Contracts are generally an exercise in precision. Reviews and negotiations of contract terms and language should result in an agreement that all parties are content with.
But contracts don’t exist in a vacuum. Circumstances can change rapidly and what was agreed previously may no longer be fit for purpose.
Change is the enemy of contract relevance."
Every contract contains attributes like the term, the performance criteria and the admin processes. The settings or values of such attributes would be expected to be relevant for enabling or facilitating the achievement of the contract’s desired outcomes.
Such settings would normally be based on the then-current requirements to be satisfied, the assumptions made, the general and organisation-specific operating conditions, and a range of other factors.
Over time, settings of any kind, not just those used in contracts, may need adjustment if the state of whatever factors were used in their derivation changes, or if such factors are no longer applicable.
An unknown level of risk can be introduced through failure to recognise such situations and continued use of settings that are no longer relevant since they don’t represent the current state of their determining factors.
Given the rate of internal and external change likely to be impacting an organisation these days, it’s possible-to-probable that some of the current settings in its growing inventory of active contracts are actually irrelevant, maybe visibly so and tolerated, maybe not.
The maintenance of relevance in contracts is an issue deserving wider recognition.
This article discusses relevance in the context of contracts, covering:
- The notion of contract relevance
- The value of contract relevance
- Common contract attributes
- The problem with contract relevance
- Change and contract relevance
- Reviewing a contract for relevance.
The notion of contract relevance
Relevance is the quality of being appropriate.
Relevance with respect to the settings of a contract’s attributes means those settings are demonstrably fit for purpose, for enabling the achievement of the contract’s intentions.
For instance, a 15-day invoice payment period will be relevant if it is more than adequate for completing all required Accounts Payable activities. A supplier-prepared performance report will be relevant if it shows verifiable details that actually describe that performance rather than just imply it.
Settings can become irrelevant when the purpose of having the attributes they belong to no longer applies, or the attributes have changed in some fashion not reflected in the settings. This can occur in many different ways, for example:
- A large group of service usage measures that are particularly tedious to calculate might be contractually required but have become irrelevant since the supplier has advised that the measurements are no longer actually checked by anyone
- A regulatory change has eliminated the need for a report to be snail-mailed to the regulator and now allows the use of email submission.
Relevance can be lost if a change that affects a contract’s setting is neither advised or acted on when advised.
The value of contract relevance
Value relates to the worth or usefulness of something.
At a low level, value with respect to the relevance of the settings applied to a contract’s attributes is reflected in the benefit that accrues through the performance of only relevant activities over its lifetime, to relevant standards, for relevant reasons.
At a higher level, value is also delivered from the relevance of a contract’s purpose and goals to the organisation’s objectives."
Extracting the full value of contract relevance requires the regular assessment of its state at all levels, understanding then addressing or adapting to the causes of any irrelevance uncovered.
Common contract attributes
A sampling of common contract attributes whose settings might suffer diminished relevance over time due to the impacts of change includes :
- Contract obligations and rights
- The contract term and termination options
- Operational processes like change and issue management
- Performance measures, targets and failure consequences
- Flexibility for dealing with change.
The problem with contract relevance
As with many other qualities like easy, derivative, convoluted and sophisticated, relevance is intangible. The so-what of this is: something intangible doesn’t have any physical manifestation, no dimensions like weight and size.
While a document search function can find the word ‘relevance’ in a contract, it has no mechanism for deducing or locating the quality ‘relevance’ in the semantics of the language used.
The problem then is just how the relevance of a contract attribute can be determined."
At the moment and probably for a long time yet, it requires the human skills of reading between the lines, conceptualisation, association, foresight and judgement to uncover relevance in the body of a contract document.
Two common scenarios can help provide a guide to where relevance should exist and matter.
1. Service delivery performance
A contract between the organisation and service provider for the provision of certain services should specify the level of service delivery performance required from the service provider, say in terms of timeliness, completeness and accuracy.
Targets for each measure should be set, such as 95% on time delivery during the measurement period, say each calendar month.
Consequences for failure to meet such targets could be financial, perhaps on an increasing scale corresponding to the increasing differential between the target and the actual level reached.
