Taking Contracts into the Future
When an outsourcing agreement fails, no matter which side you’re on, everyone loses. At Nationwide, the folks that manage contracts are very aware of this, and they’re taking steps to mitigate against failure; most notably, by focusing less on what can go wrong and more on developing the kind of language in the contract that creates a more successful outcome for the project. This also means taking a step away from a "procurement" strategy, towards a "partnership" strategy. But contracts need to support that. "If all we are doing with our contracts is keeping things at the status quo, that's not going to be a good platform for where Nationwide wants to go in the future," says Brent Rogers, Managing Counsel in the Office of Privacy, Technology, Information & Contract Services at Nationwide Mutual Insurance Company.
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Brent, could you describe your role at Nationwide Insurance to me?
I serve as a managing counsel at Nationwide Insurance and my role is to support our supply management services area in the procurement of, primarily, technology. I tend to be involved more on software, IT consulting, … those sorts of things. I am essentially legal counsel representing Nationwide in these sorts of procurements.
We’ve seen a lot of change in the financial and insurance business over the last couple of years. How have you seen the business’s needs changing and how might this be reflected in the kinds of contracts that Nationwide is signing with its providers?
At Nationwide, there's been a move towards taking contracts into the future, if you like, and we’ve put a lot of effort into transforming our group into an organization that helps to better manage contracts, and thereby becomes a better business partner for Nationwide. That is manifesting itself in many different ways, for example an increased focus on supplier relationship management, and taking a different viewpoint towards suppliers, trying to improve those relationships.
In terms of impacting contracts, we are trying hard to stop doing things how we used to, in the past. We’re trying not to look at things through a "procurement" lens, but rather move towards a partnership, and our contracts need to support that.
If all we are doing with our contracts is keeping things at the status quo, that's not going to be a good platform for where Nationwide wants to go in the future.
Practically speaking, how do you build a partnership or a collaborative relationship, into a contract – which is presumably established to protect each side?
Let me give you an example. Let's say that we're building out a deliverable, and we're buying a service to create a software-type of deliverable. Now, what you might have seen in the past is that the sales team takes the specification and gives it to the consulting arm, which builds it out. We, the customer, would do some acceptance testing and then we’d have a warranty for the specifications we provided that lasts for some time period, say six months.
This process works to a waterfall type of development, where we, the customer, provide you with the requirements and you magically create the deliverable. It doesn't necessarily reflect the reality of today, where there’s a more agile type of delivery, and where the supplier and the customer come together through an iterative process of developing out specifications on the job, over the life of the multi-year contract.
What we ought to be doing is focus less on a warranty that, quite honestly, is there to protect a failure at the end of the project, and instead, develop an iterative development process that checks us as we develop the specifications over time. We need to focus less on what goes wrong in the sale – on failure – and focus more on developing language in the contract that creates a more likely successful outcome for the project.
And as issues or complications arise – are new-style contracts living up to their expectations?
I would say yes, and part of that is anecdotal because, as legal counsel, I'm not in the role of day-to-day management of those relationships. Where I tend to get involved is when things are going wrong. But what I'm finding is that when you establish contracts that are more collaborative, they tend not to come back to me because something has gone wrong. The contracts that I do still tend to get involved in are the ones where the language did not support a good relationship, where something has gone wrong and now we need to pull out the contract to deal with it. Oftentimes those contracts don’t really support resolution, either.
So the contracts that do come back to me for resolution are the kind that are not developed in support of collaborative relationships.
So that proves the concept?
Yes, through the negative, that's right. By default, I know the new-style contracts are working.
Do you think that there is generally too much reliance on boilerplate terms in today's contracts?
Absolutely, and what I tend to see is that, when it comes to setting up a complex project we often pick somebody that we already have an existing relationship with. You're unlikely to go out and select somebody new for a complex project, right? You’re more likely to go back to a supplier with whom you have had a positive relationship and leverage that.
But when you don't critically re-evaluate that contract and how your supplier will support that particular transaction, you can easily miss something. For example, you may have established terms in the contract related to how you’ll deal with disputes. You may have said the contract will be interpreted under New York law and that arbitration will be done in New York. But you may be trying to deal with this contract along with several others, where you are working with multiple suppliers, and you really need to be harmonizing this provision across contracts if something does go wrong.
There is too much reliance on contracts that were signed in the past, and an assumption that you’re "good to go" – whereas you really need to go back and think critically about your relationship with that supplier.
Traditional contracts may be said to offer clients some kind of advantage, in terms of protecting them. With these new-style collaborative contracts, surely clients are giving up some advantage or some leverage, in return for a less tangible value-add in the future. Would you agree with that?
Absolutely, and I’ll be talking about this in my presentation at the IACCM event. When you’re dealing with contracts, you sometimes mistakenly believe that you are protected, but that "protection," especially in more complex projects, can fall apart pretty quickly.
We should be switching our mindset away from, "How do we protect ourselves in the event of failure?" to "How do we structure a contract that increases our likelihood of success." Because if you get to the end of a project and it fails, everybody fails; it's the supplier failing, it's the customer failing … everybody loses. From my perspective, we ought to spend much more time working on how we get the right incentives in place, not only for the supplier but also for the customer, to make sure that we are driving towards a successful project so that everybody can win.
Do you think different industries are being affected differently as projects become increasingly complex? Is your particular industry more challenged than manufacturing, for example?
I don't know. I do think that our industry has some challenges, especially because we deal with intangible things. As an insurance company and financial company we need to manage information and so we have a long history of development that's been put in place to manage information. Regulations have changed over time which impacts how we deal with information, and we need to consider things like whether we should replace applications that were developed specifically for us by a package solution. But we need to be very careful because they can be very expensive and, quite frankly, they go right to the critical nature of our business. We don't want failures on these projects because they're taking us into the future, and they impact how we're going to meet our customers' expectations.
So the global contracting community is going through big changes. Do you have some tips on how to manage this kind of change within the contracting environment?
I think that in many ways it all starts with the customer and so what really needs to happen is we need to have very strong individuals who are willing to push for change at the supplier management level of the organization. Those are the folks who are going to create the drive, not only in the organization itself, but also with suppliers to the organization, towards a more collaborative approach. That's tip number one: you have to have the right kind of organization in place.
Tip two is: just as we say that we want collaboration between suppliers and customers, we need to have that within organizations, too. I think that far too often organizations find themselves in these internal battles between the lawyers wanting it one way, and the supplier managers wanting it a different way – and so you really need to establish good working relationships built on trust. If you can do that, I think a lot of the details will work themselves out.
If we get to a point where we trust each other, it allows us to make changes in an organization to build successful contracting methods and processes to deal with complexities.
Brent, thank you so much for your time today and we look forward to hearing more from you at the IACCM Conference in October.
Thank you very much.