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introducing collaborative contracting

Martin West

In this post, we outline the trend to collaborative approaches, key features and requirements of collaborative contracting. 

We have covered in prior posts

Collaborative contracting offers the IT Service sector an alternative to traditional contracting approaches.  

trends towards more collaborative approaches

The movement towards less adversarial frameworks in the legal system is strong. Key initiatives are part of this trend. Examples are Collaborative law and mandatory mediation. The key benefits are parties are positioned to work together. The result is improved outcomes and lower costs. The same applies to collaborative contracting.

The requirements to contract collaboratively are unique to each sector. It has been effectively applied to the supply chain sector. The general approach is to identify key shared interests. Then design the contract approach based on these. In the supply chain sector, the model focuses on business outcomes alignment. This was effective due to an outsource model where supplier operations are highly independent.

For the IT Service sector collaborative contracting model, the core interest is team interdependence. i.e. Success is dependent on team interaction. The model requires low level cross-connecting collaboration to be effective. 

the role of conflict to build alignment

Collaboration is not the avoidance of conflict. Collaboration is a response to conflict. Collaborative contracting is designed to enable parties to work together through conflict positively.

Collaboration requires open conversations about core interests and strong disciplines for keeping each other accountable. Critical to collaborative contracting is individual performance accountability as well as joint accountability for overall success.  These cross-connections between people drive better solutions through more effective problem solving. Collaboration contracting is a system that creates cross-cutting connection around shared interests. This drives aligned actions. 

key design features

As mentioned above this model requires low level cross-connecting collaboration to be effective. The following are key features of collaborative contracting:

  • baseline - the planning frame: the baseline for governance is established as part of contracting. It is maintained throughout the life of the project. Baseline planning is a joint process. The baseline is a statement of intent but not a contract. It is a governance tool which has contractual and financial implications. It does not commit the customer to fund the extent of the baseline.
  • for small batch cycleoperational frame, the expectation is for a very low variance on estimates. The per batch metrics will include costs, earned value, and deliverable dates. These values are measured against milestone and large batch targets (planning frame). Both parties agree to estimates at start of the batch cycle. Parties agree and assign accountability for variances at end. This drives project charges.
    • for each batch cycle, there is a contract extension. The proposal is to use contracted delegated authority. This delegation will be agreed within the contract to simplify the contract extension process.
  • competitive pressure on pricing - it is critical to maintain competitive pressure on price throughout the project. The planning frame establishes the baseline on a competitive basis. Changes to the baseline threaten the competitiveness of pricing. This is due to estimates of effort being created under a single source scenario. Countering factors balance this. This includes
    • small batch cost discussions with joint liability on variance at operational governance level. i.e. if they keep estimating high and can't just justify variance, then corrective actions will be agreed.
    • initial contract outlines cost model for project beyond initial set of activities identified; and
    • the equilibrium of negotiations will have its own pressure on price along with balancing the need to protect margins.

core contracting requirements

Collaborative contracting (CC) has to address the same core requirements as traditional models. For CC, the take is on these requirements is importantly but subtly different. The features above support these requirements. 

  • predictability in operational and planning frames is needed.
  • projects need to adapt to learnings and unknowns.
  • operational management needs very high levels of predictability over very short windows. i.e. two weeks to a month. Variances are calculated against the batch cycle financials.
  • competitive pressure needs to be maintained in both the planning and operational frames
  • for risk management, customers and suppliers need to be aligned on shared interests. Individual accountability for performance is maintained.

We welcome feedback and your ideas on using collaborative contracting in your organizations. 

Please see other related posts:

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