A version of this article originally appeared on The Official ContractWorks Blog.
Agile contract management is an approach that uses the agile methodology, which means being flexible, fostering collaboration, and decomposing projects into smaller and easier tasks. This article discusses the benefits of creating an agile contract management process, information on different types of agile processes, and four steps to get you started.
Benefits of Agile Contract Management
These days, many businesses must be adaptable and accommodating in order to remain competitive. This is true with respect to their relationships with clients and various types of business partners. Contract management is particularly relationship dependent, and thus finding harmony with contracting partners is critical to long-term success. Many businesses have struggled to find the right contract management approach, as demands and technology cause frequent changes that may necessitate starting from scratch. In light of this, there is a recent move toward the concept of agile contract management.
Here are some benefits to this style:
1. Instills Flexibility
Being agile means being able to move about quickly. As a result, agile contract management places heavy emphasis on flexibility. This may seem counterintuitive in the world of contracting where every single detail matters and time is almost always of the essence. However, the business world is changing and thus contracting must change right along with it. By adopting a more agile approach to the whole contract management process, the contract management team will be better equipped to adapt to inevitable changes.
In order to instill this flexibility into the process, all parties to the contract have to be on the same page. This means taking steps to mitigate risks, especially in the face of uncertainty, and demonstrating a willingness to go with the flow when things do not flow quite as expected. More than anything, incorporating this style of management will decrease the likelihood and impact of any unexpected events and avoid unnecessarily contentious resolution processes.
2. Breaks Projects into Shorter, Easier to Handle Pieces
One of the key aspects of an agile contract management process is that it allows for long-term contracts to be broken down into shorter cycles. For example, if there is a year-long supply contract in place, the delivery schedule can be broken into a quarterly or monthly cycle. With this method, the contract management process will only focus on each cycle as it comes, and everyone must recognize and accept that the subsequent cycles may be slightly altered when change arises.
As discussed, agility requires flexibility, and this means that it is no longer necessary to constantly harp on the big picture. Granted, the big picture and end goals are always going to guide the direction of the management strategy, but it does not have to be the day to day focus. Instead, the daily efforts can be devoted to achieving each cycle successfully and making any needed adjustments for each succeeding cycle. Using this flexible approach and taking matters one cycle at a time will ease many of the burdens normally associated with long-term project management.
3. Encourages Frequent Collaboration
For this sort of style to really work, there must be frequent collaboration and effective communication among all key parties. As mentioned, contracting requires strong working relationships, and an agile management strategy makes this even more important. Given that change will no longer be eschewed as fervently, it will be absolutely crucial for everyone to be aware of where things stand at all times. The reality is that this sort of frequent collaboration should be the norm in contracting, irrespective of the actual contract management strategy utilized. And, because an agile approach basically demands frequent collaboration, this will no doubt strengthen the partnership.
4. Focuses on Mutual Benefits
One of the goals of agile contract management is to maximize the value of the deal. This means that both parties must be in it with the intention of ensuring that both sides reap the benefits of the arrangement. Agile contract management necessitates an elimination of competitive negotiations and one party seeking the better end of the bargain. Instead, the focus must be on striking an accord that will result in a positive outcome for everyone involved, which is clearly the best kind of deal to make.
Three Types of Agile Contracts
Contracts have long been considered fixed instruments with clear mandates and harsh consequences for failure to comply. For years, there was an unwavering rigidity in the way that contracts were negotiated, drafted, and managed. The idea was for parties to recognize the contractually written obligations as fixed, with the rules for performance clearly stated and necessitating near perfect obedience. In general, the price, scope, and duration of the contract were clearly defined, and there was little room, if any, for deviations.
Although this traditional contracting approach still exists, there is an increasing movement away from such stringency, as adherence to these rigorous principles has led to costly and time-consuming contract disputes. Rather than spend enormous amounts of time on negotiations and dispute resolution, there is recognition that the parties should focus on collaboration and results-oriented action. This is generally known as agile contracting, and it is changing the way in which contracts are negotiated, drafted, and most importantly, managed.
Here are three common types of agile contracts:
1. Target Cost
In a target cost contract, the parties agree on a final price for the delivery of a product or service. This price has to be realistic and takes into consideration the supplier’s costs to produce the good or service, includes the supplier’s fee which is based on its general overhead, and accounts for the risk to the supplier. The underlying goal of this sort of contract is to incentivize the supplier to fulfill the contract at a lower cost than the target cost.
In the event that the supplier is able to spend less than the targeted cost, both parties to the agreement will share in the savings. However, in the event that the supplier exceeds the targeted cost, both parties will share the financial burden. This is known as the pain or gain mechanism. The mutual savings in the underspend scenario, or the shared contributions in the overspend scenario, are meant to keep the overall cost of the contract down.
