Agile Contracting: Focus on Contract Value

You may already have heard about agile contracting, but you don’t know what it exactly is? Is there a big difference with traditional contracting? What does ‘agile’ mean in relation to contract management. And when do you need agile contracting? And how does agile contracting add to customer value and contract value?

In this article, I will explain why it may be time for you to transform the way you do contracting and contract management today. Especially if you are developing and selling bespoke high-tech products and services. For agile contracting, you need to create a mindset and contracting platform that allows you to be flexible. You should be able to easily adapt contracts if and when needed. And rapidly respond to changing (contractual) requirements and regulations.

And agile contracting is not only applicable to software development projects. You can also learn a lot about how to apply agile contracting to other products and services. And how to solve the problems you may have today in contracting complex products and services. With the goal to also create real business value for you and your customer.

What is Agile Contracting?

Agile contracting is a contractual model that makes use of ‘agile methods’ coming from software development. It is based on high adaptability and flexibility, collaboration, and outcome-driven action. Agile contracting is especially useful for complex products and services or long-term projects that in the initial stage have a high degree of uncertainty how the end-result will look like.

Agile contracts especially differ from traditional contracts by making use of broad and high-level descriptions of the entire product, service, or project at the start that will be refined over time. Instead of detailed and exact specifications of the subject matter of the contract that needs to be agreed in advance.

Putting the ‘Agile’ into Your Contract Lifecycle Management Processes

A Short History of Agile

There is a lot of talk and articles about ‘agile’. Especially in the world of software development and project management.

‘Agile ‘is the answer to a world that is continuously changing and becoming more complex. It allows you to deal with the volatility, uncertainty, complexity, and ambiguity that probably is also common to your industry.

But where does it come from?

On February 11-13, 2001, at The Lodge at Snowbird ski resort in Utah, seventeen people from different programming and software development backgrounds came together to discuss alternatives to the complex, documentation-driven, heavyweight software development processes.

The Agile Manifesto

The Manifesto for Agile Software Development was the result of this gathering.

The founders established four values in the Manifesto:

• “Individuals and interactions over processes and tools.”
• “Working software over comprehensive documentation.”
• “Customer collaboration over contract negotiation.”
• “Responding to change over following a plan.”

And they created twelve guiding principles.

Agile is a Mindset

‘Agile’ is not so much a methodology. It is a mindset and behavior you expect from your people, your customer, and other parties working on a project. Or negotiating and managing contracts.

In software development, agile practices involve discovering requirements and developing solutions through the collaborative effort of self-organizing and cross-functional teams and their customer(s)/end-user(s).

Adaptive planning, evolutionary development, early delivery, and continual improvement, and flexible responses to change are essential components of agile.

Agile is a methodology that stresses the value of maximum flexibility and adaptability.

It helps you ensure that you complete projects, in short, demonstrable steps (‘sprints’) and with frequent interfacing with clients. Your focus is on achieving realistic goals that you can complete in a few weeks.

Every time you complete a goal, your agile team shows the customer – who is participating in the whole process – the work they completed in the step. The customer then gives feedback so you can see whether you’re still meeting the customers’ expectations.

And you don’t, as happened in the past and still happens, deliver the result to your customers until you have completely finished the work.

Traditional Contracting is Traditionally Rigid

Now – how is the agile approach related to contracting or the contract management processes?

Traditionally – which means over the past millennia. we have looked at contracts as being fixed and therefore rigid instruments. They contain clear mandates and severe consequences if one of the parties fails to comply.

The way in which we negotiate, draft, and manage contracts has always been the same. Law books have taught us that written obligations and specifications are fixed and that we can only change them upon mutual agreement. The risk of not doing that is that one party will penalize the other party.

In general, traditional contracts clearly define the price, duration, and especially the scope of the contract. The parties leave no room for deviations or changes, unless mutually agreed.

This model of contracting is still the standard in many industries, including IT. However, sticking to such rigid principles has often led and still leads to costly and time-consuming contract disputes and therefore to contract value erosion.

Traditional Contracting Starts with the Scope

Even in IT, contracting models have historically been aligned with the traditional ‘waterfall’ model of delivery in IT. The ‘waterfall’ method focuses on parties identifying requirements upfront. This enables parties to agree with a supplier upon a fixed price for the design and delivery of a fixed scope.

In this model, it is essential to spend a lot of time getting the specification or statement of work right.

However, the problem often is that the customer and supplier don’t necessarily know what it wants.

This results in contracts for long-term projects or complex products and services which are based on an open-ended time & materials basis and where the balance of power sits with the supplier.

The drawback of traditional contracting models like fixed-price, or time & materials is that they favor either one or the other party. They do not allow parties to have a common goal, to collaborate, or explore alternatives.

