The Purpose of a Contract
Key highlights from WorldCC's latest report and what to look out for next week!
This week I was at the OPEX EPC Summit in London, presenting on WorldCC’s latest report. The "Purpose of Contracts" report by World Commerce & Contracting and Deloitte. I wanted to share some of the key statistics we discussed as we tried to balance risk & commercial/ relational outcomes. It was a journey.
The report highlights that contracts often fail to deliver on their intended business outcomes. The report does provide a WorldCC definition, which, of course, supports the notion that contracts do provide protection and remedies in the event of a dispute; it is a tool for risk allocation and risk management. It is also an instrument for financial benefit.
(Link to report at the bottom of this article).
However, the report does find gaps, which leads to frustration and lost value. It challenges traditional views, urging a shift towards contracts as enablers of business relationships and value creation.
Over the next few weeks, I will share some of my own personal experiences working with many blue-chip organisations that are working to streamline this field.
Here are some key stats, highlights & actions the report highlights.
Key Statistics:
Only 39% of legal and contract professionals believe that contracts support successful business outcomes. This is a worrying figure that shows a significant gap between what contracts aim to achieve and their actual impact.
Even more striking, just 16% of practitioners feel that negotiations focus on the right topics. This misalignment is a major cause of contracts falling short of expectations.
Additionally, the performance gap – the difference between desired outcomes and actual results – has grown from 27% in 2017 to 40% in 2024. This sharp decline underlines that contracts are increasingly struggling to meet business needs.
So, what’s the problem? The report highlights several critical areas for improvement:
Lack of Ownership
A significant factor is the absence of clear responsibility for contract outcomes. Only 24% of respondents said that contract management teams were responsible, with a further 23% indicating that ownership is often shared or unclear. Without clear accountability, it's hard to drive change or enforce improvements.Ineffective Negotiation Focus
With only 16% of professionals believing that contract negotiations focus on the right topics, it's clear that the process itself needs rethinking. Current practices often prioritise risk allocation and legalities, rather than aligning contract terms with business goals. This misalignment contributes to value leakage and increased friction.Rigid Contracts
Contracts are too often seen as static documents, unable to adapt to the dynamic nature of business relationships. The report suggests that businesses need to shift away from this transactional view and embrace more flexible, relational contracting models.
Actions We Can Take:
Focus on Strategic Alignment
We must ensure that contracts are not just legally compliant but are also aligned with the organisation’s strategic goals. This includes making sure that negotiation discussions focus on value creation and long-term success, not just risk mitigation.Clarify Ownership
There needs to be clear accountability for contract performance. Whether it’s the commercial management team, procurement, or legal, having a designated owner ensures that the contract serves its intended purpose and can evolve as necessary.Simplify Contracts
The complexity of many contracts makes them difficult to navigate and understand. By simplifying language and structure, we can ensure contracts are more accessible to all stakeholders, reducing misunderstandings and delays.Invest in Technology
Contract Lifecycle Management (CLM) systems can help streamline processes, track obligations, and ensure compliance. In the digital age, investing in such tools is critical to maintaining contract efficiency.
Conclusion
The data clearly shows that our current approach to contracts isn’t working. But by refocusing on strategic alignment, ensuring clear ownership, simplifying contracts, and embracing technology, we can make real strides towards improving contract outcomes.
Let’s not just rely on contracts as documents of compliance but use them as tools for growth, collaboration, and long-term success.
Have a great weekend! If you liked this, be sure to subscribe and watch out for some stories coming next week, where I will share real-life examples of this report in action!
Matt
🌍Matt Tizzard
🌍mtizzard@worldcc.com