Looking Past KPIs – The Case for Contract Design Flexibility

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Author: Margaret Gilbert 

Procurement is not a ‘one size fits all’ activity as each procurement is different. You could be forgiven for thinking the opposite. We often put in place contracts that relies on and expects similar requirements that has been used elsewhere – and then we get surprised when the outcome is not as expected or wanted.

Transformational procurement can be achieved if we look at each procurement differently and we put in place contracts that reflects the specifics of the contract.

We should focus on contracts that looks past KPIs and look at the benefits of specific and relevant contract clauses and for relevant contract design flexibility. To be clear the contract must be robust but it must be relevant and we should focus on the word ‘flexibility’.

For new suppliers, it is acceptable to retain KPIs that is specific and measurable. For long term performing suppliers, having contracts that looks at performance, outcomes and outlines the relationship focus provides for more than ‘rules’ and gives room for a more effective relationship as well as more open delivery mechanisms. This type of specific contract will most likely work well especially in regards to contract management.

A generic contract that is not totally relevant and has irrelevant clauses but is there ‘just in case’ will not assist with effective contract management. Such contracts will flatten signs of innovation, consultation or collaboration.

We want to encourage innovation, an ‘open’ environment and this can be achieved by contracts that are relevant and specific.

All too often contracts focus on ‘rules and penalties’ clauses rather than providing for positive and successful outcomes.

Useful checklist:

  1. Is your supplier performing well?
  2. Is the supplier providing goods or services that are important to you?
  3. Is innovation and collaboration important?
  4. Are you wanting to focus on productive outcomes?

If the answers are ‘yes’, then there is the opportunity to put in place a specific designed contract that provides for a more trusted approach with a focus on outcomes.

Issues:

Using a template – a template supposedly is there to assist but has done the opposite in practice. It seems to have stopped us thinking about the specifics and has produced a contract that is often irrelevant and therefore not abided by.

Time – The issue of lack of time is not relevant as early involvement will save time later. This is not a good reason not to consider what is best.

‘Policing’ versus outcomes – Having contracts with a high ‘policing’ factor shows lack of trust and corresponding lack of ideas and focus. Suppliers will do the minimum required and no more – do we want that? Or, do we want a positive environment that promotes positive solutions?

Examples of ‘policing’ clauses – these being penalty clauses, KPIs that are time focused rather than outcome focused and termination clauses.

It would be useful to have clauses that focused on exceeding expectations with an emphasis on ‘rewards’ and collaboration By doing this the working environment is positive – on both sides A win-win. This is better than ‘dinging’ suppliers with penalties without corresponding bonuses or other positive steps.  Penalising without recognising for positive results leads to supplier cynicism and likely disinterest. In effect this is an ‘own goal’.

Looking ahead:

We have to move to an environment that allows suppliers to complete the task and to focus on the outcomes rather than on the steps taken along the way. We should also recognise that being negative will pass on negativity to suppliers. We should be providing a positive environment where we ask for and receive ideas and solutions.

A positive and enabling relationship where ideas are discussed is the goal and essential for mutual growth where both sides benefits.

All the above can be achieved by putting in place a specific contract design with flexibility to allow for ongoing movement. We do not want to limit the procurement and relationship to the equivalent of a straitjacket.

Examples of clearly defined wording:

  1. We welcome ongoing ideas.
  2. We welcome positive solutions.
  3. If work completed on time and under budget a bonus will be paid.
  4. We would like to collaborate by…

Summary

Putting in place contracts that provides for delivering outcomes are essential. This assists in moving procurement from transactional to transformational procurement.

A robust contract is always required but adding positive clauses relating to outcomes will achieve more.

Let us put in place relevant contracts which have flexibility to ensure room for ongoing movement through the contract term.

We can get what we want if we are smart to allow the ‘expert’ (supplier) to provide their expertise. Yes, there must be some controls but allowing for forward movement provides opportunity for both. The benefits can be significant. We have more to gain but we may lose more if we cannot think strategically.

  • Margaret’s books ‘Contract Matters: A Future for Procurement’ and ‘Contract Matters: Changing the Buyer/Supplier Conversation: A Paradigm Shift’ both look at a different ways of working to achieve better outcomes. Available from:
    www.contractmatters.com or Margaret@corpcontracts.co.nz ($30.00 e-book and $60.00 for hard cover book).   

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