Lean Contracts & Trust - Are they really compatible?

I was asked an interesting question this morning - "Agile just doesn't work our work with fixed price contracts - so what should we do?"  I guess I understand the problem - when you're designing & delivering using an iterative approach it's pretty difficult to tie down what's the contract is all about.  If you can't do that then it's even more impossible to apply penalty clauses to incentivise suppliers.

The more I thought about it the more other questions came to mind.  Do fixed price contracts really work in any project environment?, Can we really define exactly what's got to be delivered in sufficient detail to deliver a truely accurate cost?, Do penalty clauses really deliver? and What do we have fixed price contracts anyway?  Now I've worked on a wide range of projects including so those with so called "Hard Deliverables" and, without exception, I can say that fixed price contracts never delivered what we expected - but that's in their nature.

There are two ways to look at contracts and it depends on what you believe.

Conventional view - Companies look out for their own interests and Contracts are needed to limit opportunism

Lean view - Assume other parties act in good faith, good relationships limit opportunism and contracts should encourage through incentives

So if we take the lean approach there are some key questions that will be worrying managers: Who takes the risk?  What's the price of trust?, How does our approach change? What does a Lean contract really look like? and Can it really work?

Now I don't profess to be a procurement expert but I do know that lean contracts are very effective in all environments - especially in software development and business transformation.  I've negotiated partnership agreements with suppliers based on Time & Materials with incentives and they've been extremely profitable for both parties.

Luckily for us though, Mary Poppendeck really explains the subject very well in her presentation Agile Contracts - What is trust? She tackles the difficult concepts for lean contracts precisely with good case studies and excellent practical conclusions so I'd really recommend a read.

I'll come back to this subject in the coming weeks.  I believe that extending Agility to partnerships & suppliers is the next barrier for Agile to overcome.  Pulling together the wider end to end team (partners, customers and suppliers) reminds me of the "Just in Time" projects I covered early in my manufacturing career and the key foundation of that was Kanban management....  Trust & partnership were the foundation of those phiolosopies as well and they've coped well over the years.

Maybe I can see a link here - Just in time->Kanban->Agile.  That's what I'm going to talk about soon in this blog.  There might just be a coming together of lean manufacturing & lean projects or BAU & Projects.  That sounds an exciting development.