A New Age of Organic Contracting

Author: Steven Zolman

Organic Contracting vs. Traditional Contracts

What is Organic Contracting?

  • Fresh
  • Healthy and Growing
  • Evolving with a changing future
  • Used to make organizations more effective at working together

Traditional Contracts

  • Stale
  • Artifacts of the relationship
  • Relics of the originating transaction
  • Used to form polarizing positions for disputes and litigation

Which do you prefer?

Most client organizations have difficulty effectively managing their supply chains in a way that maximizes both economic and strategic value, and most supplier organizations have difficulty developing, and sometimes even retaining their existing customers.  One technology supplier told me once, “The day we start losing a customer is the day we sign them up, so our job is to take as much money as fast as we can, before they find out we really can’t do what they think we can do”.  One Client told me once, “Vendors are like blood-sucking parasites, only worse, so we constantly look for ways to rid ourselves from those who have ambitions to suck all the nutrients out of the host, before leaving us for dead and moving on to another host body to infect”.  With views like these, it’s no wonder a high percentage of client/supplier relationships are characterized as strained, and it’s no wonder that clients are looking for something better than traditional contracts.

In a recent poll of NET(net)’s clients, we found that only 11% characterized their relationships with their most critical suppliers as good or excellent, and that a whopping  89% said their relationships were average or below.

What’s needed?  Namely:  new Strategic Supplier Management skills.  Clients need to manage strategic suppliers differently than commodity suppliers, and as the line of accountability continues to shift deeper and deeper into your supply chains (see previous blog post:  The Shifting Line of Accountability), and as more and more suppliers are becoming increasingly strategic to the client organization – whether clients realize it or not, traditional contracts are just not cutting it.  However, most clients have not yet built a Strategic Supplier Management capability, and therefore, they continue to hemorrhage considerable economic and/or strategic value over time through mismanagement of the agreement, the investment, and/or the relationship.  Strategic Supplier Management often fails because organizations have not yet elevated their traditional contracting capabilities to be able to offer an Organic Contracting capability, and are therefore still reliant upon traditional contracts that largely result from archaic purchasing methods.  The real challenge to better Strategic Suppler Management is to develop improved Organic Contracting capabilities so that your organization has flexible agreements that have the foresight to allow for future changes to the investment structure, enabling the constant maturation and improvement of the relationship.

In comparison to organizations that have disciplined and world class processes in place for both Organic Contracting and Strategic Supplier Management, on average NET(net) sees an amazing 50% economic improvement and significant non-monetary strategic improvements as well.  One common theme we have seen with clients that have had great success in these areas is the unification of both the Organic Contracting and Strategic Supplier Management functions so that the closed loop enables for lessons learned in one area to feed and foster continuous improvement in the other.  Another area of commonality is that most of the clients that have had great success in these areas have built cross-functional capabilities in this regard, including team members from the business, IT, legal, finance, procurement, and supplier and contract management, among other areas.  Getting a 360 degree perspective of the entirety of the agreement, investment, and relationship with the supplier is key to determining how best to harvest and enhance value for the long term.  It also provides fertile fields for how to improve contracting capabilities to incorporate much of that learning so that clients can start to develop organic contracts that foster innovation, enable positive change, and deliver on the promise of the relationship rather than become traditional contracts that serve to bind the agreement, lock down the investment, and prevent meaningful changes to the relationship.

The result?  An Organic Contracting process for maximizing the economic and strategic value of your technology supply chain that also serves as the building blocks for a world class strategic sourcing function, and one that opens up team dynamics, fosters collaboration, and generates real business value for both you and your supply chain.  At NET(net), we’ve created a methodology for Organic Contracting that works in conjunction with Strategic Supplier Management and we offer it as a comprehensive service for any client that is looking to improve economic and strategic value with their critical technology suppliers.  Increasingly, there are surprising names on the list of suppliers that our clients consider strategic, but with the emergence of cloud computing and software-as-a-service (SaaS), we expect to see the line of accountability continue to shift deeper and deeper into our clients’ supply chains.

NET(net)’s Website/Blogs/Articles and other content is subject to NET(net)’s legal terms offered for general information purposes only, and while NET(net) may offer views and opinions regarding the subject matter, such views and opinions are not intended to malign or disparage any other company or other individual or group.

About NET(net)

Celebrating 10 years, NET(net) is the world’s leading IT Investment Optimization firm, helping clients find, get and keep more economic and strategic value.  With over 1500 clients around the world in nearly all industries and geographies, and with the experience of over 15,000 field engagements with over 250 technology suppliers in XaaS, Cloud, Hardware, Software, Services, Healthcare, Outsourcing, Infrastructure, Telecommunications, and other areas of IT spend, resulting in incremental client captured value of nearly $100 billion since 2002, NET(net) has the expertise you need, the experience you want, and the performance you demand.  Contact us today at info@netnetweb.com, visit us online at www.netnetweb.com, or call us at +1-866-2-NET-net to see if we can help you capture more value in your IT investments, agreements, and relationships.

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