A pre-nuptial agreement is no guarantee of a successful marriage just as a contract is not always 100% assurance of a successful commercial relationship. What counts among other things, is the strength of the relationship, their expectations and the lines of communication. Both documents however serve to identify risk, manage the possibility of failure and act to limit the extent of damage. Consider it a bit like taking out insurance.

We accept the need for insurance, to protect our health, life, homes, vehicles, our commercial premises and even some key personnel, however with industry being so highly competitive it doesn’t take much to tarnish a reputation; then consider what it would take to recover your company’s former sparkle as the damage of a sullied commercial relationship could extract a cost that other risks don't, such as devaluation in the eyes of our industry peers, our brand, supplier relationships, business partners or our image. On balance is it therefore harder to evaluate damage or manage risk and with hindsight is it then better to document our business arrangements with a simple written contract, rather than run the risk of fall-out due to verbal misunderstanding.

I asked a client prospect recently about their organisations level of contract management, did they have any, if yes how were they managed. His response was no surprise to me as I hear it all the time, “well in our industry its very informal, its trusted relationships and not over complicating things”. So I asked, “what happens when it all goes wrong?”, “Well” he said “as it happens I am currently cleaning up the mess and trying to mitigate risk where I can. Some issues have been resolved by sitting down with the people involved and some issues have not been able to resolved satisfactorily at all”. This was not some small owner operator business either. This was an organisation distributing household name products. He conceded that in their organisation evaluating suppliers and identifying risk was poorly done. That very same week I was talking with a potential new supplier for our business. This was a much smaller company with about 10 staff. During our meeting I was interested to learn that they had recently hired in an IT Support professional to undertake some work on their computer system only to be presented with a bill far in excess of what they had been expecting. It turns out that during the job the IT professional had assessed as part of the service scope it necessary to undertake other activities which had resulted in this extra cost. As neither party had sufficiently defined their expectation or thought to ask the other for input along the way, relying instead on their trust of the other, this is now the subject of a claim in the Disputes Tribunal.

The Law provides some protections, however this does not compensate for naivety and casualness surrounding contract formation. In New Zealand this is partially cultural because we have a ‘she’ll be right’ attitude, however there is also a very widespread genuine lack of understanding for when a contract is formed or when one is materially changed. Take for example the frequency with which business relationships are entered into without a written contract only to fall foul of their expectations of the other. This is evident at a grass roots level with the volume of claims before the Disputes Tribunal. Nationally, the Ministry of Justice reports new filings for Auckland alone in 2007-2008- 2009 at $7.8million per year and for the period 2009 to April 2010 $4.1million. It is however very likely that an even greater number of disputes never get as far as court because the parties deem it all too hard and walk away with nothing or perhaps each agree to a less than ideal settlement and chalk the whole incident up to a learning experience. We can all think of occasions when in business something hasn’t gone quite to plan or perhaps there has been a dispute over costs. In most instances everyone genuinely wants to do a good job so perhaps we let ourselves down when we don’t adequately identify the risks or manage the possibility of failure. I believe it's better to do that upfront than to chance the cost of getting it wrong.

5 things to consider are:

Contracts have a beginning, middle and an end, so think of a contract as just another business tool. However make a mistake, like don’t think you need or have one and it could mean disaster for business or threaten the company's very ability to operate.

Cathy has more than 20 years of experience across a wide range of disciplines including Service Delivery, FMCG, IT, Banking and Telecommunications having worked with major New Zealand and dominant global organisations. Outsource management, cost saving and contract management strategies are areas she is both professionally and personally passionate about.

www.vendormanagement.co.nz