RECOGNITION BY IACCM, USA

IACCM has issued a certificate of Excellence to Mr. N Balachandar for his oustanding contribution in the field of Contract Management and for spreading the cause of IACCM in India.

INTERVIEW OF BALACHANDAR.N BY TIM CUMMINS, CEO, IACCM, USA

A View From India: How IACCM Is Assisting The Development of Contract & Commercial Management

Among IACCM’s fast-growing membership in India, one of the most active and enthusiastic has been N. Balachandar, Head of Contract Administration & Management at Technip India Limited. Technip is a major engineering, procurement and construction company with annual sales of almost US$10bn. Balachandar.N has graciously acknowledged the value of IACCM’s advisory and networking services in assisting successful bids and negotiations – and has been a powerful advocate of IACCM membership to his fellow professionals in India. We recently interviewed him to discover the aspects of IACCM services that have been most helpful.

Balachandar, you have been an active contributor and participant in a wide range of IACCM activities. Can you briefly outline those for us?

As soon as I enrolled as a member of IACCM, I started to utilise & actively participate in the ‘Message Board’ of the IACCM site. I also responded to most of the relevant surveys initiated & conducted by IACCM. And as soon as I had the chance, I volunteered to be a part of the IACCM working group to deliberate on ‘Complex Project Contracting’ with ICCPM – an initiative led by Mr. Tim Cummins.Today, I am also participating and contributing in many of the Webinars, Webcasts, ‘Ask the Expert’ calls of specific interest.After a few months of experiencing IACCM and its members, I wrote an article on ‘Transformation to Pro-active Contracting Model’ which was well received & appreciated by Technip group personnel & IACCM, and subsequently got published in the Special edition of the “Contracting Excellence” News Letter.Of course, when the chance came around, I also volunteered to be a part of the core group reviewing the IACCM Contract Management Book (that will build on IACCM’s eLearning modules).Finally (a moment to cherish), earlier this year I was inducted into the ‘Advisory Council’ of IACCM representing India.

In what ways do you feel you have benefitted from your connections to IACCM and to the member network?

Whenever I feel the need of having clarity on certain areas of ‘Contracting’ or approached by others on complex topics, my first source of contact is IACCM. I started effectively utilising the ‘Message Board’ of IACCM site. I used it not only to get clarification but to initiate debates and try to get maximum insight into the subject. Moreover, I did not hesitate contacting fellow professionals through the on-line ‘Member network’, to raise queries relating to specific Project or topic. In almost all the cases I get positive & fruitful response from the members, many of whom hold high positions in their respective organisations. Interestingly, some of the responses come from academic world.

Has your management been supportive; do you think they appreciate the value of those connections?

In India, these kind of activities are just not possible without the support of the Management. It will not be out of place to mention the tacit support & inspiring guidance I receive from Mr. K. Shanker, Managing Director, Technip India.

My Colleagues & Superiors are convinced that my connection with IACCM has certainly enriched my knowledge on the subject over the period of time and they do not hesitate in approaching me on issues related to ‘Contracting’.  It is widely believed that most of my rulings on the subject have the backing of IACCM. I am slowly but steadily moving towards my goal of becoming  ’Anchor point in Commercial Contracting related issues’ in my Organisation.

What inspired you to set up the network within India? (Last year, Balachandar initiated a LinkedIn group that ties through to IACCM)

In India, most of the companies do not have a separate Contract Management division. These activities are being performed by Projects Personnel or Procurement Personnel with the support of Legal experts. This made me to think & create awareness among Project Professionals about the importance of ‘Contract Management’ per se. Since I am already confident of drawing expertise from IACCM, I felt the need of creating a ‘Networking group’ in India, which could act as a bridge, connecting the members to the activities of IACCM and ultimately populate IACCM membership in this part of the world. Nevertheless, my primary goal is to create a vibrant Contract Management community among young professionals in India.

How mature is contract and commercial management in India today?

In India, Contract and Commercial Management is just one step above the nascent stage. Contract management is mostly restricted to ‘Progress measurement for payment’ in Civil related works or only as a tool for (extra) ‘Claim Management’. But the global exposure experienced by Indian Industry over a period of the last two decades has certainly created much needed awareness about Contract Management. But still a long way to go.

What are your hopes for contract management in India in the future?

By seeing the overwhelming response to the ‘Indian Association of Contract & Project Management’ – LinkedIn Network, I am confident that the Contract Management community in India is getting more vibrant day by day.

I draw strength from the interest shown by the members of this group in IACCM activities and in particular to the ‘Commitment Matters’ blog of Tim Cummins. I am convinced and confident that the day is not far off when the Contract Management community of India could be considered ‘at par’ with Europe and that of Americas.

MANAGEMENT OF CHANGE IN EPC CONTRACTING – A WIN – WIN PROPOSITON

INTRODUCTION

Traditionally, among all other facets of Contract Management, “Change Management” is among the most striking responsibilities for a Contract Administration & Management division.

Today’s business and economic environment has made the discipline of ‘Change Management’ increasingly significant to Contract performance. The volatility of markets, the emergence of new technologies and the regular introduction of new regulations are among the causes of more frequent change, which pose a real challenge to costs, profitability and performance requirements. This is reflected by the findings from ‘International Association for Contract and Commercial Management’ (IACCM) that ‘Change Management’ is amongst the top items for negotiators when they are agreeing the initial contract terms.

From a Contract point of view, a “Change” means the difference between the Contractual requirement as set forth in the original agreement between the Parties and the requirements imposed subsequent to this agreement, during the implementation of the Project / Contract. Changes that arise during the Engineering phase, Procurement phase or Construction phase could originate with the Owner (Client), Contractor or even a third party to the Contract.

CHANGES per se

A “Change” represents any modification – addition, deletion, substitution or any alteration – of the scope of work, the Contract Schedule, or any other part of the Contract. More importantly such a “Change” does not alter the general of work viz. the ‘basic work’ for which the tender has been floated must not be altered.

A Contract Manager must ensure that the Contract defines “what constitutes a Change” (and, for the Client – “What is not a Change”) and also specify a remedy in the Contract – remedy available to the Contractor in terms of Compensation, Schedule extension & possible impact on other provisions of Contract.

