Long Term Contracts: Friend or Foe?

Dealing with the positive: how do you optimise long term contracts? Dealing with the negative: can you turn around a troubled contract?  Tim Scott, an experienced commercial leader in the TMT sector provides his observations of practices in the channel and working directly with UK enterprises and the public sector.

Many network service contracts, especially outsourcing or managed service contracts, are a behemoth – created after weeks and months of drafting and negotiation. The stakes are high; risk is high, value is high. If the client is in the public sector, the construct may reflect standard formats and terms, but it is no less complex. Indeed, complexity is the overriding finality of each negotiated commercial contract. And where there’s complexity, there is ambiguity.

Yet there are other common attributes:

  • Each contract is full of intent from each party – positive intent on delivery, commercial outcomes and collaboration; positive intent on what the agreement is intended to achieve. An intent based on common success rather than penalty.
  • Each contract is full of obligations – obligations on what each party must do and must achieve; of course, particularly aimed at the supplier. Because contracts are written the way they are, the strategic intent tends to pale to the background and the penalties (SLGs, indemnities etc.) of not doing and not achieving loom large.
  • Once written and agreed, they are seldom read – how many multiple-schedule contracts are frequently reviewed? On how many multi-year network service contracts do the original personnel stay with the contract? And therefore for how long do the intent and obligations of the agreement stay clear to the teams involved?

In larger organisations, professional bid teams hand over to professional contract teams. In SMEs this is seldom the case. Responsibility stays with the sales or account owner, and no matter how competent that individual or team is, chasing the next sale after not so long becomes the priority. And more often than not this starts to compromise the lifecycle profitability of the agreement.

The business case for major agreements is always done over the lifecycle of the term of the agreement (say 5 years or 10 years) and often longer, when initial capex is high. It is always surprising that attention is so accentuated towards the initial delivery phase – activities associated with novations, migrations, people and service transition or specific transformation – and not the full lifecycle of the contract. After all, in the context of time, the delivery phase represents only 20% of the term in most cases. Yes the delivery phase may represent the most significant part of the cost, but it doesn’t represent the most significant part of the profitability.

Attention on the “in-life” is often limited, sometimes even in the written contract but definitely in the way organisations behave. Unfortunately, that’s when things go wrong. The intent is lost as people move on. The interpretation, especially around those ambiguous clauses, becomes an area of collective angst. The relationship turns abrasive and mistrust sets in as each party believes the other party is getting a better deal.

Optimising long term contracts and turning around troubled contracts have lessons that are consistent – it’s how you handle the tangibles and intangibles. To move forward and adhere to the positive intent, organisations should consider the following:

  1. Baseline: every network service contract needs a baseline; a baseline of the “As-Is” so that journey to the “To-Be” or the “Future Operating Model” can be measured and demonstrated. If the baseline has been lost, which is often the case in troubled contracts, it needs to be re-captured and re-agreed.
  2. Intent and Obligations: charting both the intent and the obligations of the contract is a critical activity. Take the time to lift and synthesise these from the contract. This will become your management tool as well as a plan-of-record between the parties of what you both want to achieve and how.
  3. Governance: internal management of the contract should be led by a dedicated or nominated commercial contract manager – not the sales lead. This independence allows focus on the integrity and profitability over the length of the contract. An important part of the commercial contract manager’s responsibility is the capture and management of the inventory of all assets – billable and non-billable items – and the management of change control away from the baseline.
  4. Relationships: this is all too obvious, but stakeholder mapping across the parties with peer-to-peer mapping, structured reviews and feedback mechanisms is imperative. However, relationships and behaviours are complex. Using the RACI (Responsible, Accountable, Consult, Inform) model and having this agreed between both parties, for each component of the contract is a good structure to manage expectations and behaviours.
  5. Manage the “In-life” as well as the Delivery – getting to the future operating model and managing the future operating model are two distinct phases. The “in-life” requires no less energy, commitment and integrity. Mapping and refreshing intentions are critical to maintaining relevance.

Tim Scott has worked in many contract environments, having held commercial leadership positions within both large enterprise and SMEs including BT, Virgin Media Business and Convergence. He is MBA qualified with significant experience of negotiating and winning multi-million pound, complex deals, developing high performing teams and leading organisation and process design that delivers simplicity and efficiency.

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