Contract Failures – Nicholas Ahadjie Knowing the various contract types and selecting the appropriate one for

a specific transaction is a skill that that the Project Manager and the procurement team must have to minimize contract. It is evident however that it is not all contract agreements that are successful particularly outsourced projects. I would like to share a few thought on contract failures and a follow-on question for your consideration. Ozanne (1999, pp.7) defines outsourcing as “The use of outside partners to perform tasks that traditionally would have been performed inside the company.” Thus outsourcing enables the organization to focus on areas where it has greater core competencies for effectiveness and efficiency. Other reasons for which organizations engage in outsourcing include cost reduction, expand capabilities, and increase flexibility (Deloitte, 2005). Contrary to the intended benefits of outsourcing, it has been found that it is quite a complex process and usually there are failures to achieve the anticipated benefits (Deloitte, 2005). KPMG (1997) reported a failure rate of 41% of outsourced contracts. Approximately, 25% of outsourcing relationships fail within a two-year of establishment and up to about 50% within five years (Dun & Bradstreet). The failures have been attributed to:

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lack of clarity in specifications and requirements lack of understanding for each other’s specification lack of communication or information flow with the supplier dissatisfaction with contract terms

Amey (2012, pp. 697) reported that most experts believe that the above factors occur primarily because of the poor competency of the procurement team and in some cases their manpower is not commensurate with the volume of investment being managed hence they tend to gross over some fine details . Kim & Trevor also emphasize the point that poorly developed contracts could lead to budget and schedule overruns particularly in government projects thereby shifting the contract risk from the vendor to the government It is very important for organizations and particularly government agencies to work on reducing contract failures as well as reducing or sharing their risk with the suppliers or contractors. Some government institutions in response have responded by re-organizing their procurements units, increased staff where necessary and developed a continuous capacity building plan for their team (Amey, 2012, pp 608). I would like to know how contract failures pertain in your industry or sector and how this is being mitigated or managed? References Amey, S. H. ( 2012) Contract Design Failures Lead to Bad Deals Public Administration Review, Vol. 72, Iss. 5, pp. 697–698. © 2012, The American Society for Public Administration. [Online] Available from (Accessed on February 18, 2013) 2013) KPMG (1997) Outsourcing Contracts: 41% Fail to Make Transition Computer Audit Update· October 1997 Elsevier Science Ltd.pdf (Accessed on February 18.htm (Accessed on February 18. [Online] Available from: http://www. [Online] Available from http://www.2000”. Dun & Bradstreet Receivable Management Services.pdf?_tid=3a61d37a-7a8a-11e2-a78e00000aacb362&acdnat=1361274667_8d81f1fe102ec6ebfab80a74af2ea28c (Accessed on February 18.liv.ezproxy. 2013) Ozanne. R. ”D&B Barometer of Global Outsourcing .Deloitte (2005) Calling a Change in the Outsourcing Market: The Realities for the World’s Largest Organizations. (1999).ac. 2013) [Online] Available from:

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