A lack of clarity about the purpose of contracts creates tension and a loss of value

The report, created in collaboration with Deloitte, is based on research and surveys among WorldCC’s nearly 100,000 members.

Almost 40% of respondents believe that contracts fail to meet their fundamental purpose—a dramatic increase since 2017, when only 27% expressed this view.

But let’s take a step back—what is the purpose of a contract?

WorldCC identifies at least 11 different purposes, and the surveyed members responded as follows:

Source: WorldCC, September 2024 

The dominant purposes for members remain (1) documenting rights, obligations, and responsibilities, and (2) protecting the parties while granting the necessary authority in the event of disputes and conflicts. Following these are (3) the contracts must serve as a framework for mutual business success and (4) acting as instruments for risk allocation.

Contracts should also (5) serve as effective communication tools, (6) provide frameworks for ongoing contract and delivery management, and (7) function as tools for managing emerging risks.

Naturally, contracts are also (8) instruments for achieving financial benefits, but surprisingly, this ranks only eighth among the 11 purposes.

Remarkably, the purposes (9) supporting business relationships and (10) offering operational guidance for contract management have declined significantly in importance since the 2017 survey. Even more surprising is that contracts are perceived as less significant for (11) demonstrating brand value and corporate values—particularly unexpected given the growing emphasis on ESG initiatives.

But what explains the apparent importance—or decreasing emphasis—of these purposes? And are these the right purposes to pursue?

Lack of Purpose Clarity Stems from Ignorance, Poor Leadership, and  disagreement about Goals

The report highlights that when leadership fails to understand the various purposes of contracts and take responsibility for shaping contract management as a comprehensive organizational discipline, the result is often conflict between different domains.

This leads to a lack of recognition of the diverse purposes contracts serve, potentially resulting in a narrow focus on certain purposes while diminishing the contract's overall effectiveness.

For instance, if contract management is rooted in Legal, Procurement, or another organizational function, without acknowledging that contract management must function holistically to serve multiple purposes, problems can arise. Rooting it in Legal may overly emphasize legal risk management, potentially neglecting or underprioritizing other important purposes.

An example from a WorldCC member (Senior Director, Contract Management, Aerospace & Defense) illustrates this:

A few years ago, our contract and commercial functions were merged with Legal, which gradually changed the function and, therefore, the purpose of the contracts. This wasn’t a deliberate decision; it just happened that the focus shifted towards legal aspects.

For example, our approach to contract terms and negotiations became more dominated by risk conditions, whereas Contract and Commercial Managers had previously been more focused on delivery and performance.

In recent years, market uncertainties and volatility did not lead to a formal reassessment of this approach, but it became evident that a lack of focus and skills in subsequent contract management, as well as less attention to the quality of elements like scope definition and KPIs, caused problems with customer relationships and financial performance.

While the discussions currently taking place in the organization don’t specifically address the purpose of contracts, that is essentially what they are about.

Narrow Focus Risks Losing Direction and Value

A one-sided focus on specific purposes, without regard for the “big picture,” can lead to a lack of direction in initiatives, value loss, and increased tension and conflict among stakeholders within the organization. In other words, contract management risks becoming overly politicized. This can lead to rushed decisions that “anchor” contract management in a particular business unit or function, with negative consequences for other purposes.

These tensions are heightened by the growing need for contracts to adapt to changing circumstances and business requirements—for example, compliance with GDPR or sustainability regulations. How should these be reflected in contracts and their management? Should the focus be on compliance and penalties when suppliers fail to meet GDPR or sustainability requirements? Or should the focus be on proactive dialogue, standards, and collaboration? Or should a combination of tools be applied—and how?

This development places greater demands on understanding, communication, collaboration, and relational competencies among internal stakeholders as well as between customer and supplier. Here, leadership must take the lead.

This, however, requires leadership to understand the different purposes of contracts and why it is crucial that everyone in the organization—and relevant suppliers—are heard and work together as a team to improve the entire contract lifecycle.

The report also emphasizes that no one should monopolize specific purposes or their management unless there is a strong justification for doing so. This could, for example, be due to the type of transaction, the nature of the relationship between the parties, or specific legal requirements necessitating or justifying a particular type of purpose in the contract - and its subsequent management.

A Unifying Purpose for Contracts

Finally, the report attempts to define the overarching purpose of a contract—or rather, a principle guiding the alignment of the various purposes:

“To protect and promote the parties’ economic and financial interests by establishing a clear and mutual agreement on their rights, obligations, and expectations.”

This purpose encompasses the theoretical aspect of legal enforceability, but the practical value lies in fostering moral and ethical accountability that encourages the parties to fulfill their obligations, build trust and collaboration, and provide a framework for resolving disputes.

Thus, the contract functions both as a legal tool and as a foundation for achieving mutually beneficial economic outcomes.

Rethinking “Contract Habits”

WorldCC urges us to rethink our “contract habits” and suggests the following points:

• Focus on fostering and strengthening the collaboration needed to achieve mutual benefits

• Make contracts operational guides that clearly describe deliverables and the value they create

• Define “must-haves” based on the transaction type and the roles of each party

• Center efforts around these “must-haves,” moving away from predefined concepts such as general terms and conditions

• Manage risks through pragmatic and operational solutions rather than attempting to predict and preemptively lock all contingencies into restrictive standard rules like liability limitations or termination clauses

• Shift negotiation focus to how contracts, collaboration, and ecosystems are practically managed to achieve outcomes

• Use data to gain insights and to assess whether the contract framework remains “fit for purpose” and adapts to changing external conditions

Leadership as the Driver of Change

WorldCC concludes that these changes can only occur if leadership, legal teams, and contract teams initiate them. Leadership, legal professionals, and contract managers must:

• Adapt their approach to contracts and be willing to let go of traditional methods

• Lead by example, embracing new methods for handling contracts, thus driving a mindset shift within the organization

• Seize the opportunity to lead and reinvent the way contracts are created and managed.