parametric cost modeling to build estimated cost budgets.

Tim cited a great example of the Australian Government, which is committing to a contract management approach called “FIRST PRINCIPLES”. This approach emphasizes that buying companies need to think of their supply base as an amalgam enterprise that delivers a particular outcome – in an extended enterprise form. If the desired outcome is to create a highly productive fleet of organizations, and we can define the organizations (e.g. suppliers) that need to be part of this fleet, then we simply deem all of these strategic suppliers as an enterprise. The question then becomes – “how do we build sustained relationships and build internal enterprise thinking to an extended network. This is similar to the integrator model – the parallel is again like the aircraft industry where multiple suppliers must work together to create an aircraft design.  The Terminal 5 construction project at Heathrow Airport was also a similar model.

This view of contracting with a community that operates across borders and boundaries is a radical concept. When we do relational contracting we bring the amalgam enterprise into the room, and the negotiation is not about liabilities and payment terms.  It is about ensuring that we have a mutual understanding of goals and objectives – and form joint working models and active discussion of the performance mechanisms that we need to achieve these goals, and design how to communicate with one another in the process. We need to define what the communication media will be, and the rules around communication. Buyers and suppliers need to focus on the discipline of those meetings and focus the purpose on problem avoidance.

In this sense, contracting and relationship management are not opposites.  Some people claim we should move away from contracting and focus only on relationships, whereas others will only work through defines processes and procedures that are in the contract. They argue “it is not the contract that matters – it is the relationship. Other argue that if you have the contract – you don’t need a relationship. Relationships are good, contracts are bad or vice versa. The emerging, new perspective perspective – is that relationships and contracts are related.  Our relationship operates a certain way – and the underpinning for the relationship is the contract.