Relevance in this area requires consideration of, for example, whether or not, currently or in the recent past:
- The performance measures realistically describe delivery characteristics that the service provider has any influence over or responsibility for
- The targets for each performance measure are realistically achievable, with an acceptable effect on the service provider’s pricing for meeting such targets
- The consequences for failing to reach the targets are proportionate, and will actually incentivise the service provider to behave in the desired manner, rather than just absorb the consequences as the cost of doing business.
2. Contract termination options
The parties to a contract may have rights to terminate the contract for cause or for convenience. Notice may or may not need to be given about termination intentions, and minimum periods may be specified before the actual termination can take effect.
Relevance here relates to whether or not:
- The termination circumstances specified are sufficiently broad to represent genuine possibilities in order to minimise risk to the organisation, for example covering force majeure and the service provider’s insolvency
- Notice periods are realistic. For example, when services have been outsourced, the notice period must provide sufficient time for the organisation to locate another service provider and be able to receive the relevant services before the contract can terminate.
Change and contract relevance
Both the sources and the effects of general change are innumerable. When it comes to change that can affect the relevance of contract settings, that number is probably somewhat less, but that’s just splitting hairs. A big number or a bigger number makes no difference, practically speaking.
The main problem with change is that its consequences are not generally advertised."
For sure, some consequences might be really obvious in an “a + b = c” fashion. A change to a regulation governing certain organisational activities in respect of their contracts might now indisputably require the submission of additional data to the regulator by a certain time for all active contracts. It may not be easy, not the regulator’s problem, but the requirement is clear.
Other consequences though can be subtle and sneaky, taking time for the implications to surface or be discovered.
A change to a regulation governing certain organisational activities in respect of their contracts might now require organisations that do a certain thing a certain way under certain circumstances with certain contracts, to no longer do those things that way in those circumstances past a specific date unless some new conditions apply to the selection of contracts.
In this latter case, the effects of the change on the relevance of any contract’s settings might need to be checked on a per-contract basis before compliance with the changed regulation can be established and guaranteed.
Reviewing a contract for relevance
The targets of a contract relevance review could realistically be limited to the organisation’s most important contracts due to the level of risk those contracts represent compared to others.
Relevance reviews could be conducted according to a schedule for a selected group of contracts, or as a spot check on a few at a time when warranted.
The frequency of a relevance review could nominally be annual, unless the perception of the nature and volume of contract-affecting change endured since the last review suggests otherwise.
The ongoing relevance of a contract’s settings isn’t something that can be calculated or determined by automation anytime soon, perhaps ever."
As discussed above, such an assessment requires human capabilities, for dealing with nuance, extrapolating seemingly unrelated contexts to find any linkages to other information that validate or disprove relevance, and devising approaches for elimination or reinstatement of relevance.
Reviewing a contract for relevance requires:
- Strong awareness of the volatility of a contract’s operating environment
- A good understanding of the target contract
- Fine attention to detail and comfort with complexity
- Advice from contract stakeholders about actual and potential relevance issues
- Discovery of contract areas where relevance needs to be addressed
- Development of approaches to deal with each uncovered relevance area
- Discussion with other parties to the contract to agree on those approaches
- Amendment of the contract if needed to implement agreed approaches.
While the overall process itself is amenable to automation in terms of control, visibility and handover, the vast bulk of the low-level work is highly manual.
Vigilance is the action or state of keeping careful watch for possible danger or difficulties.
It’s an important element in many Contract Lifecycle Management practices such as dealing with change and tracking obligations compliance.
It’s also critical for ensuring the ongoing relevance of a contract over its operational lifetime.
Relevance is a bit of an odd bird for Contract Managers, difficult to wrangle, only detectable and measurable using human faculties, time-consuming as a result, but definitely necessary.'
Maintaining contract relevance is one of those ounce-of-prevention activities, where the time spent pays for itself many times over via the minimisation of surprises, mitigation of risk, or even just a contract that remains fit for purpose or becomes more so.
Train inexperienced staff via exposure to the attributes and their settings in different contract types, coupled with guidance and mentoring from Contract Managers experienced in conducting contract relevance reviews. It is likely the most efficient and cost-effective way of developing the depth of capability required for the challenging activity of the contract relevance review.
If you would like more information about conducting a contract relevance review, or how Gatekeeper can assist with that activity, then contact us today.