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Contracting for Real Value - Radiant Law in Supply Management

Posted on Oct 21, 2014

"80 per cent of time negotiating contracts is wasted"

Some 80 per cent of time spent negotiating contracts is a waste of time, an event was told.

Martin Brenig-Jones, author of Lean Six Sigma for Dummies, told delegates that typically 20 per cent to 30 per cent of steps in a process “can be seen to be not adding value”.

Speaking at a CIPS Contracting for Real Value event, he said: “It can be upwards of 80 per cent of time is not spent in value-adding activity.”

He added: “We find organisations are over-processing, perhaps because something went wrong before.”

Alex Hamilton, CEO of Radiant Law, said: “I would say 80 per cent of time spent on deals is a waste of time.”

Delegates were told limitation of liability, price and indemnification were the three most commonly negotiated contract terms. Hamilton said contracts needed to be more tailored. “The contracts we are creating are too complex, they are too long, they are hard to use and no-one likes them,” he said.

“The negotiation process crushes relationships rather than creating them.”

He said people were “really, really bad” at evaluating risk and that for strategic suppliers buyers should move to “relational” contracts, which are contracts “that can’t be enforced”. “The parties can walk away. The relationship is built on that,” said Hamilton. “People who use this have created high value.

“If you need real help in solving a problem, stop treating those relationships as a commodity.”

Ed Owen, head of technology procurement at Three, said when drawing up contracts buyers should:

•     Future-proof your agreement and anticipate change

•     Understand each party’s scope

•     Target the supply chain with collaborative objectives

•     Understand and allow for the other side’s goals

•     Use the contract process to build relationships

Owen said at Three they were developing a new approach to the supply chain where they viewed suppliers as a “community” with one service level agreement (SLA). “We are beginning to look at a whole community of suppliers based on one SLA. I don’t care what elements you are responsible for, the SLA is about where the business needs to go and if you are contributing, there’s the reward,” he said.

He added: “It’s really important that when you are head down in a room negotiating contracts that you use the opportunity to build a relationship rather than destroy it. The goodwill, the trust that you build at the contracting point will serve you well for the next few years.”

You can view the original article here.