TENDER STIPULATION

The ITB (Invitation To Bid) or the Tender document prepared by the Client typically defines many conditions, with regard to Changes in Work. As a Client, it is quite natural that they expect these changes could be accommodated as a part of ‘Design Engineering Evolution’ or ‘Construction Site requirement’ or ‘normal industry practice’ for which they need not pay extra to the Contractor. They are afraid that such changes will result in substantial increases in cost, potentially causing budgetary overruns. BUT for the Contractor, such changes represent ‘scope creep’ and can reduce or eliminate profit margins. Contractors should ‘satisfy’ -themselves- of the input design parameters and Site conditions if they are expected to quote an ‘all inclusive’ Price which factors in these expected evolution & industry practice ‘Changes’; and they must be clear about the boundaries for such ‘Changes’.

As an example, a Tender may read like this: – “Purchaser shall have the right at any time to order Change in Work …………………….” and try to list non-exclusive examples of items that shall NOT constitute Change in Work:

Instructions, interpretations, decisions or acts of Purchaser (Client), which are

1. To achieve compliance with Contract by Contractor
2. To require Contractor to correct errors, omissions, poor engineering, faulty workmanship or any other failure of Contractor to comply with contract, due to reasons attributable to Contractor; or
3. To avoid failure by Contractor to achieve compliance with Contract; or
4. Required because of some neglect, omission or default of Contractor; or
5. A mere addition to the number of man-hours to be utilized by contractor in the performance of work or its obligations under the Contract, which are normal industry practice for Project definition and engineering work and which may include rework by Contractor; or
6. Any modification or alteration of, amendment or addition to, or deletion from the work necessary to avoid injury or death to persons or damage to property or as a consequence of Contractor’s failure to comply with any of its obligations under the Contract; or
7. Any approvals, instructions or advice given by the Purchaser to achieve Contractor’s compliance with the Contract.

From the above list given in the Tender, there appears to be little or even worse, no scope for ‘Change of Work’. Client would like to bury these changes under the carpet by the use of the phrase ‘compliance with Contract’ or ‘in accordance with Contract’.

WHAT CONSTITUTES A ‘CHANGE’

First, it is essential that the Contractor has a well defined process for managing changes. Far too often, there is an informality to review and approve which may leave Project Managers or ‘Sales’ with the ability to agree ‘Changes’, often with little or no documentation. Not only this will threaten the profitability of the Contract, but it may also generate confusion in the event of a claim or dispute. From the outset, the Contract Manager, in order to avoid ambiguity & misinterpretation of the Contract document must aim counter this situation by insisting on the inclusion of non-exclusive examples of items which may have direct impact on the Work and SHALL constitute a ‘Change in Work’. Examples might be:

1. Revisions by Purchaser to any part of Contract documentation;
2. Revisions required by Purchaser to parts of Work already completed in accordance with Contract;
3. Delay or Suspension of Work caused by Purchaser;
4. A change in Statutory Requirement after the Effective date of Contract;
5. Variations to scope of Work contained in the Contract;
6. Any default or cause or reason not attributable to the Contractor.
7. In addition, the Contract Manager may specify certain remedial measures aimed at softening the ‘Change of Work’ syndrome.

The Contract Manager may try to add a specific Clause addressing the obligation of the Contractor to implement the ‘Changes’ ordered by Purchaser and linking it with a ‘value’ and ‘agreement’ by Purchaser to pay, something similar to the following:

“Contractor shall not proceed with the implementation of any Change in Work requested by the Purchaser or an aggregate of several Changes in Work that exceeds xx% of the Contract Price or value of such change exceeds xxxx USD/Euro, unless the Parties have agreed upon the impacts (both Price & Schedule, as applicable) of said Change in Work”

In some cases the above may not be acceptable to Client. Even in that case it is better to address this issue rather than to be silent:

“If the Parties could not agree on the impact due to Change in Work, and if the Purchaser requires the Change in Work to be undertaken, Contractor shall comply BUT is obligated to record all cost of the Change in Work via a special cost account tracking system including all activities / details to be resolved at a later date”.

The idea behind such a stand is that to keep the issue afloat and would provide an avenue for further negotiation.

CONTRACT ADMINISTRATION

Having drafted the Contract with utmost care, it is the duty of the Contract Manager to have a sound “Change Order” or “Management of Change” Procedure in-house which provides a means of

1. Identification
2. Registration
3. Documentation and
4. Processing CHANGES.

Of course, the precise allocation of resources to a project will vary, and it will not always have a large number of dedicated resources, nevertheless, the following roles should be allocated within the team:

Combined Responsibility:

Project Manager is the authorized representative of the Contractor responsible for formally notifying the Contractor’s Project Organization and subsequently the Owner / Client of a ‘Change’.

Project Control Manager is responsible for coordinating the ‘Changes’.

Cost Control Manager is responsible for evaluation of Cost impacts.

Schedule Control Manager is responsible for evaluation of impact on Schedule & key dates.

BUT the Primary responsibility for operation of this procedure lies with the CONTRACT MANAGER. This includes, but not limited to,

1. Register & Track potential ‘Changes’ identified by the Project Team.
2. Coordinate the preparation of Change notices & Change Proposals
3. Lead negotiation of Change Orders with Client
4. Keep the Change Order Register updated
5. Lead regular Change Order meetings with the Client.

SOME BASIC RULES IN PRESENTATION

Before we conclude, let us highlight a few basic rules (borrowed from Mr. Peter Marsh) to be followed in preparing for and presenting Claims:

1. Consider the possible areas for claims from the start of the Contract and plan accordingly; Do not wait until they happen.

2. Keep accurate records from the start of the contract – in particular a good, factual diary

3. Ensure that the records are such that it is possible to trace the number of Man-hours spent on revisions to each drawing and particular reasons why such revisions became necessary.

4. Make a record of the requirements for the giving of notices and ensure all key project personnel concerned are made aware of these.

5. Ensure that all correspondence with and from the employer which could have an impact on claims is reviewed, as are all minutes of meetings.

6. In presenting the claim, make sure that it contains:

a) a short executive summary

b) clear references to the terms of contract on which the claim is based

c) all essential data required in order to understand the claim

d) copies of the program, minutes and other document supportive of the claim.

I would add to this list that a well-functioning Contract Management department captures all changes and claims and maintains a record of them and how they were resolved. It seeks to learn from experience (‘Lessons Learnt’) and to constantly improve the quality of its operations, thereby also gaining the ability to demonstrate its business value to Senior Management of the Organization.

