A little data can go a long way…

At last week’s 6th Contract and Risk Management Summit in Lisbon, a consistent theme was the trend towards an increasing requirement for trust based, highly dynamic contracting against a backdrop of future waves of disruption and uncertainty. A great example was the ability of one of the pharmaceutical alliances to mobilise together at speed to begin developing a COVID-19 vaccine on the basis of a Memorandum of Understanding around four pages in length. A far cry from the 1,000+ page agreements with which so many of us are familiar. For clients used to spending time and money not just in the contracting process, but later in gaining assurance over supplier compliance, could this herald a change in the commonly used ‘right to audit’ that our team is so often engaged to perform?

Clearly technology will play a key role in enabling ‘real-time’ compliance assessment and preventing leakage before it happens, with the endless possibilities that blockchain technology enables and that technology enabled contract management solutions offer. For certain types of contracts, technology could eliminate or significantly reduce the need for retrospective look backs of the type our team undertakes through an ‘audit’.

But how can buyers develop trusted partnerships, through procurement and during their contract life, and ride the disruption wave collaboratively? Here we think a little data can go a long way to both understand and evidence critical success factors. A form of ‘audit’ or special purpose review performed by a third party may be the only way of independently scrutinising data behind the supplier firewall to establish and maintain trust with your partners. Three lessons emerge from our experience of conducting such reviews and how a little data can go a long way to growing trust and transparency in your chosen partnerships:

1 Compare apples with apples – you may well be interested in how large or successful your potential or actual partner has been, and whether they generate ‘normal’ costs, profits and growth. But do you know how to compare one supplier to another, given the differences which might arise from financial structure, choice of accounting practice, and any impact of one-off transactions (e.g. COVID-19)? Unravelling these effects is essential to enable reliable insights. Relying only on standard ratios and formulaic approaches can disqualify or disadvantage good suppliers and limit better choice and competition through a procurement process.

2 Beware of routes to hidden profit - overhead recovery mechanisms based on a percentage of direct cost are very common in large engineering and construction contracts for long?term infrastructure projects. Such mechanisms, if incorrectly and/or inflexibly structured, can provide opportunities for costs to be recovered twice, recovered when not incurred, or recovered at inflated values over time (particularly relevant in the macroeconomic environment we are experiencing today). Consider how the various contract cost definitions sit together so that overlaps can be identified, and understand more about how your supplier’s actual underlying overheads behave (where they are coming from, how they are predicted to change, and how they relate to a chosen business model: overheads may be considered a fixed cost, but no cost is fixed in the long term).

3 Connect the dots – without holistic data points, it is easy to be given apparently plausible explanations for an assumption or assertion that, put together, are in fact contradictory and mutually exclusive. Sometimes the linkages between data points can only be made when a third party can step back and examine the relationship as a whole. Poorly performing contracts can feel like a game of ‘whack a mole’: as soon as one issue pops up and is resolved, it is quickly replaced by another. That can be due to lack of transparency as to how your supplier is dealing with its other customers and demands, again something to which an independent audit can start to add insights.

That said, an ‘audit’ or review can never be a panacea to future contract issues or the ongoing challenge of spiralling costs. It is critical to have the right partner to represent you to your most critical strategic supplier relationships and gain the data you need. Trust and integrity should ultimately be capable of being evidenced, and true partners should have little or nothing to hide.

Co-authors: Nathaniel Hicks Zoe Hollingsworth