The Modern Contract: Connected Sets of Data

The purpose of almost every business contract is the same: to define the relationship and allocate risk. To effectively do the latter, supply chain managers must manage external risks and internal risks.

• External risks (those beyond their control) include risks associated with fluctuating customer demand, interruption in the flow of direct materials, environmental risks and the financial health of suppliers
• Internal risks (those within their control) include manufacturing risks, where the goal is to avoid self-inflicted process disruptions; changes in key personnel and their relationships (internal and external); risks caused by inadequate planning; and cultural risks, such as a business’s tendency to react slowly to negative information again

But even considered separately, the point is that managing both kinds of risk is challenging. With a plate that full and interdependent, is it any wonder that contracts seem to create more operational friction than they’re worth? Why haven’t we figured out that we can’t adjudicate such variability?

Consider the most basic steps. Negotiations are a time sink, followed by an authorship process that hasn’t changed that much in years. Regulatory pressures are pushing procurement and SCM practitioners to focus more on matters of compliance. How does any of this help maximize the value of the relationship, the effectiveness of the agreement and our ability to monitor performance?

Fixing the Content Problem

Fortunately, there’s a reasonable path forward. For starters, legal departments must simplify. This is not breaking news. But contract law is experiencing a renaissance, so if your legal department hasn’t yet noticed, educate them. Invite them to a demonstration of the latest systems, because the best ones are populated with content that represents the latest legal thinking.

Put another way, if you’re a procurement professional evaluating a new contracting solution, remember that “garbage in means garbage out.” Don’t invest in automating the creation of bad agreements. Instead, fix the content problem at the same time.

Beyond that, numerous supplier risk management solutions have recently entered the market. And from a licensing cost perspective, they’re reasonable. Find out what you need, select the solution that does the job and make sure your contracts identify the risk metrics that you will be monitoring. Engage your top suppliers in this process.

Finally, as PactSafe Founder Brian Powers put it, “Stop thinking of contracts as words on paper…and rather… start thinking of them as connected sets of data.” In other words, maximizing contract performance requires data integration.

Whether you’re talking about monitoring supply risk or measuring supply performance, don’t neglect to update your contracting practices. Don’t allow them to become the third wheel. Provided there is a willingness to simplify and organize around what matters, you can make meaningful progress here — quickly.