CONCLUSION

The points & issues discussed above are reflective of the practical situation we face during negotiating & executing EPC Contracts world-wide. Some may prefer to claim that it may be easy to put on paper but difficult to practice. Nevertheless, a sincere effort has been made, though brief, to highlight the major issues involved and the role of Contract Managers to have a real ‘Win – Win’ proposition.

MANAGING CRISIS THRO’ CONTRACTS (Author: Dr. Rene Franz Henschel)

This article has been published with permission from (& due regards to) Dr.Rene Franz Henschel,  Aarhus School of Business, University of Aarhus, Denmark.

Dr.Rene Franz Henschel is the CEO of Henschel Contract Management.

This article was presented at the European Symposium on Pro-active Law, in Nancy, France (in collaboration with IACCM) & later incorporated as a chapter in the book “Leadership Handbook” which is however in Danish.

Dr. Rene Franz Henschel is kind enough to forward us the English version exclusively for our  forum. (All copy rights, whatsoever,  rest with Dr. Henschel)

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1 Introduction

This article focuses on how best to engage in crisis and risk management through the company’s contracts. It is well known to most companies that you can carry risk and crisis management through contracts, for example by means of liability clauses in relation to contractors or by proactively manage how regulation is best complied with.

The issue addressed in this chapter, however, is not about legal risk management and crisis management in the traditional sense, but on how the contract interact with other tactical and strategic risk and crisis tools, for example, supply risk management, customer relationship management, crisis communication and innovation strategies, and how the contract should be designed accordingly. The main point of this article is that Enterprise Risk Management systems and other similar systems should recognize these relationships in order to optimize risk and crisis response.

The article is based on the fundamental assumption in the light of studies and empirical data that risk and crisis management must not only deal with known risks and unknown risks, but also proactively manage the risk of “lost opportunity”, i.e. danger of losing new customers, new markets, or at all new opportunities. To recognize such risks before they erupt into a real crisis, it is required that the individual parts of a risk and crisis preparedness is connected, and that the company is able to conduct transversal and interdisciplinary analysis of how intervention in certain parts of the system triggers effects on other parts of the system.

The basic observation is here that companies can improve their knowledge about what effects their contracts have for proactive or reactive approaches to risk and crisis handling, including adverse effects which may well exacerbate and increase the risks and potential or existing crises.

There are many reasons why the contract has become increasingly important for enterprise crisis and risk management. A major reason is seen in the shift from an integrated business model, where most production processes took place in the company itself, to a network-based business model where outsourcing, supply chain management and CRM is in focus. Consequently the role and importance of external relationships are increased. This trend is reinforced by the forces of globalization and the shift of many companies from sales to services, where both price and innovation play a key role in positioning the company in the market.

A large part of the company’s external relationships, for instance in relation to the supply chain and to the customers, are regulated by contracts. Contracts have therefore been of increasing concern for the company’s. It is therefore imperative to analyze the significance of contracts for the company and to determine the tactics and strategies in relation to contracts that best support the company’s overall business strategy.

The claim is that if a company has not analyzed the role of its contracts role in relation to crisis and risk management, then the company’s crisis and risk management must be said to be incomplete. This is not consistent with good risk management, still less good corporate governance. Entreprise Risk Management systems, for example built over the COSO standard, would then be incomplete. Furthermore, the risk of a crisis in relation to lost opportunities is increased. In the following section an example illustrates some of the critical issues that can be analyzed in connection with the role of contracts for risk and crisis management systems.

2. Case concerning application of contracts as part of crisis management – and the consequences this had for other risk and crisis strategies

Brewer Anheuser-Busch, located in St. Louis, Mississippi, which was recently acquired by the Belgian brewing giant InBey, announced in early 2009 that it would henceforth pay its suppliers delivery + 120 days. The reason was, according to Anheuser-Busch InBev, the financial crisis and the supply conditions were therefore “take it or leave it”. Consequently, if a supplier delivered the goods in beginning of October 2009, it would receive payment in the beginning of April 2010!

Evil tongues, however, accused InBev to impose the new terms of payment as part of a general cost strategy in order to make the predominantly leveraged takeover of Anheuser-Busch, profitable, and here, the financial crisis was as a great opportunity for “opportunity management”.

Some suppliers with less bargaining gave up their protest in advance, while others did not accept this unilaterally imposed change in payment terms. Emerson, who is one of America’s largest producers of specialized manufacturing equipment for the food industry and which for a lifetime had supplied products to Anheuser-Busch, announced in an internal memo that no parts of the organization now where allowed buy, use or refer to goods associated with the Anheuser-Busch

InBey group. At the same time Emerson dictated obtaining supplies of other brands of beer and soft drinks, e.g. in connection with the sale in canteens, when having sponsoring events, etc.

This internal memo was leaked to the press, and the story landed on the front of the American media, also because Emerson and Anheuser-Busch where both located in St. Louis, so the companies had traditionally enjoyed good cooperation. Furthermore, in Emerson’s board of directors also sits a member of the Anheuser-Busch family, which made the conflict extra delicate.

By leading industry associations Anheuser-Busch InBeys approach where described as unethical -also taking into account the fact that Anheuser-Busch InBev shortened its payment times to its customers at the same time! Furthermore, the approach was hardly consistent with good risk management practice.

From the investor side, there were serious doubts as to Anheuser-Busch InBey’s financial situation -why else have the need for a 120-day period for payments in relation to suppliers and at the same time shorten payment periods for Anheuser-Busch’s customers? From the legislators view the question has been raised whether to introduce legislation on maximum payment periods. Finally, Anheuser-Busch InBey was reported to the Belgian competition authorities with allegations of abuse of a dominant position to gain unfair trade conditions.

Apart from the allegation of opportunity management, this is a very good example of how a financial crisis became a credit crisis, which in turn triggered a series of other crises – now in relation to suppliers, customers, the press, the competition authorities, etc. One can also speculate about whether there has ever been carried out macro or microeconomic calculations about the consequences of imposing such one-sided payment terms on suppliers that are already supposed to be under financial stress because of the crisis. Likewise Anheuser-Busch InBev now probably cannot expect that Emerson or other suppliers want to spoil them with new, innovative products at attractive prices thanks to the good relations in a time of crisis. As the Titanic went down, there were also large differences in peoples’ queue-culture – which, however, also turned out in survival rates between the peoples…

As shown above, it must be concluded that contracts and conditions are closely linked to crisis and risk strategy, that these contract strategies are not confined to legal issues and financial considerations, but very much has wires out to other areas, and that contract strategies can sometimes have unexpected and unforeseeable consequences

Companies must therefore carefully analyze this problem area and develop the tactics and strategies that adequately – both proactive as reactive – are able to address the consequences that such risks and crises can have. The following section will highlight the need to see the connection between the contract and the various risk and crisis strategies.

