Stephan,

When you use the word contract, are you refering to those "Latin littered" documents that are usually outdated and gathers dust in a filing cabinet somewhere?

Yes! I realise that every deal actually constitutes a form of contract. Hwat i am talking about is the actual documenting of the deal. Do we need them?

All agreements are not contracts. So just agreeing something could merely leave a party with some form of moral obligation. A contract suggests that both parties commit to enforcing the agreement by law. This includes the agreed recourse if parties do not perform. When we write these details on paper, you get your typical "paper" contract.

The decision to record a buying contract on paper is based on the nature of the "deal". Think of this practical example:

You buy all your office supplies from a company called ABA. Over the last few months ABA did not perform that well. It is now time to act. I think it is safe to asume that we are not going to take legal action. At worst, w'll just move to an alternate supplier (if we do not already have a second one). To have a lengthy contract to cover this deal serves no purpose. A simple price agreement with an agreed billing processes and other practical arrangements should suffice. (In these cases you should minute a meeting in which you make it clear to the supplier that you do not commit to volumes and that they do not have exclusivity)

For a commodity that is essential for the survival of your organisation you will do one of those lengthy written contracts. You will include generic terms, detailed specifications and MOST IMPORTANTLY SERVICE LEVEL OBJECTIVES. (SLA'S).

You need to record secure written contracts for commodities of strategic importance. You do not need written contracts for non critical items. I am often shocked to see that organisations (Very large ones at that) have detailed contracts in place for office supplies and travel, yet their strategic commodities are not covered under written contracts!

In short then. Do not just compile contracts for the sake of doing it. Focus on top quality contracts for those commodities that will influence the survival of your organisation. If you have time left, pay attention to the "lesser" commodities.

Remeber though. Many institutions have a blanket rule that all commodities must be under written contract. (Auditors will even give you a working over if you do not comply!) Try and influence the rule, but follow it to the letter untill it changes!

Why do we have contracts?

The purpose of a contract is to establish and safeguard economic interests. While the ultimate protection of those interests may be a resort to law, the reasons for having a contract are not exclusively legal. Indeed, our networked world and the shift to a services-oriented economy have arguably reduced the importance of many traditional legal imperatives, while increasing the significance of others.

An effective contracting process — from which the contract is an output — ensures a mutuality of understanding between the parties involved. The “contract” is a formalised approach that provides a record of key expectations and obligations to guide performance, and consequences in the event of failure by one or both parties. “Contracting excellence” expands on these basics, by selectively creating a forum in which the parties can optimise the value of their relationship, both at inception and over time. This means that economic interests are not only protected, but enhanced. To achieve this greater value, the parties must commit themselves to a wider and more open appraisal of their respective needs and capabilities; and they must also embed ongoing review and change mechanisms to ensure a response to shifting needs or opportunities. In this context, “negotiation” is not a temporary phase of the process, but an ongoing dialogue through which alignment of interests is maintained. This distinction between a basic form of contract and a more advanced form of contracting is important. The basic contract is appropriate for relatively short-term transactions.

The process-based view is important when the parties seek to establish a life-cycle or longer term relationship during which needs and sources of value are likely to change. While most contracts today reflect a balance of legal and financial views, a majority fail to support optimized economic outcomes. The financial aspects of contracting are frequently restricted to basic considerations of setting prices or charges, payment dates and determining liabilities when things go wrong.

Best practice contracting ensures that the terms associated with a product or service are set in a way to generate economic benefit to both parties. They understand the value impacts of different relationship structures and the individual terms that support those structures. “Financial engineering” is a source of competitive difference. Best practice also ensures that economic interests and value remain aligned during the execution of the contract or relationship — and that misalignments are addressed rather than ignored or allowed to fester.