Michael Porter, BCS

There is rarely a commercial interaction between two organisations that doesn’t warrant the need for a written contract to ensure clarity, peace of mind and self-protection. But increasingly within the IT sector, there is a perception that existing contracts and contractual processes are of decreasing value in the overall management of risk. This would be worrying at the best of times, but in the context of the credit crunch, it is the contracts that businesses have in place that will enable them to succeed in this unstable economic climate.

One solution to the contractual inefficiencies identified by the IT sector is the use of standard form contracts ­ a process with which the sector is certainly no stranger. Many IT organisations dealing with central and local government clients are now obliged to use the standard form contracts made available through the Office of Government Commerce. Similar processes are also developing in the private sector, with standard “boilerplate” clauses increasingly being employed in contracts to save time and costs during drafting and negotiating.

But while the use of standard form contracts may seem like the right solution, they still fail to address the fundamental flaw behind the ongoing failure to fairly proportion risk.

Current models of contractual agreements have been developed over many decades, particularly in the low-cost production and manufacturing arena where change tended to be slow and infrequent. This has led to contracts becoming inflexible and failing to allow for the necessary processes that ensure a responsible attitude to change. For example, the term “fit for purpose” is no longer valid in the IT sector, as the deliverable attributes of the same product can have a different impact on different organisations.

Is the real solution perhaps not then a new contract model, but a change in the sector’s approach to contract management? Specialist contract management advisers have recognised a possible change in approach, namely “commitment management”, and it seems particularly relevant to the IT sector. Historically, the sector has viewed contracts as a defence mechanism and used the negotiation period as a time to focus on the allocation of risk, but this doesn’t allow for flexibility in a contract.

Without this flexibility at the time of drafting and agreement, allocated risk can quickly become disproportionate to the intent and spirit of the initial agreement. This is particularly evident in the IT sector. Commitment management enables a move away from this static model and focuses on balance, ensuring contracts are used to manage risk on a fair and reasonable basis for both parties.

Therefore, the contractual process should emphasise not just the actual deliverables of the service or product being procured, but also the importance of clearly defining the relationship of the parties. By focusing on the outcome of the relationship rather than allocation of risk, a contract will ensure that the necessary processes are in place to allow for change. This will help both parties to restrict the likelihood of services or products becoming outdated or obsolete.

Today’s economy is fast moving and the ability to be flexible and ready to react is integral to the success or failure of a business. Where changes in technology were once restricted by processes, they are now the norm and, standard form contracts aside, new processes need to be considered in harnessing and managing the modern environment we are facing. The future is clear ­ define your contract not by the allocation of risk, but by the expectation of delivery.

Michael Porter is a director of consultancy Blake Newport and a BCS contributor

Like this story? Spread the news by clicking below:

 del.icio.us     Digg this     reddit!