3. The need to see the relationship between contracts and other risk and crisis strategies

As the example of Anheuser-Busch and Emerson showed above, the introduction of new payment terms as part of a financial strategy involved a number of other risks that triggered other crises in the financial crisis strategy of the enterprise: the credit crisis is changing the payment terms, triggering a domino effect on already financially stressed suppliers; a crisis occurs in relationships with strategic suppliers to deliver innovative products to foster competitiveness; there is a crisis in relation to communications and media; crisis in relation to consumers who may want to choose other products; crisis in relation to industrial associations which accuses the company of unethical behavior and poor risk management; crisis over compliance and competition authorities, etc., etc.

It is unclear whether all of these risks have been adequately identified, the linkages between them adequately analyzed, and whether there has been strategies designed to proactively or reactively curb or mitigate any possible harm. The principal strategy for modification of payment terms has probably been a financial strategy conditional on cash-flow improvement and cost minimization, in other words a bottom line strategy. The approach can be defended from a short-term, crisis-oriented and financial-oriented cost-benefit analysis – but on the short term the strategy triggered a series of other crises, and in the long run it is not certain that the strategy has been successful, unless it has focused on nothing less than survival of the company in a growing financial crisis. In such a case, the strategy may be justified. Having the critical eye, the use of delivery + 120 days payment terms almost could be seen as a declaration of insolvency – and from an ethical and a macro- and microeconomic point of view the strategy can also be questioned.

The illustration shows that companies should identify the risk parameters that are related to the company’s contracts, and very thoroughly analyze the relationships that exists between the different strategic areas within the company, such as the relationship between supplier loyalty, innovation and contractual terms

This requires a 360 degree analysis of relevant risks and potential crisis and their linkages through Enterprise Risk Management systems or other similar systems – including breaking up and rethinking previously fixed assumptions, for example what role the contract plays for the company’s overall business strategy. In the following section, some illustrations will be given of such interactions.

4. Examples of contracts underpinning or counteracting risk and crisis strategies

In relation to the introduction of new payment terms, an enterprise must analyze the legal aspects of the changes. One thing is the legal aspects – for example if payment periods in the current contract can be amended or whether contracts can be renegotiated – another question is public law aspects, such as the aforementioned competition concerns on whether delivery + 120 days is an abuse of dominant position.

These types of problems are typically categorized under the term legal risk management which is a sub concept of general risk management. It is indisputable that any modern company should have a legal risk management strategy, that proactively relate to legal risks. The legal risks should be identified and the necessary decisions be taken (risk be avoided, transferred to another legal person, insured or reduced through proper measures or alternatively accepted from a cost/ benefit or risk/ reward analysis).

The risk is, however, that an incomplete risk and crisis landscape will be the result, if the legal risk management is sequestered from the rest of the company’s risk and crisis analysis models. A risk may be assessed low in the legal risk area but may very well contain a high risk in other areas – e.g. in relation to innovation. At the same time the risk must also be assessed based on whether there might occur a real crisis – and how this crisis as addressed.

4.1  Payment Clauses

An example of the relationship between crisis management and business is seen in payment clauses in installment contracts or frame contracts. Does the framework agreement contain any possibility that the payment terms may be changed unilaterally? If not, should the company try to get this incorporated into new agreements, so that it can make use of the possibility of extended credits? Should existing clauses be renegotiated? And should it be up to 120 days or even more, or should the company try to find a balanced solution in which the parties spread and share the risk, instead of trying to avoid the risk at the expense of the other party?

4.2  Liability Clauses

Another example is the use of liability clauses. Subcontractors should naturally provide goods and services which meet the agreed specifications, but has the company made a risk analysis that shows what happens if subcontractors will be met with, respectively, to hard or too soft liability clauses? If subcontractors, e.g., must accept strict liability clauses, which establish that they are liable without limitation in case of default for both direct and indirect losses, does the enterprise risk that the subcontractor supplies its innovative inventions to others who do not impose the same strict conditions of liability?

Studies show, that the subcontractor run a greater risk of developing and delivering new, innovative products, instead of providing established and well tested products. This risk must be quantified and is done so in e.g. the price. A strict liability clause would be payable at a higher price for the product. If this is not accepted by the customer, it must be compensated by supplying goods which do not pose as great a risk if the liability clause is maintained.

As innovative products, by their nature often will have a more limited history, it can be difficult to calculate the risks of default. The consequence is that the subcontractor would prefer to offer the most innovative products to customers, offering balanced conditions. This is the experience of particular the U.S. telecommunications sector, where the undergrowth of smaller, innovative companies often have had to offer their groundbreaking and not always entirely risk-free inventions to telecommunications companies in Asia, as they could not live with or pay for uncovering the conditions of liability, the major American telecommunications companies offered them.

If the competing Asian telecommunications companies succeed with their investments, this in the end threatens the U.S. telecoms company. A legal risk analysis has thus triggered a risk of inadequate intake of new inventions, which eventually may end up as a genuine innovation crisis threatening the market position and earnings.

4.3  Intellectual property rights

A third example is the use – or perhaps rather misuse – of the rules for intangible rights such as patent rights. If a subcontractor develops and supplies a new innovative product to be used in the customer’s end product, the subcontractor has often had to accept that his intellectual property rights after the contract passes to the customer.

Such arrangements are common in many industries, including in the American automobile industry, and could be a disincentive to the subcontractor who did not feel he gets enough out of investing in new inventions. If the contract does not ensure the right motivational elements such as shared rights and bonus clauses, sub-contractors would prefer to deliver innovative products for those customers who understand how to reward and motivate. A legal risk analysis resulted in a rigorous and aggressive acquisition of patent rights from the subcontractors can then trigger an innovation crisis.