In time & material contracts, for time overruns or extra materials, the customer has to continue to pay (more). The supplier wants to spend more time & materials on the project because the customer pays anyway. Even for the defects that need to be repaired. Or for work that is done inefficiently.

In fixed-price contracts, the supplier takes all the risk. Already long before the project starts, as a result of the proposal they submit and subsequent negotiation, the supplier has to commit to the price of the project, product, or service. At a time when there is still a lot of unclarity and uncertainty about the outcome.

What happens next is that, as soon as the supplier starts delivering, the customer starts demanding the supplier to do more. However, the supplier – given it’s a fixed price – has an incentive to limit its activities to only do the necessary.

The Rise of Agile Contracting

To deal with the problem of rigid traditional contracts, you should be looking for contract models that bring the benefit of a fixed price without fixing the scope. And that does not put your customers at a disadvantage from the outset or limit the value they can achieve from you.

Rather than spend huge amounts of time and resources on negotiations and dispute resolution, you and your customer should better focus on collaboration and outcome-driven action.

This is where ‘agile contracting’ comes in.

To accommodate agile contracting, the idea is that you apply the principles and values similar to those in the Agile Manifesto to contracting:

• Satisfying the customer by keeping pace from an offer, contract negotiation, or management perspective with the project team working on early and continuous delivery of valuable software or other deliverables.
• Welcoming changing contract requirements, even late in contract drafting or negotiation and especially in the contract management phase, rather than follow a rigid plan.
• Preferring customer collaboration over contract negotiation – rather than waste time on endless negotiations on the specification or statement of work create an environment of working together.

Also, you can translate the other values principles of the Agile Manifesto into the behavior and activities required for creating an effective agile contracting approach in your company.

So agile contracting is a different way in which you negotiate, draft, and most importantly, manage contracts.

In agile contracting, you and your customer together define business value, (implementation) risks, expenses (effort), and costs. On the basis of the resulting assumptions, you agree upon an indicative fixed price scope. This is not yet contractually binding since over time you and your customer can still adapt the scope.

Especially for industries delivering complex high-tech (and often bespoke) products and services, agile contracting can add real business value.

Agile Contracting for Products and Services Other than Software Development

I asked on Quora and in LinkedIn, whether companies also use ‘agile’ and therefore also agile contracting in other areas than software development.

And the answer is yes, absolutely. Even in traditional industries like construction people are trying agile (Agile construction – Wikipedia).

You will also find ‘agile’ in various research and development environments (pharmaceutical, car design, hardware design, etc.).

But also it is more and more applied in home remodeling, book publishing.

You can use agile contracting for almost any complex product or service where there is a high level of uncertainty about the outcome and therefore, where flexibility and adaptivity are important.

If you are creating something different or unique each time you can benefit from the ‘agile’ approach. Think of non-recurring projects in law, marketing, construction, car design.

If you are doing the same thing over and over again (recurring: software support, aircraft production, etc.) it is better to use lean methods.

All responders in Quora stressed that agile only works in ‘trusting’ environments (both on the supplier and customer side) that are open to change, innovation, self-organizing teams, and working iteratively.

As said before is a mindset, a culture.

Agile Contracting from a Cultural Perspective

Talking about mindset and culture, ‘agile’ reminds me very much of the way certain countries and cultures look at contracting.

Have you ever worked in or with companies in South-East Asia or Japan? Or other countries where people put more value on personal relationships than on rules?

In his very readable book ‘Riding the Waves of Culture’ by Fons Trompenaars (1993) about how to deal with cultural diversity in business, calls this ‘particularist cultures’.

In particularist cultures, people accept that relationships evolve. This also goes for contractual relationships. There are more than one truth and reality in a relationship since more parties are involved And this changes continuously over time. To reflect such changes, parties therefore should be prepared to readily modify agreements. Trust is based on accepting such changes.

On the other side, we have the ‘universalist cultures in our Western world where we are taught that a contract is a contract. A deal is a deal. Trust is based on honoring the contract as parties have drawn up. The contract is the only truth and reality.

Now, if we look at the values and principles of ‘agile’ again, this looks very much how ‘particularist’ cultures do business anyway!

Introducing Agile Contracting in Your Company

These days, you must be adaptable and flexible in order to remain competitive.

This already starts at the moment you initiate the proposal and definition of a project and continues up to and including the execution and contract management phase.

You not only need this adaptability and flexibility for your customers. It is also essential for your relationships with other types of business partners, like your own vendors and suppliers.

Since in high-tech and similar industries, the customer relationship for a large part determines long-term success, collaboration with contracting partners in the supply chain is essential.

So, for products and services that require adaptability and flexibility you have to look at how your contract lifecycle management approach can be adapted.

