CIPS (the Chartered Institute of Purchasing & Supply) is pushing for procurement to become a licensed profession, similar to accountancy or the law. They suggest that the growth of supply chain risk makes it more desirable to have the rigorous standards that licensing implies.
it is an interesting proposal and merits debate. A few of the observations that come to my mind are:
- is this push for licensed professionals anything but self-serving? To what extent does licensing actually improve quality of decision-making? So far as I know, the accounting institutes were relatively silent in the wake of the banking and financial collapse, but what were their ‘skilled and qualified’ members doing throughout the period of uncontrolled risk-taking? And what about the medical profession? Yes, they perhaps restrain or act on some of the most obvious abuses, but do they not also tend to ‘protect their own’?
- As guardians of a standard, doesn’t licensing constrain innovation? Every professional body I can think of struggles to adapt to changing market and business needs. It is slow to respond and faces inevitable push-back from established practitioners who face a need for dramatic re-learning and should be required to re-certify.
- Is this really any different from the old closed-shop mentality of the craft guilds and trades unions, both of which led to terrible abuses of power?
- Why Procurement? Why not instead move to licensing suppliers based on their visible achievement of standards. This would be far more efficient than having thousands of buyers all doing the same tests to validate the supply network.
- Isn’t this positioning by a procurement association rather opportunistic? For years, the procurement associations have been claiming that their members are professionals and they have been beating the drum over commoditization, cost reduction and squeezing suppliers through unrelenting competitive bidding. Many outsiders have long pointed out that Procurement practises such as these damage quality and undermine supplier integrity – in other words, the very things that this call for licensing says it now wants to guard us against!
Why is it that contracts are often so fragmented, so difficult to understand? Why is it that assembling a contract is often so contentious? Why is it that no one really provides holistic training on contracts and their management?
The answer, of course, is because the contract document is influenced by many different stakeholders and its assembly relies on co-operation between these stakeholders. For many reasons, that co-operation is often lacking. Nowhere is this more apparent than in academia, where contracts feature in many classes, but are not addressed holistically in any of them. Programs in law, finance, marketing, supply chain, operations, project management and many others will each touch on contract-related topics, but none result in expertise. All of them (in my experience) teach a narrow perspective based on a functional or specialist view.
This has been a subject for recent debate between IACCM and a number of academics in both the United States and Europe. A number of factors are coming together to cause a re-think in the approach to contract and commercial management:
1) There is no question that this field is rising in importance on the executive agenda. Just the number of bid requests we are receiving at IACCM for training in fields like ‘commercial skills’ or ‘commercial competence’ is clear evidence of that. I am sure business schools are observing some of that pressure.
2) There has been an increase in academic research and a growing appreciation that contracts can be a dependency item for certain functions to optimize their value; this is awakening academics to the need for more research, but to be meaningful it must often be cross-departmental.
3) At a more cynical level, many universities and business schools are wrestling with how they maintain student numbers and revenue streams. This is causing them to be more adaptive and more open to addressing business needs. Hence they see contract and commercial management as an opportunity.
The form of the debate is therefore interesting. In many cases, individual institutions are developing contract or commercial management as a bolt-on for existing classes – for example, modules within a law or project management program. While this is a welcome trend, it is questionable to what extent it adds to the understanding or capabilities of the student. A few academics are pushing further and suggesting that universities must themselves adjust to the demands of this cross-functional discipline by developing an approach to inter-disciplinary collaboration. In other words, classes in the field of contract and commercial management would actually bring together the various academic disciplines that represent a holistic view of the stakeholder community.
A few businesses have succeeded in establishing this formula of shared and collaborative responsibility, but it remains the exception – perhaps in part because our academic institutions themselves encourage specialism and discourage cross-departmental sharing. It seems to me that we must start to train specialists that their knowledge is not useful when it is simply stored in their own mind; knowledge and expertise should be put to use by a focus on enabling others to make better and more informed decisions. A true expert does not hoard knowledge; they disseminate it in ways that those less expert can understand it and put it to practical use.
Last week I attended a small meeting to discuss Building Information Modelling or ‘BIM’. It is not an area where I had prior familiarity and you may be wondering why it is relevant to contracts – so read on!
The construction industry has traditionally suffered from relatively high levels of claim and dispute, reflected in a history of major delay, sizeable cost overruns and concerns about quality. Many of the problems arise from poorly defined scope and lack of clear requirements. Technology has made the situation worse, due to the extent to which it has reduced the social interaction between the client and the supply chain (email was highlighted as the culprit; I would add ERP and globalization to the factors that have damaged inter-party communication). As a result, contracting parties have tended to battle over risk allocation, in spite of efforts to develop more collaborative forms of contract (for example, NEC contracts and some versions of FIDIC).