This is a part of the criticism directed against U.S. automakers, and some believe that this has been a contributing factor to the crisis that the American automobile industry is in. U.S. automakers are behind particular Asian automakers when it comes to new engine technology. Here, Asian automakers have shared rights with subcontractors and has offered motivational licensing, which has prepared the groundwork for the suppliers’ incentive to innovate. Consequently, partnership, trust and cooperation rather than unilateral accommodation of interests can be seen in these clauses thereby promoting innovation and motivation to the benefit of the company.

4.4  Termination clauses

A fourth example is the use of termination clauses. If we imagine in the example above, that the car manufacturer reserves the right to terminate the contract with the subcontractor, at any time, without reason and without compensation – which is not uncommon in certain industries – how does this then motivate the subcontractor to invest heavily in product development, if he knows that the customer can get out of the agreement before it becomes viable and profitable for the supplier? Termination Clauses like this could discourage innovation and the use of contractual clauses should be carefully considered in relation to its other goals and strategies.

4.5 Conclusion: Contracts can either underpin or counteract risk and crisis strategies

It can be concluded that contracts can both work to support, but also to discourage risk and crisis strategies, if the implications of various clauses are not thought through. One should therefore not impose a one-dimensional legal risk management strategy or other contractual strategies, without having first conducted a comprehensive analysis of the other risks that exist, and the crises that can be triggered. The above examples show that isolated analysis may trigger new risks and crises, which may well change the basics of the cost/benefit analysis, which was the reason for such decision to introduce, e.g., new conditions for payments, termination of contracts or clauses on patent rights.

Studies show that 2/3 of businesses do not perceive their risk and contract management systems are connected properly with the company’s overall strategies. At the same time, studies show, however, that one possible reason that some Asian companies are willing to take a bigger risk when buying products from innovative suppliers is that they have not so well developed and rigorous risk management Systems as Western companies have. The optimal solution lies perhaps in halfway between the two positions. It is therefore the role of the contract management strategy to find the perfect balance between risk and reward.

5. Elaboration of optimal strategies for proactive risk and crisis management through contracts

Studies have shown that among the leading companies in the world is a recognition that legal risk management cannot stand alone but that a contract and its clauses should always be analyzed and evaluated relative to the overall goals, the company seeks to achieve. The contract must not only be viewed in isolation from a legal standpoint, otherwise there is a risk that the contract works against business goals.

The contract strategies must therefore be integrated into the core strategies that the company has set to achieve its goals – and the contract must support these strategies and goals, not hinder them. This

is an important insight that any risk and crisis strategy will have to recognize in order to create a more complete Entreprise Risk Management system and to achieve the goals in the core strategies.

The first element of such a contract strategy is leadership. It requires leadership to launch the process necessary to create an overview of the company’s contracts and how they affect other risks and strategies. Who should take the initiative? Should the legal department take this leadership? Must Sale or Purchase? If the legal functions are outsourced, who will then take the leadership?

Studies suggest that there should be a central staff function to perform this leadership, and that this function must be linked to corporate strategy and senior management. It thus requires active involvement from management and leadership, for the interaction between the individual parts of the organization to be implemented, and for the importance of the contract to risk and crisis management to be recognized and accepted by the entire organization.

Furthermore, requiring a proactive risk and crisis management through contracts may take that the company’s view of what a contract actually is, is analyzed and possibly redefined. Traditional legal risk management has often focused on eliminating and preventing risks. In the interaction with other business strategies, it is not always certain that the contract must be a defensive and risk-exclusionary tool, but perhaps rather that the risk is accurately described and then shared between the parties, in order to support the partnerships that are strategically important for the company - and for both the short and long term goals.

This requires a proactive and venture open contract, which focuses on goals and rewards success through partnership. This implies in turn that the whole organization should understand and support the key business strategies the company has, by preparing their own respective strategies – including the parts of the organization dealing with the company’s contracts.

This development is seen in the increasing importance that Contract Management is getting in more and more enterprises. Contract Management is a set of procedures, policies and practices that should guide the individual partners through the handling of contracts from start to finish in the most optimal way, including finding the most optimal contract clause. At the same time Contract Management, Supported by the right IT tools, offers a range of synergies, for example improved

control and Compliance, increased insight into Commercial and legal risks and better collaboration across the organization and improved management.

In focusing on business contracts, the use of motivational clauses, clauses partnership, exchange of information and cost/benefit in relation to risk/reward should clearly be considered, since this has a direct connection to the enterprises core business strategies. For example, the company will be strategic weaker in the market, if innovative suppliers chooses other companies that have nurtured the partnership during the crisis.

Implementation of a risk and crisis strategy is therefore closely linked to the company contracts. To uncover the impact the contracts has for its risk and crisis management, it is necessary to measure and analyze the portfolio of contracts. Contracts may be divided based on customer segmentation, supplier groups, etc., and then be connected to the overall strategies, so that the optimal tactics and strategy can be selected for each particular type of contract.

This work requires data collection, processing and analysis in transverse and multidisciplinary working team. Companies which have developed Contract Management systems have an advantage here because the contract life cycle, historical data on underperformance, compliance etc., is quickly and readily accessible through electronic databases. At the same time the responsible Contract Managers or the responsible staff function can competently and quickly provide input to the strategies.

The analysis should also identify how the traditional Legal Risk Management should be performed -for example in relation to non-strategic suppliers that can easily be replaced and where price is the only decisive factors – and/or where the supplier does not deliver a service which is central to the completion of their core business strategy. It is an open question whether this kind of analysis was conducted in the Anheuser-Busch InBev example, or if the company blindly chose to rely on, that an extension of the payment terms would solved the problems that had come to attention.

The company should not only develop strategies and tactics to manage known risks and crises, but also strategies to be able to manage the crises that the company do not yet know the nature or effect of. For example, there should be a review of the force majeure clauses and assurance that these reflects the increased likelihood of climate change, the commodity crisis and other human and natural crises, but also ensure that such clauses are drafted in sufficiently broad terms, so they can take into account that the unknown may arise.

Delivery clauses, payment terms and pricing options, etc., should also reflect these factors, so it is not only in case of liability that the force majeure clause relieves the company of unpredictable and insurmountable consequences. There should in other words be to a careful analysis of how the contract should provide predictability, weighed up against what should be done in order to take

account of unpredictable events. Where possible, if the incalculable risks are identified, they should be mitigated, for example, through insurance, export guarantee schemes etc.

