Executive Summary
This paper analyses the conditions and terms of the contract between ADCO and Emirates Transport for the provision of light transport services coming into effect on the first April of 2014. The contract terms influence the distribution of coercive and expert power in a positive way for ADCO by introducing effective consumer protection mechanisms, such as the system of disciplinary actions and the right to make final decisions on issues involving substitutions and vehicle acceptability.
Also, the contract is beneficial to the service receiver in terms of knowledge power since it grants ADCO the right to access and audit the contractor’s facilities and information (HR, financial operations) peculiar to the provided services. The contract terms allow ADCO to effectively reduce different types of risks, such as poor performance, delays resulting from the contractor’s fault, waste mismanagement, or the contractor’s purchasing of goods from ADCO’s competitors. To sum up, ADCO is recommended to continue the mutually beneficial relationships and consider implementing communication strategies suitable for low-power and high-interest stakeholders.
Introduction
The readiness to agree to concessions and make compromises does not remove the significance of contractors’ interest in conducting highly profitable activities while minimizing obligations and risks as much as possible. This paper contributes to the discussion of the issues of power and risk distribution by evaluating the contract for the provision of light transport services. The sides to the contract are Abu Dhabi Company for Onshore Oil Operations (ADCO) and the Emirates General Transport and Services Corporation (Emirates Transport).
Background Information
ADCO’s contractor is one of the largest providers of public transportation and logistics services in all seven emirates making up the country. The contractor’s transportation services are mainly utilized by educational institutions and various organizations in the government sector (Emirates Transport, “Who We Are”).
The service provider collaborates with multiple public sector organizations, including the UAE Ministry of Education, the Emirates National Oil Company, the Union Railway, the Emirates Post Group, and other clients (Emirates Transport, “Who We Are”). ADCO, a part of the ADNOC Company Group, is a leading onshore gas and oil producer in the Emirate of Abu-Dhabi that operates eleven gas and oil fields (ADNOC Onshore). In the contract with Emirates Transport, this organization goes under the name ADCO, but its present brand name is ADNOC Onshore.
The Five Forces Framework proposed by Michael Porter is widely used to analyze factors contributing to competition in particular industries, thus informing businesses’ decision-making peculiar to strategic development. Regarding its additional uses, the analytical framework applies to much more specific units of analysis, such as particular opportunities for making contacts with organizations in the public sector. Taking the forces into account, it is possible to deduce that the supplier of vehicle rental services to ADCO is currently in a relatively safe position when it comes to the competitive landscape (see figure 1).
New competitors’ emergence is unlikely since Emirates Transport fills the transport rental niche by having contracts with different companies in the government sector, ranging from the UAE Ministry of Interior to the Department of Transport (Emirates Transport, “Emirates Transport Service Guide” 21).
Another factor that would reduce the potential incumbents’ willingness to enter the market is the accessibility of Emirates Transport’s services in more than forty locations throughout the territory of the UAE (Emirates Transport, “Emirates Transport Service Guide” 18). The threat of substitute products is non-existent in this case since there are no services outside of the transport rental market that would provide the same benefits. Emirates Transport actively invests in innovation and uses smart tracking devices to improve fleet management and control and offers complex follow-up support and integrated services, which contributes to its uniqueness as a service provider to large organizations.
The supplier’s fleet includes vehicles manufactured by top car producers that enjoy popularity among individuals and corporate clients, thus having power in the market. Emirates Transport is much less likely to sustain unbearable losses from car price fluctuations than smaller transportation and car rental services. Finally, Emirates Transport has to raise quality standards to represent the UAE Government honorably, but buyers, when it comes to the government sector, do not have plenty of service providers to choose from.
The total fleet of Emirates Transport consists of more than 30,000 cars, buses, trucks, and other types of vehicles, and the corporation employs over 10,000 qualified drivers and 2,000 maintenance specialists (“Emirates Transport Service Guide” 1). This access to abundant human and technical resources makes Emirates Transport capable of meeting the needs of organizations in the government sector, thus making the corporation attractive as a contractor. At the same time, Emirates Transport sells its services in high volume and to well-educated buyers, which increases buyer power (Emirates Transport, “Annual Report 2018: Transforming to Stay Ahead” 17).
