USE YOUR CONTRACTS TO COPE WITH CHANGE
The fourth in a series of articles on contract management.
It's a truism that the only constant in life is change. The business world is no exception. Today, more than ever, the business world is being swept by change. The pace of change, moreover, is rapidly accelerating. Most contracts are not designed to deal with this phenomenon. Indeed, they probably compound it. Your contracts need not be incompatible with change, however. They can instead be the very means by which you successfully cope with it.
To use your contracts to cope with change, you must understand the nature and sources of change as well how it affects your contract documents. Change in the business world is constant and pervasive, it occurs on both a large and small scale, and it can be either externally driven or internally generated. Large scale change occurs, for example, when old line institutions disappear and whole new industries spring up, when the economy lapses into recession or when inflation soars out of control. Small scale change, on the other hand, typically involves just your company or the other party to your contract. It can be driven by large scale external factors or it can be self-generated by factors such as internal growth, a change in company strategy, or a change in management.
Both types of change have increased the volatility of the marketplace. The consequent uncertainty about how long a particular set of conditions will last has made people increasingly wary of entering into binding contractual relationships, especially long ones. This situation is compounded by the fact that business has an increasing number of alternatives in any particular situation. The trend toward corporate downsizing and outsourcing has increased the number of competitors. Technological advancement and the ongoing communication revolution have created more options as well as a greater awareness of their existence.
The increasingly fluid nature of the business environment calls for a flexible contract that can adapt to changing circumstances. Most contracts, however, do not deal well with change. The traditional role of contracts in regard to change is to resist it. Contracts historically have been seen as static documents, whereby the parties attempt to determine their respective positions as accurately as possible and then lock them into place for a set period of time. This type of contract thus tries to halt change temporarily, or at least preclude any response to it. It is inflexible by design and neither anticipates nor easily accommodates change. Significant changes in its underlying assumptions will normally render the contract either partially or wholly irrelevant, requiring it to be either modified or entirely rewritten. Unless both parties agree to change the contract, however, the old one will remain in force, with the result that at least one party will be stuck with a bad bargain and both parties will have a bad contract. Renegotiating and redrafting the contract for every significant change in circumstances, however, is costly, time-consuming and equally undesirable.
The traditional static view of contracts is outmoded. Trying to use such a contract to halt change is like trying to stop the wind. It is much more realistic to recognize that change is inevitable and to embrace it, rather than fight it. Whether or not you believe that change is desirable, coping with it is essential if you are to compete successfully in the marketplace. This requires you to adopt a dynamic view of contracts, one that will enable you not only to anticipate and adapt to change, but to turn it to your advantage.
Contract documents that effectively cope with change must confront it head on. Here are a few basic guidelines:
· Your contract proposals should acknowledge the possibility of changed circumstances arising during the course of the transaction and should educate the client about the consequences of such changes. They should, for example, explain the assumptions on which the price and time schedules are based and explain how these terms would differ, and by how much, if the client significantly changed the scope of the project at various stages of the project.
· The contract itself similarly should acknowledge the likelihood of changes during the term of the contract and should contain guidelines and specific mechanisms for dealing with them. For long term contracts involving rapidly expanding technology, for example, there should be an agreed procedure for migrating to new technologies.
· Don't assume that the parties' initial goodwill will enable you adequately to modify the contract in the event of later changes in circumstances, since the other party's decision-making personnel and business strategies may have changed. The original contract should instead contain provisions that allow for continual adjustment in accordance with pre-approved guidelines.
· There must also be administrative documentation that is integrated with the terms of the contract and which easily and efficiently deals with changes during its term. There should be a standard mechanism, for example, for supplementing the contract to accommodate changes in the scope of services, the time schedule or pricing.
· Ascertain any limits of decision-making authority of those persons with whom you are working on the project and make sure they designate an authorized representative who has the authority to make all necessary commitments on behalf of the company. That person must have the authority to make changes to the schedule and the scope of work and also have the authority to get you paid, in full and on time.
Using contracts that enable you to cope successfully with change can give you a major competitive advantage. Your approach to business will be perceived as being more realistic and reasonable, thereby enhancing your credibility with potential customers. Customers will find it easier and more comfortable to do business with you because they know they won't get locked into an unfair and unworkable arrangement. By utilizing a dynamic contract, your obligations will adjust to changed conditions in ways that you find acceptable, because you will have agreed in advance to that type of adjustment. You will thus be in control of your economic destiny. Change will be a source not of doubt and uncertainty but, rather, a source of opportunity and profit.