The strategy should also consider the use of clauses that define the circumstances and the ways and procedures under which, adjustments and modifications are possible in the parties’ obligations and rights (agile contracts). Adjustment, amendment, resolution, and cooperation clauses should therefore be carefully considered in these deliberations, and so should clauses which enables and rewards the sharing of information and early warning, for example, about possible delays in deliveries or possible failure of subcontractors, etc.

Dispute resolution clauses in the parties’ contracts should reflect this open and collaborative approach to risk and crisis strategy. This development is already seen in the increased use of mediation to replace the typically more costly, lengthy and not at least confrontation oriented nature of court or arbitration processes. In this way, companies can quickly and effectively settle their disputes, restore and maintain their partnerships and move forward in their efforts to meet their business objectives.

The company should also choose the law which best suits its needs for risk and crisis management, and they should consider whether the company should have a genuine regulatory strategy. Changes can occur with such speed that politicians are forced to fast action, so quick response from affected businesses is a must if the companies want to influence the legal solutions that the legislature wants to implement as a response to the crisis.

6. Overall conclusion

If there is something the crisis has taught us, it is that we have to respond to multi-faceted future crises. This requires 360-degree analysis of relevant risks and crisis scenarios and a transversal and multidisciplinary analysis of their linkages, for example in relation to Entreprise Risk Management systems and corporate strategies.

It is therefore necessary that the company considers its use of contracts in its risk and crisis management strategy. This analysis should include interdisciplinary and cross-cutting analysis of the correlations with other parts of the enterprise crisis and risk strategy, as well as overall company goals and strategies. Only in this way can the company ensure that the contracts support the company’s overall business objectives.

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Acknowledgement & References:

^[1] About different definitions of e.g. contractual risk management see: Tobias Mahler: The State of the Art of Contractual Risk Management Methodologies, i: Helena Haapio (Ed.): A Proactive Approach to Contracting and Law, Turku University of Applied Sciences and IACCM (Turku, 2008)

^[2,3] See e.g. Tim Cummins: Taking the Law out of Contracts – and putting lawyers into the contracting process, i: Helena Haapio (Ed.): A Proactive Approach to Contracting and Law, , s. 97-105 (Turku University of Applied Sciences and IACCM, 2008).

^[4] See:
http://www.upi.com/Business_News/2009/04/16/Emerson-freezes-out-Anheuser-Busch-InBev/UPI-
63401239901273/.

^[5]
http://www.iaccm.com/newsitem.php?id=1079

^[6] See e.g. IACCM: Impacts of Corporate Governance on Contract Commitment, 20 July 2005; Nicolas Ward, Robert Handfield, Poul Coussins and Tim Cummins: Supplier Relationship Management: The Soft Stuff is the Hard Stuff, IACCM, 30 April 2007, but compare Omri Ben-Shahar & James J. White: Boilerplate and Economic Power in Automotive Manufacturing Contracts, University of Michigan law Review, August 2005.

^[7] IACCM, Risk Maturity Study, 2008.

^[8] Nancy Jessen & Jason Smith: The General Counsel’s Role in Driving Enterprise Change for Contract Lifecycle Management, Contracting Excellence, May 2009, s. 10-14; Cohen, L. og Young, A.: Multisourcing. Moving Beyond Outsourcing To Achieve Growth And Agility, Gartner Inc, Harvard Business School Press (2006) p. 127 et seq.

^[9] Cohen, L. og Young, A.: Multisourcing. Moving Beyond Outsourcing To Achieve Growth And Agilty, Gartner Inc, Harvard Business School Press (2006) p. 111 et seq. and p. 171 et seq.; Broadbent, M. og Kitzis, E.S.: The New CIO Leader, Gartner Inc., Harvard Business School Press (2005), especially p. 129 et seq. and p. 223 et seq.

^[10] Jf. Tim Cummins: Losing touch with the market, Contracting Excellence, Vol. 1, No. 5, June/July 2008, s. 1-4.

^[11] Ian Stewart: What do commercial managers need to know about strategy? I: IACCM International Academic Symposium On Contract and Commercial Management, 2008, p. 3-15. Se ogsa Tim Cummins: Best Practices in Commercial Contracting. Key Initiatives That Are Driving Competitive Advantage, i: Scandinavian Studies in Law, Vol. 49: A Proactive Approach (Stockholm, 2006).

^[12] Tim Cummins: The value proposition behind commitment management and improved corporate contracting, Contracting Excellence. Vol. 1, no. 3, February/March 2008, p. 1-3; Crossing the contractual chasm: using contract management automation to improve organizational relationships, Contracting Excellence, vol 1, no. 6, August/September 2008, p. 14-16.

PRO-ACTIVE CONTRACTING MODEL

INTRODUCTION

Traditionally, researchers & consulting agencies have described contracts as ‘the life blood of an organisation’. I would rather slightly depart from this custom and state that contracts are the spinal cord of the organisation. I see ‘Contracts’ as the framework of a relationship and their focus on managerial decision making – in the same way as the spinal cord which translates the neural signals from the brain (‘Management’) to the rest of the body (‘other entities’ of business environment) and also contains neural circuits that can independently control numerous reflexes (‘Proactive’).

Contracts form the documental ‘yarn’ that converts in to ‘fabric’, while binding People, Clients, Suppliers and Organisation into coherent working relationships wherein goods & services may be exchanged in a mutually agreeable framework. It is worthwhile to recall that a recent study¹ reveals that the typical Fortune 500 companies maintains 20,000 to 40,000 active contracts at any given time. With this background, it is imperative that the contracts be ‘proactive’ rather than ‘reactive’.

Before embarking on the nemesis of ‘reactive’ Contracting, it will be appropriate to define ‘Contract’ and the core elements of Contract Life Cycle.

CONTRACT per se

Gartner Research² defines contract as the sum of all transactions & interactions that have taken place between the Parties, both before & after the award of Contract. For the purpose of our discussion, we can consider the contract to be a set of documents governed & restricted by law, that clearly establish the boundaries & extent of the executing Parties’ relationship & responsibilities along with the rights & responsibilities, of the entities involved.

In more than one occasion, I have observed Mr. Tim Cummins, CEO, IACCM reiterating the bottom line of contracting (adage):

IF YOU ARE NOT IN CONTROL OF YOUR CONTRACTS,

YOU ARE NOT IN CONTROL OF THE BUSINESS.

Tim further states,

ORGANISATIONS THAT DO NOT MANAGE THEIR CONTRACTS EFFECTIVELYWILL BE AT A TREMENDOUS COMPETITIVE DISADVANTAGE.

