How often have you experienced a business relationship failure due to the supplier not making money, the buyer feeling they were being “nickel & dimed” on every change order, the supplier not providing the benefits you expected or your customer not receiving the benefits they expected?
The fundamental cause of most contract failures or disappointing outcomes is that one or both parties feel that there is inflexibility, unfairness or bad faith and the underlying root cause is usually economic.
Why be concerned about clarity of your requirements? As cited by the WCC, (World Commerce & Contracting, formerly known as the International Association of Commercial Contract Managers) in their annual survey of the top ten reasons for contract failure, the evidence is growing exponentially that failure to clarify requirements and the associated contracting structure is the largest single cause of poor contract performance.
Why do requirements matter?
The benefits of robust, detailed requirements include achieving a better solution, lower costs and improved implementation and adoption. Requirements need to include the functional and technical aspects needed by the project. They should also be concerned with timescales, external total cost, internal total cost, legal and contractual risks and technical and implementation risks. Note that an analysis of requirements inclusive of all the above elements may result in a different recommendation than if the assessment is done based solely on the functional requirements.
That said, the roles of Requirements include the basis for Request for Proposals (RFP) and responses, the framework for direction towards appropriate solution, the basis for pricing the project, the foundation for contract negotiations, a key component to communicate details to stakeholders, a critical reference or component of contracts, the basis for determining acceptance of project and the basis for change control in lifecycle of contract. 88% of global companies indicated in a recent WCC survey that improving quality of requirements is the number one factor to improve their contract management function. The Issues include Incomplete requirements, represent someone’s view of the solution and not true requirements, failure to accurately map the range of stakeholders that need to have a voice and Ignorance of company policies and procedures. They include, identifying your stakeholders, understanding your business objectives as they relate to your organizations vision, mission and strategic plan, understanding your internal customer’s (business function leading the project) specification and goal, ensuring that the your internal business leader and define the acceptance criteria to measure success and accurately define the change control process that will ensure variances are identified quickly and can be addressed through a formal change control request form submitted to or buy the supplier.
All of the above deals with internal processes. Part of understanding clarity is understanding supplier’s capability. It is therefore critical that your team perform financial modeling on the other party in order to understand capabilities. These will take the form of standard financial measures (Revenues, COGS, Overhead, Allocations, Cash Flows), time elements ( Life of contract, review intervals), drivers such as term and termination, penalty clauses, etc., risk elements addressed through Service Level Agreements and Key Performance Indicators and standard financial metrics (ROI, ROR, NPV, Payback, etc.).
Spending your time pre-award to validate these elements are within your company’s tolerance for risk factors will dramatically improve your situation.
Jim Moran, C.P.M., CPSM, CCC-AP; Principle JRM Supplier Consulting, LLC and Treasurer ISM Philadelphia.
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