IACCM Asks: What’s the Purpose of a Contract?

Topics: Contract Management

Editor’s Note: This is a guest post written by IACCM CEO Tim Cummins.

iaccm-purpose-of-a-contract.jpgWould you buy goods or a service if you were not clear about their purpose? Customers must perceive a desirable benefit.

The International Association for Contract & Commercial Management (IACCM) set out to discover what benefits people see contracts providing – to define what exactly is their purpose?

The Purpose of a Contract Survey Findings

Our findings demonstrated a real lack of clarity. In fact, many of those interviewed admitted that they had never really thought about the question. When pushed, the most common answer was that contracts exist to record rights, responsibilities and obligations. But the problem with this answer is that it doesn’t indicate any specific or measurable benefit – which is doubtless why many question the value of contracting and are impatient with its perceived cost, bureaucracy and delay.

For legal and contracts professionals, the fall-back argument for contracts is that they provide protection and remedies in the event of a dispute – and some assert (with no evidence) that their contracts are effective in fulfilling this purpose. The problem with these value propositions is that they are not supported by senior management, who (according to research by Professor Gillian Hadfield) see little value in most contracts.

It isn’t until we reach the third item on our list of possible purposes that we see something which might cause business people and consumers to pay attention – and that is the idea that contracts provide a framework for a mutually successful outcome. 61% of respondents feel that a contract should fulfill this purpose ‘to a high extent’. The problem is, only 11% feel that their contracts are actually effective at achieving it and almost none are confident that they could actually prove this benefit.

The State of Contracting: Power Over Value

So what does this survey tell us about the state of contracting, and the steps needed to raise its relevance and value? Essentially, it indicates that the use of contracts is in many cases driven by custom, with benefits typically flowing to the more powerful party. However, the impact of this constrained approach is that the contracting process fails to deliver key areas of value. For example, rather than using the contract as an opportunity to maximize economic returns or to minimize risks of failure, the parties instead frequently engage in repetitive discussions over risk allocation or obligation avoidance. In this context, contracts are seen primarily – often exclusively – as instruments of protection and control.

The IACCM report captures a total of eleven possible purposes for a contract and reveals that there is typically a shortfall in achieving any of these. It recommends that those responsible for producing contracts should initiate a debate within their organization to establish which benefits are of greatest importance and to use this analysis to drive future strategy and approach. For example, many executives perceive contracts as important instruments for generating financial benefit – yet practitioners rank this in tenth place, suggesting it receives relatively little attention when a contract is being formed or negotiated.

Grasping the opportunity for improvement

A key lesson from this research is its confirmation that contracts are innately complex instruments, spanning the interests and needs of multiple stakeholders. Those interests are frequently difficult – and sometimes impossible – to balance, especially in large organizations. However, the good news is that emerging technologies are starting to change the ability of contracts and legal professionals to gather facts and display value. For example, front-end data gathering systems can enable more rapid identification of optimum contract terms and structure. Artificial intelligence and natural language processing (NLP) enable automated evaluation of a proposed contract against existing norms and past precedent, allowing machine-generated risk analysis and cost or price recommendations.

Suddenly, the contracts expert is becoming empowered through data. They will be able to demonstrate the value and contribution of their work.

Right now, there is just one thing missing – and that is clarity over what value and contribution should be given priority. It’s time to engage in conversation with senior management to define what, precisely, is the purpose of a contract in your business?

This blog is based on interviews and an online survey undertaken by IACCM in August / September 2017. It reflects answers from 563 respondents, representing multiple industries and geographies. The report is free for IACCM members and available on the IACCM website.

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