Contractual Terms and the Distribution of Power
According to the text of the contract, Emirates Transport takes on the obligation to provide high-quality light transport services to ADCO and accepts responsibility for a wide range of tasks associated with such services. In concordance with the formalized written contract, Emirates Transport shall work diligently and apply force to meet the expectations of ADCO regarding several types of services. The scope of service includes the provision of properly functioning vehicles to ADCO and transport maintenance and management services for eight types of light vehicles in four geographic areas, including Abu Dhabi, BAB, NEB, TPO, and other areas that ADCO may want to add in future.
Emirates Transport undertakes to provide any resources needed to fully meet ADCO’s expectations at its sole cost and expense. Examples of such resources include the appropriately trained human resources, supervision, and staff training activities, equipment for vehicle maintenance, and other materials critical to timely service provision. Thus, Emirates Transport is fully responsible for bearing employee remuneration expenses when it comes to its staff members and any other individuals or organizations that assist it in the provision of services to ADCO.
For its part, ADCO shall provide Emirates Transport with information and assistance needed to obtain customs duties exemption and any permits to work from ADCO or other ADNOC subsidiaries. Upon receiving the correctly prepared invoices from Emirates Transport, ADCO has thirty days to make the full payment or start alternative actions, such as requesting credible evidence of Emirates Transport’s expenses, and so on.
The size of an organization plays a critical role in assessments related to the distribution of power associated with entering into mutual agreements. The total number of employees in ADNOC Group exceeds 55,000 people, whereas Emirates Transport has more than 17,000 employees (“Emirates Transport Service Guide” 1). ADNOC Onshore makes part of one of the largest organizations in UAE, and the difference between its size and the size of its contractor is also evident when it comes to annual revenues.
Mendelow’s matrix is a simple and effective tool for stakeholder analysis that draws links between the types of interested parties and the preferred stakeholder communication strategies to be implemented (Cheshmberah 144). Applying this model, it is possible to conclude that Emirates Transport is a highly interested stakeholder that, however, does not have much power to influence ADCO’s organizational goals and ways of doing business (see table 1).
For instance, the analyzed contract contains multiple examples of ADCO’s attempts to reduce its contractor’s power by maintaining maximum decision-making control. At the same time, ADCO has the right to partially or fully terminate the contract for any reason without being liable for the contractor’s loss of anticipated profits or related damages (ADNOC 29). Considering that, Emirates Transport is interested in meeting ADCO’s performance expectations and complying with the contract terms to the maximum possible extent.
Table 1. Emirates Transport’s Position in the Mendelow’s Matrix.
Having analyzed the contractual terms accepted by both ADCO and Emirates Transport, it is possible to say that the agreement does not influence the distribution of power in a negative (for ADCO) way. To begin with, specialists from ADCO have managed to formulate the contractual agreements that help the organization to preserve maximum power and put ADCO in an advantageous position when it comes to the ability to control collaboration and influence another party’s behaviors. Legitimate power is the source of power that refers to an individual’s ability to impact others because of the position held in an organization (Twalh et al. 47).
The contract does not give much legitimate power to Emirates Transport. It is, among other things, evident from the contract term 7.2, according to which Emirates Transport should not appoint or replace its representatives without obtaining written approval from ADCO (ADNOC 19).
The contractual terms accepted by Emirates Transport and ADCO also result in the uneven distribution of power between the parties if attention is paid to imposing direct influence by sanctions. The so-called coercive power refers to an entity’s ability to use negative reinforcements, such as penalty charges or the threats of early abrogation of a contract resulting from dissatisfaction (Twalh et al. 47). As it follows from the clause 5.11e, the service receiver can exercise its coercive power in multiple ways, including the right to reject any vehicle that it regards as unsafe and lay Emirates Transport under an obligation to retire and replace the vehicle without delay or face immediate disciplinary actions (ADNOC 40).