You have to identify when and where you need a more agile approach to deal with customer demands and increasingly frequent technology changes.

The 5 Benefits of Agile Contracting

Here are the benefits to agile contracting:

1. Increased Flexibility

A characteristic of agile projects is that it is difficult to determine requirements at the beginning. For any product or service that involves ‘non-recurring’ costs for product or service development, this is the case.

So you derive requirements on the go.

Over time stakeholders start to know exactly what they want or not. They adapt requirements and create new ones.

Being agile means being able to adapt quickly.

So also agile contracting has all to do with flexibility. Adapting to changes if and when needed. 

Agile contracting requires flexibility on both sides: the supplier and the customer. Both parties have to accept they have to go with the flow, accept unexpected events and avoid unnecessarily contentious resolution processes.

2. Risk Reduction Risk 

One of the key aspects of agile contracting is that it allows you to break down complex and long-term contracts or projects into shorter parts or cycles.

This makes the contract management process simpler. You will only have to focus on each phase in the contract lifecycle as it comes. It also makes working on complex products and services and long-term projects easier to manage. Finally, you reduce the risk by being able to better calculate costs, and time needed.

Parties can always change the process, or contract, for the next phases when needed. 

Agile requires flexibility. You only need to know the big picture and end goals and revisit them once in a while, but you do not have to define them in detail upfront.

In agile contracting parties accept that along the line changes happen and should be treated in a proper way. The focus of agile, and contracting in particular, is on creating a relationship between contract parties that is based on collaboration. And not penalizing each other.

By using an agile contract model both the supplier and customer benefit.

The real benefit is that you and your customer have an incentive to be more effective and focus on the important things. In the end, it should lead to you earning more and your customer spending less.

3. Strong Partnership

Working agile requires strong collaboration and effective communication between you and the customer.

You just have a healthy working relationship, and an agile management strategy makes this even more important.

This is also applicable to agile contracting, and the contract lifecycle management process you use.

The contract parties have to understand that changes to the specification or statement of work will occur. This means that you must write the contract in such a way that you can easily adapt the contract to allow for such changes without causing damage for you or your customer.

Increasing collaboration and improving communication by using the agile approach will also have the effect of strengthening your relationship with your customer. Agile working with your customer will – if done correctly by both sides – lead to stronger partnerships. 

4. Mutual Value

Agile and therefore also agile contracting on value. For you and the customer.

An important goal of agile ​contracting is to maximize contract value, the value of the deal. For both parties, there must be benefits.

Not only should both parties share benefits. There should also be a balanced sharing of risk. For instance for unexpected changes or one party wanting to terminate the contract ‘at convenience’ (so-called ‘exit points’).

Agile contracting helps us to focus on customer value and our own business value.

5. Collaboration Focus

Negotiations, therefore, need to focus on how to work together and find common ground to collaborate from the start of the contract to the close-out. Tough, winner-takes-all approaches and long negotiations over penalties, liquidated damages don’t belong in this approach.

Negotiations in an agile environment are collaborative. Based on principles and interests, not on positions. If you don’t have it already, immediately go online buy the classic negotiation book ‘Getting to Yes‘ by R. Fisher and W. Ury (3rd revised ed. 2011). This is really a must-have for any supplier selling B2B high-tech products and services.

In collaborative negotiation, the relationship with your customer is an important part of the deal. It should be equitable and fair.

There should be no winners and losers in negotiations. You and your customer should be happy with the outcome of the negotiations. This again will strengthen the relationship and improve the chance of you and your customer entering into new contracts in the future.

Conclusion

In this article, I described how agile contracting in high-tech for different types of products, services and projects can benefit you and your customer in different ways. To do that you may need to transform the way you are doing contracting today. You need to create an agile mindset and agile contracting platform that allows you adaptability and flexibility.

The benefits for you and your customer will be:

• Increased flexibility to adapt to change
• Reduction of risk in implementing products, services, and projects
• Stronger partnerships with your customers
• Creating business value for both you and your customer
• Negotiations based on fairness and equitability

I will be writing more on this and other related subjects. So if you want to be kept informed, please subscribe to my newsletter. You can also find me on Twitter and LinkedIn.

Finally, do you already also work with agile contracts? What obstacles do you see to introduce agile contracting into your own environment? Please leave your questions and answers in the comments box below.

Resources used for this article:

• Manifesto for Agile Software Development (2001) – the official Agile Manifesto website
• Forbes (2013): What is Agile? – a great article on how agile is today used everywhere and impacting organization theory
• Wikipedia: Agile Contracts – agile contracts as defined in Wikipedia
• Villanova University (2020) – What is Agile Contract Management?
• Medium (2017) – Agile Contracting

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