CONTRACT LIFE CYCLE

Contracts are ‘living entities’ with a Birth, a Maturation period and in most cases a Termination – maybe a smooth close-out or an abortive exercise.

Contract life cycle consists of the following basic stages³:

CONTRACT CREATION –                      authoring the contract using standard clause templates.

CONTRACT COLLABORATION –           collaboration with legal, risk management cell, taxation, Audit, insurance & other groups internal to the organization, negotiation & collaboration with Suppliers, Clients & other business partners.

CONTRACT EXECUTION –                     specifying contract start date, completion date, capturing signatures from all entities involved and establishing a control repository of all contractual information.

CONTRACT ADMINISTRATION –           tracking & auditing of contract terms, pricing, discounts, quality level compliance, change management & performance.

CONTRACT ANALYSIS –                       enforcing spending against budget, balancing orders, assigning resources for the optimal management of the most profitable projects & customers; Also term analysis of contract performance and attributes to determine future sales, budgeting, sourcing and risk strategies including the exercise of Lessons Learnt.

PROACTIVE APPROACH

As addressed before, it is imperative that contracts be proactive rather than reactive.

Proactive Contracting refers to the use of contracting processes that blend ‘Best Practices in Contracting’, Quality conformance, Risk mitigation practices with “Pro-active / Preventive Law”.

Thus the goals⁴ of Proactive Contracting can be listed as below:

• To promote successful performances & frame work of relationships

0   To identify & eliminate root causes of potential problems

• To optimize risk & return and

0 Minimize deterrent when problems arise

• To manage conflict & prevent litigation
  • To minimize costs & losses where they are unavoidable

PROACTIVE CONTRACTING MODEL

Often contracting is merely referred as a legal document and many organizations never formalize the management of their contracts during the agreement period; Contracts are archived away in departmental filing cabinets never to be reviewed again until a problem arises⁵.

Contract dispute management is not just a walk in the park.

“Contractual disputes are time consuming, expensive & unpleasant. They can destroy the Client-Contractor relationships painstakingly built-up over a period of time. They can add substantially to the cost of the contract, as well as nullifying some or all of its benefits or advantages. They can also impact on the achievement of value for money. It is in every one’s interest to work at avoiding disputes in the first pace………….⁶”

Traditionally, the steps in providing legal care resemble those of Medical care:

diagnosis – treatment – referral, all steps that happen after a client or a patient has a problem. Care has been reactive.

You get sick, you seek treatment;

You encounter a dispute, you turn to a lawyer⁷.

As core professionals, we have to lean away from this approach. Businesses benefit from a proactive approach focusing on how to secure & sustain success and help the team out of trouble.

One should clearly understand that businesses do not succeed by winning disputes or court cases, or by looking for parties to blame and claim damages from. Companies are not interested in damages or remedies; all they want is successful frame work of

relationship and the expected level of performance. They seldom benefit from spending hours drafting and negotiating clauses dealing with liabilities (read limitation of liabilities) and remedies – instead they benefit much more if those efforts are aimed at clauses that enhance communication, clarify liabilities & responsibilities, and help in securing successful performance.

The following table⁸ is presented just to highlight the differences of the conventional approach as opposed to proactive approach to contracts & contracting.

Attributes	Conventional approach	Proactive approach
Looks at matters	After the event,Backward looking Ex post; reactive	Ahead of the deal,Forward looking Ex ante; Pro-active
Sees Contracts as	Legal documents,Legal rules	Framework for relationships,Management tools
Core concerns	Contracts’ validity, enforceability and interpretation in a dispute; contract / project failure, liabilities and remedies	Contract’s usability and functionality; success in reaching parties’ goals, optimizing & managing risks, contingency planning/business continuity planning
Discipline	Predominantly law and commercial	Multidisciplinary and working in teams – project/matrix management
Serves primarily the interests of	Courts, research and academia; litigators; public lawmakers	Contracting parties; people in sales, procurement, finance & projects, contracts professionals; private lawmakers
Focus	Law; legal decision making; legal theory; legal precedent	Cross-professional collaboration;Managerial decision making; reaching business goals cost-effectively, risk management
Centre of perspective	Judges; public policymakers,Rules; past facts, Contract in dispute or litigation, One contract at time, Dispute resolution, Curative, corrective action	Contracting parties; private actors,People, process, culture, future facts, Contract(ing) in organizations, Program/project management, Contract portfolio and process, Dispute prevention and management, Proactive, preventive action
Central themes	Conflict & dispute resolution; what courts or legislators or tribunals have done or should do	Contracting skills and tools; process, roles & responsibilities; good relationships, successful performance

Contracts do not exist in isolation and do not make things happen — It is driven by the People; It should be for the People. After negotiating & signing the contract, the parties must follow their agreement. The contract documentation becomes the blueprint for the project and for managing the relationship; it provides the boundaries within which the relationship has to be managed. Hence it is essential that Contracts should be made simple, effective & enforceable.

The contract is not the goal; successful implementation is⁹. Successful implementation is what contracts are made for; contracts must transform into desired performance. Here resides the role of the Contract professional. Contract reviews should be done ceremoniously ensuring that all the actors are fully conversant with the Contract clauses. The way in which they are involved differ Company-wise, Industry-wise, Project-wise and type of contract-wise. When managing the project they not only manage the Client (sell-side) contract but also a portfolio of contracts which need to effectively pass on to Suppliers & Sub-Contractors, the applicable terms and the associated risks of the main contract. So Contract professionals need to capture the nuances of both sell-side and buy-side contracts, and managing the interfaces.

An experienced Contract professional can make a valuable contribution at the contract planning stage by sharing his experience & knowledge from previous projects & of his colleagues. ‘Lessons Learnt’ exercise by Project Managers would be a useful & effective tool. It should be noted that these Lessons learnt should not be limited to capturing technical issues as is being done in most of the cases. It should also include contractual issues. The Contract professional can help tailor the contract to the needs of the project, and protect the relationship between parties and ultimately protect the project.

On both sell-side and the buy-side, the roles of contract professional need to be  co-ordinated with project managers, sales managers, finance managers, legal professionals and others. Some of their contract-related activities and the varying extent of their authority can even cause conflict. It is often useful to map out what the organisation’s current contracting process, roles & responsibilities, eliminate the potential bottle-necks & try to arrive at a rejuvenated Contracting process. It may become apparent that no one really has ownership and is accountable for the process, end-to-end. Each organization must make its own determination as to who is in-charge. What matters the most is that the process & the role of individual team members should be made clear to every one involved.

