Published on: Wednesday 10 September 2008 by Administrator
Two more CMD articles published in the world's leading procurement periodical
Supply Management the official magazine of the Chartered Institute of Purchasing and Supply (CIPS) has recently published another two articles by CMD. The institute has over 42,000 members, based in the UK and overseas, and is one of the world's foremost bodies for purchasing and supply management professionals. The fortnightly magazine and has a total readership of over 50,000.
The first was the highly praised "Four seasons in one deal" article which was reproduced in a Supply Management Student Guide to help attract graduates into the procurement profession. The Second article is the following piece drafted by Contract Management Direct Founder Paul Carter Hemlin on the subject of Performance Contracts, which is reproduced below.
Only as good as your current job...
Paul Carter Hemlin looks into the concept of suppliers being focused and incentivised on value add, instead of tried and test incentives.
Harold Geneen, CEO of International Telephone and Telegraph Corporation said "Performance is your reality. Forget everything else" and this has never resonated more than in the current global climate.
More recently Forrester Research said most contracts would be based on the value they add rather than cost savings by 2015. If this is true, it will require a shift in mindsets for purchasers to move away from strict targets and Service Level Agreements (SLAs) in their contracts to a of culture providing incentives for suppliers that can provide mutual benefits.
I believe that incentives in contracts can be dangerous and can run contrary to your ultimate goals if not drafted and managed correctly. Less than five years ago, it was common for contracts to include significant bonus provisions for over-achievement. Now, with the exception of a contract and SLA for ejector seat reliability why would a customer wish to pay for over achievement? You agree the deal on what you want, need, or sometimes what you can live with. So why pay more for service at a level you do not need, or indeed asked for?
Recently, I too have started to see contracts drafted with less of an emphasis on SLAs, which has been quite unusual given my experience over the last decade. The state owned Kuwait Petroleum Corporation is, for the first time, negotiating performance-related contracts with international oil companies as it seeks to boost oil and gas production. Well so what, I hear you ask? Well, when I chaired an international Contract Management conference in Dubai last year, I was somewhat surprised to see that the Middle East appeared to be at least a decade behind Europe with regards to commercial innovation in its contracts. It was commonplace for a heavily amended 20 year old FIDIC contract (intended for engineering works) to be the ‘standard form' for all contracts including IT and Telecoms, because that is what was understood. Now within 12 months they are leading a global trend.
It is an interesting, and let's face it an intellectual proposition for a purchaser to link technical and commercial arrangements to performance. Can we live with contracts that accent to delivery? It is not like before, where everything hung off technical assistance; now, that's a given, we expect performance as well for our dollar, and why not? We all have targets, milestones and strategic plans to meet. The worst contracts are those where the requirements and SLAs do not marry-up with the business needs, so could this be the way forward? Dare we offer our suppliers the opportunity to become more integrated with our service offering? Of course the devil is in the detail, which in our case is the contract, but hey, that's what we are paid for...
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