If the supplier had to assume all of the risk, then the projected target cost would likely be much higher. However, given that both parties will essentially be jointly penalized for any cost overrun, the supplier can accommodate a lower target point. In addition, there is an actual financial incentive to work more efficiently and find opportunities for cost savings. Although there is a target cost, there is built in flexibility and the avoidance of overly harsh repercussions, which is the very core of an agile contract.
2. Incremental Delivery
In an incremental delivery contract, there are predetermined review points written into the agreement. This basically allows a longer project to be broken up into several distinct mini projects. At each review point, the parties can evaluate performance up to that point and decide whether they wish to modify the arrangement, continue as planned, or terminate altogether. This method is commonly used for the development of software and other technological tools, as the incremental approach allows for a gradual building of the needed product.
Of course, it would be unfair for the supplier to create something for which they are never compensated, so the idea is for the most valuable components of the system to be provided for immediate use and benefit. Then, each subsequent increment will simply add other features and tools, thus continuing to enhance the overall value of the particular product. This again incorporates a great deal of flexibility and allows for ongoing improvements rather than a fixed timeline with concrete requirements.
3. Time and Materials
Perhaps the simplest of the agile contracts is the time and materials agreement. This sort of contract works precisely as it sounds in that the supplier is paid for the time spent creating a product or delivering a service as well as for the materials that were used in its creation and delivery. Obviously, the supplier will want to ensure that it utilizes its time and materials in an efficient manner to keep the overall costs of the contract as low as possible since this will help preserve the longevity of the contracting relationship.
In some cases, the parties may wish to implement a capped form of this agreement, so that the total cost is capped at a certain point. This further encourages efficiency and protects the purchaser from any potentially excessive cost overruns. Granted, the capped version stifles the flexibility and thus agility associated with a time and materials contract, but it is still less rigid than the traditional fixed price, scope, or duration type of agreement.
4 Steps to Create an Agile Contract
Traditional contracting focused on risk mitigation, allocation of liability, avoidance of conflicts, and significant financial consequences in the event of non-performance or a breach. Although this approach to contracting persists today, there is a growing desire for companies to incorporate a more relaxed mindset when it comes to negotiating and drafting contracts. The agile contract is one that prioritizes flexibility and outcomes over stringent adherence to doing things a certain way and demanding complete obedience. With constant changes in technology and the ease of conducting affairs across state and national borders, companies will have to adapt to new ways of thinking or risk losing business to a company that is able and willing to do so.
Here are four steps to take to create agile contracts:
1. Identify Priorities and Focus on Outcomes
An agile contract is tailored to meet specific objectives but maintains a fair amount of flexibility to allow for unavoidable changes in circumstances. The key to ensuring that a contract retains this agility is by identifying mutual goals and focusing on crafting an agreement that clearly identifies the priorities of the contracting relationship. Rather than focus on all of the scenarios the parties wish to avoid and incorporating terse language in the contract to that effect, it is best to emphasize results and the overall outcome. This gives some room for one or both parties to make any necessary adjustments without facing the possibility of a breach, an essential facet of any agile contract.
2. Elicit Feedback
The only way that contracting partners can engage in an agile manner is by knowing what the other side expects. Honest feedback must be exchanged, so that each side can adapt accordingly. This feedback loop must be immediately initiated upon commencement of the contract negotiations, must continue during the contract drafting phase, and has to remain an integral aspect of the contracting relationship throughout the management of the agreement. Failing to offer feedback and communication lapses in general are often the downfall of contracts, whether they are more traditional in nature or more modern and agile. But, agility is only attainable if both sides are comfortable making suggestions and are willing to accept constructive criticism for the sake of the deal.
3. Emphasize Collaboration
There are often two or more sides to a contracting arrangement, but this does not mean that the separate parties must act in an entirely distinct manner. In fact, agile contracts are best realized through collaboration. Mutual respect and cooperation for the good of all is a cornerstone of the movement for agile contracts. For so many years, contracting relations often soured, leading to conflict, costly disputes, and sometimes long and drawn out battles in court. Fortunately, there is a shifting business mindset that competition does not necessarily equate to being combative. With contracting, in particular, it simply does not make sense to approach the relationship in an adversarial fashion.
4. Respect Transparency
Prioritizing transparency to preserve an agile contract relates to the collaboration and feedback pieces of the equation. One of the reasons that contracts can be fraught with conflict is because one party tries to sweep an existing or potential issue under the rug. More often than not, this allows the problem to fester to a point where it becomes harder and harder to contain. However, with the agile approach, the whole point is to make modifications as needed, and thus being transparent at the time that things begin to unfold will prove critical to making the requisite changes.