Thus a Pro-active approach combined with an understanding of the Contracting process is a key for a Project to succeed. Teamwork, communication and clearly stated roles & responsibilities give a good leverage for effective Contract management. A well thought-out contract and the early involvement of the contract professional in the contracting process will set the stage for successful project completion. All team members from the word ‘go’ must commit to making it happen.

CONCLUSION

As the adage goes along the same lines as “war is too important to be left to the generals”, it can be said that contracting is too important to be left to the contract professionals or lawyers. If the allocation of tasks is unclear, then everything is unclear, and problems will follow.

Nevertheless, ¹⁰to create good quality contracts that serve both as business tools and as legal tools, organizations need the skills and strengths of business managers and proactive project & contract professionals. These skills & strengths must be integrated through collaboration & communication. The core of corporate contracting capabilities resides in companies’ ability to merge and optimize their respective knowledge and skill sets.

Proactive contracting offers a new, practically focused approach that deserves to be widely known. Its ramifications have wide implications & potential both in business and training, and in the continual development of contract professionals. This learning should be promoted and its results should be shared. Here resides the collaboration of total commitment of the top Management of an organization and the professional association of educators and researchers like IACCM.

Before we come to an end, once again quoting the recent words of Tim Cummins, IACCM (though meant under a different context),

Whatever we write in the Contract,

However diligent our Management is,

It is our culture that will drive behavior.

“LET US MAKE PRO-ACTIVE CONTRACTING A PART OF OUR BUSINESS CULTURE”

References & Quotes:

¹ Institute of Supply Management

² Gartner Research, Oct’03, ‘Six keys to better Procurement Contract Management

³ Alti Inc., ‘Enterprise Contract Management – An Overview’

⁴ Helena Haapio & Linda Baines

⁵ Hummingbird, ‘Contract Management – a strategic asset’

⁶ UK-OGC: Dispute Resolution Guidance 2002

⁷ Linda Baines

⁸ adapted from Haapio 2007a

^{9, 10, 11} Helena Haapio & Linda Baines

INTELLECTUAL PROPERTY RIGHTS – MYTH & MEANS

IPR Series – V (Concluding)

We have reached the important phase of this series on IPR — ROLE OF CONTRACT MANAGERS / ADMINISTRATORS in matter relating to IP.

Please understand that the author do not suggest that Contract Administrators should consider themselves equipped for patent filing or decide between design registration or non-registration. Leave such things for experts. However, very many common place contracts implicitly touch upon IP matters & to the extent this is so there should be ‘express’ terms in the contract.

If the contract is for the supply of goods only the physical property transfers to the buyer who can do whatever he likes with them — to use them, modify them or sell them. Ofcourse, he only buys the physical property and thus no right to manufacture or sell copies as “no rights in the design” have been sold.

In contracts which go beyond pure & simple supply of goods there is nee to think about IPR issues. Let us examine the following instances:

(1) If the contract calls for the provision of documents, handbooks or reports, “Whose is the copyright”? Can the buyer make & distribute copies??

(2) If the contract calls for design & development work, “Who owns the design”? Can the buyer or seller exploit it commercially? Are there any license arrangements to make?

(3)If the seller is providing the design and the rights to exploit the design, what is the position regarding any proprietary features?

(4) If, as a result of a contract, the IPR of a third party are infringed, is the buyer or seller or both or neither liable??

These are the situations that need to be considered on a case-to-case basis. The point here is that the 2 parties to the contract can make any agreement they like as regards ownership of any rights in their respective IP. If there is a third party IP is involved, then their freedom is limited by whatever is the contract or license under which the third party IP is available to them.

The above points are always & although open for negotiation & conclusion, there are some general considerations that needs to be highlighted from the Contract Management point of view:

(1) Ownership of proprietary information remains with the proprietor and the ‘buyer’ obtains rights under licence. The ‘rights’ acquired are usually the minimum necessary to meet his ‘needs’; (“More rights — More cost”)

(2) Where the buyer or client is paying for the creation of a design & its associated documentation, IP may belong to the designer in which case the contract secures rights for the buyer as in (1) above. The IP may belong to the buyer in which event the designer may have rights unde the contract to use th esign for his purposes.

(3) Use of third party IPR usually involves a sum of money, either as a license fee or loyalty; In respect of his own IPR the seller may include the sum within the price for the work.

(4) Where the contract is based on IP to be provided by the seller it is usual for the seller to indemnify the buyer against third party action for infringement or ‘alleged’ infringement.

(5) Where the buyer needs to ‘acquire’ rights from the seller not only for his own internal purposes but also pass on to his customers, these rights to ‘sub-license’ must also be secured under the contract.

Whenever IPR are involved, whether they belong to the parties — to the contract or to third parties — the ownership and terms (ie. monetary sums & conditions) must be somewhere recorded in writing. This can be either within the express provisions of the contract or by a separate licence agreement.

(Conclusion of IPR Series – total 5 parts)

INTELLECTUAL PROPERTY RIGHTS – MYTHS & MEANS

IPR Series-IV

TRADE MARK: A trade mark is a symbol or sign used by a trader to distinguish his product or service fro that of others. Thus trademarks can help customers & traders to recognise a business & identify it with the quality of product or service for which the company is known. Trade marks can be ‘words, logos, colours, shapes, sounds or jingles’ which help to create a distinctive image for a company.

Trademarks are essential for companies to protect their BRANDS, reputations and business. BRANDS are central to marketing programs and it is a trade mark that protects the distinctive elements that make up the market identity element of most BRANDS.

COPYRIGHT:

Copyright is a property right that protects original literary, dramatic, musical and artistic works, published editions of works, sound recordings, films and broadcasts.

Copy right may protect the work that expresses an idea but not the idea behind it.

As a form of intellectual property, copyright can be bought, sold or otherwise transferred. Copyright owners can choose to license others to use their works whilst retaining ownership over the rights themselves.

The points discussed so far serves as a good introduction only; What should CONTRACT ADMINISTRATORS infer from the above and how to conduct themselves while drafting a CONTRACT ………………………….. please wait for my next writing (Series V will be the concluding part of the current IPR Series)