This aspect of the agreement is advantageous for ADCO in many ways; most importantly, by introducing it, the company reduces the risks of getting unsafe services that could cause damage to its property, employees, or even reputation. Additionally, by reserving the ultimate right to decide which vehicles should be replaced, ADCO effectively reduces the risks of fraud associated with other experts’ involvement in the procedure of vehicle condition assessment.
ADCO’s coercive power also allows it to take all remedial actions that it considers necessary (withholding direct payments to the contractor, terminating the contract on an ex parte basis, confiscating the performance bond, or alternative actions) in some instances. As for particular examples, ADCO can influence Emirates Transport’s employee relationship practices by implementing the mentioned actions following the contractor’s inability to comply with the UAE Labor Law and contractual obligations regarding wage payments (ADNOC 18).
The contract terms also contain detailed descriptions of how ADCO and its representatives will exercise coercive power in case of isolated incidents involving the contractor’s employees or equipment. According to the contract terms, ADCO introduces eight categories of disciplinary actions, ranging from formal warning letters to total deductions of specific vehicles’ pro-rated daily rates (ADNOC 59). With that in mind, the terms enable ADCO to punish the contractor for non-compliance in multiple ways.
To continue, the contract terms give more expert power to ADCO even though the contractor’s rights also include access to information peculiar to ADCO’s facilities and operations (Arora and Rao 4). Concerning expert power, in many cases, the terms of the agreement enable ADCO’s representatives to act as the sole judges of the evidence. For instance, when evaluating a case of non-compliance that is not explicitly discussed in the contract, ADCO can use its expert power to categorize the case at its sole discretion (ADNOC 59). Similarly, ADCO has the right to make final decisions concerning whether the substitutions for vehicles, equipment, or any materials offered by the contractor are adequate (ADNOC 15).
Regarding knowledge power, ADCO’s contractor can access information about ADCO’s operations, plans, and assets if it influences the contractor’s ability to fulfill its obligations. This fact, however, does not give much power to Emirates Transport since it is obliged to use and share such information only with ADCO’s consent and solely to deliver the specified services in full and on time (ADNOC 28). Apart from information concerning equipment and facilities, the contract grants ADCO the power to access information about the contractor’s workforce size, utilized employment conditions, staff members’ skills and experience, duty rosters, and other types of documents (ADNOC 19).
ADCO’s knowledge power also finds reflection in its and its representatives’ right to copy, access, and audit the contractor’s printed and digital documents relating to payments to be submitted by ADCO (payroll files, receipts, expense support documentation, etc.) (ADNOC 22). Considering this and the fact that no non-disclosure obligations accepted by ADCO are mentioned in the contract, ADCO seems to possess more power than its contractor when it comes to knowledge.
Risks between the Supplier and ADCO
Government-owned organizations predominantly prefer to take the risk-averse approach to contracts with suppliers, which is the case of ADCO. To prevent many disputes related to contract implementation and address risks related to amendments, negotiators should develop guidelines concerning which party has the authority to make amendments and whether other parties can reject them (CIPS; CIPS Knowledge 3). The contract terms accepted by ADCO and Emirates Transport contain such specifications that significantly reduce the risks of unmet needs for ADCO. Thus, if ADCO needs additional drivers or vehicles beyond what is specified in the contract, the contractor has about two weeks to comply with the request or provide evidence of the non-availability of the required vehicles (ADNOC 38).
Both parties may face various adverse events, but the supplier seems to have taken more risk compared to ADCO. Using Porter’s analysis of the contractor, it is reasonable to suggest that the moderate intensity of rivalry will contribute to the contractor’s motivation to perform at its best to avoid early termination of the contract (figure 1).
Additionally, common risks are linked with the provision of false or inaccurate information (“Misrepresentation;” Weitzenböck 12). ADCO effectively addresses this issue by demanding compliance with its code of conduct for third parties (ADNOC 6). In general, ADCO is in a favorable position when it comes to collaboration with Emirates Transport since it is well-protected, and the potential threats are not very likely to happen (see table 2).
Table 2. SWOT Analysis: ADCO’s Collaboration with the Contractor.
STEEPLE analysis is an assessment tool that focuses on external factors affecting businesses and can be helpful when it comes to risk analysis. Certain asymmetry of power observable in the contract between ADCO and Emirates Transport gives rise to the unequal distribution of risks between ADCO and the supplier. As for the socio-cultural factors affecting collaboration and risks between the parties, religious customs of the areas in which ADCO operates may result in requests to change the contractor’s working schedules (ADNOC 15).
Another socio-cultural factor refers to the immigrant workforce – according to the contract agreement, the contractor is solely responsible for obtaining all documents necessary to import foreign workforce and meet these employees’ accommodation, educational, healthcare, and daily living needs (ADNOC 18).
The technological factors specifically relevant to the case are presented by the use of innovative vehicle monitoring systems. As per the contract, the contractor will have to use ADCO’s in-vehicle monitoring system (IVMS) equipment with due care and diligence and return it in proper condition (ADNOC 46). Any tampering with such devices should be recognised as violations of HSE requirements and incur disciplinary actions (ADNOC 59).
The environmental forces impacting the parties to the contract include being expected to comply with environmental protection regulations. The contractor, for instance, is held responsible for observing waste disposal practices approved in the UAE, including the use of the customer’s waste disposal facilities based in Al Ruwais (ADNOC 16). Unpredictable factors, such as weather, may also incur risks on the contractor and even ADCO since adverse weather conditions (excluding natural disasters) are not classified as force majeure circumstances (ADNOC 32).
The contract terms do not explicitly discuss any specific political factors that can create risks for ADCO. The contractor, at the same time, faces risks in case of its employees’ dissatisfaction with employment terms since any strikes or protests involving the contractor’s staff are excluded from the definition of force majeure causes, and delays resulting from such events should lead to disciplinary actions (ADNOC 32).
To continue, both parties are greatly affected by certain economic factors. As part of the ADNOC Group, ADCO is interested in preventing losses resulting from the contractor’s collaboration with its key competitors, such as Saudi Aramco. Therefore, the terms require the contractor to give preference to Abu Dhabi subcontractors and merchants whenever practical, including using diesel oil provided only by ADNOC or its official distributors (16). Another economic factor affecting ADCO is the risk of cost overruns resulting from unexpected circumstances that the contractor cannot control. For instance, increases in fuel prices by more than 20% should lead to the revision of vehicle hire rates on a negotiated basis (ADNOC 67).
Regarding the legal factors, the contractor is obliged to comply with the UAE Labor Law in any aspect of its collaboration with employees, including the timely and full payment of wages, overtime work wages, paid day-offs, workers’ health insurance, and so on (ADNOC 72). The contractor is also obliged to indemnify ADCO against any sort of penalties resulting from alleged violations and infractions of rules and laws by Emirates Transport and its employees/agents and defray all of such expenses (ADNOC 31). Concerning ethical forces affecting the parties, the contractor is anticipated to get acquainted with ADCO’s Third Parties Code of Conduct and comply with all of its provisions (ADNOC 30).
Conclusion
To sum up, the terms accepted by Emirates Transport demonstrate its readiness to seize on an opportunity for building strategically important partnerships. The contract grants significant coercive and knowledge power to ADCO, enabling it to act in a way to minimise the risks of receiving unsafe or inappropriate services. With that in mind, from ADCO’s perspective, the contract can be regarded as a valuable opportunity.
Recommendation
Based on the evaluation of the contract terms, the following recommendations can be provided to ADCO:
- Continue to collaborate with Emirates Transport on the previously agreed terms and conditions;
- Keep the service provider motivated and informed by resorting to different strategies, such as meetings, communication with the contractor’s personnel, and facility audits;
- Make sure that the contractor gets only accurate and up-to-date information about ADCO from ADCO’s managers and employees;
- Consider developing strategies to reduce the risks of unintentional disinformation of the contractor by ADCO and prevent associated expenses or delays.
References
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ADNOC. Contract No. 15509.01 Between Abu Dhabi Company for Onshore Oil Operations (ADCO) and Emirates General Transport and Service Corporation for Provision of Light Transport Services. 2014.
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