This story is probably starting to sound familiar to many who are not involved in the construction sector and where similar issues are prevalent. So the real interest in hearing about this meeting is to understand what remedies and improvements are taking place. And this is where we come to BIM.
BIM – to my limited understanding – is a process that results in animations, rather than the traditionally complex drawings that unqualified personnel cannot understand. It enables buyers and users to experience the construction and offer intelligent comment at the design phase. Level 2 of BIM (which is the current level achieved by some organizations) is typified by “models, objects and collaboration using file based collaboration and library management”.
The potential benefits to reduced capital expenditure, reduced operating costs and reduced cycle times are substantial – hence the extent of interest, especially by Governments charged with improved control over public expenditure. But right now, it is proving difficult to expand the adoption of BIM beyond individual projects and to drive the approach at a portfolio level. One reason for that seems to be the contracting process. “In one room, we define the technical needs and scope. But when these go to Procurement in the next room, something completely different seems to emerge,” commented one participant. Another factor is impatience: it takes longer up-front to develop all the information needed for accurate design and the building of the model. Traditional procurement processes are driven by speed and the demands of management to ‘get things started’.
Overall, these factors combine to encourage a contracting process that drives the very adversarialism that undermines intelligent design. In general, contracting does not lead to open sharing of commercial issues and risks and is often a game that suppresses requirements (in order to keep the price lower) and exaggerates capabilities (in order to win the bid). What I find fascinating is the idea of ‘animation’ within contracts. Just as BIM is now enabling users to walk-through a virtual building, why couldn’t CIM (contract information modelling) enable a walk-through of the contract?
Relational contracting is a step in this direction because it expands the areas of discussion and the approach to negotiation, ensuring the development of mechanisms that increase communication and cooperation. In that sense, it is almost a suitable accompaniment to BIM Level 2. But like BIM, it often struggles to replicate and the contracting community needs to explore new approaches that support the continued evolution of technical design. However, we must start somewhere – and it is for these reasons that IACCM has been developing and promoting approaches to relational contracting and recently introduced its Contract Design Award.
What a fascinating set of ideas lie ahead of us … who will be first with a fully animated, virtual contract?
An IACCM member recently told me about his company’s experience when they decided to insource a range of services which had been outsourced for more than 10 years. Despite the fact that these services had periodically been re-bid, they discovered that they are able to perform the activities internally with only half the numbers of staff and at almost 40% lower cost.
I do not know whether this experience is representative of others, but it certainly suggests a need for careful review. The problem for most companies is how to undertake such review. In this case at least, periodic competitive bidding was not effective.
In many ways, managing the level of resource at an outsourced provider is little different from controlling head count within an internal function. Periodically, most CEOs demand cuts, often demanding reductions in headcount that appear quite arbitrary. But the truth is, organizations have a way of growing and as they grow, resources remain busy, but steadily become less productive. They are also extremely talented when it comes to justifying their existence.
So I have reached the conclusion that occasional demands for sizeable cuts probably is the best way to ensure value for money. Without this, there really is no strong incentive for resources – internal or external – to become more efficient or to innovate in how their work is performed.
“Contract management will be writ large in terms of where we put our focus in the public sector”.
These are the words of Sally Collier, Deputy CPO for the UK Government, when she spoke at the Scottish Government Procurement Conference last week. Sally was one of many speakers who highlighted the increasing role of contract and commercial management in ensuring delivery of value and successful policy objectives.
As this blog has highlighted on many occasions, this growing focus is not unique to the public sector. Organizations generally are grasping the need to improve alignment on scope, to ensure that governance and performance criteria are effective and to select trading partners who can support successful outcomes. This is achieved through contract and commercial disciplines.
Recent publicity over contract management practices has probably accelerated interest in improvements. Next month, the CEOs of three large companies – Serco, Capita and G4S – will appear before the UK Public Accounts Select Committee to explain charges of large-scale over-charging on Government contracts. The incidents have already led to two high profile resignations, plus extensive internal re-organizations (see here and here). But I am sure Government ministers also recognize that failures are to some extent due to poor contracts and weak governance procedures with the public sector.
IACCM research shows that similar problems apply across most industries. Commercial and contracting skills and capabilities have largely been ignored in recent years, even though business complexity has steadily increased. Now they are very much on the agenda – but, as one delegate in Scotland opined, “Can we have any confidence that the skills we need to change this situation are actually available?”
I recently commented on a ‘spoof’ version of the Apple terms and conditions supplied to consumers. The economist John Kay picked up on this theme in an article “Why I ignore Apple’s silly reams of terms and conditions“.
Mr Kay’s article is a rejoinder to all the experts who castigate people that fail to read contracts. He suggests that, far from being stupid or ignorant, people who do not spend their time perusing terms and conditions are in fact wise. This is based on several factors:
1) Major providers rely on their market reputation and therefore cannot afford to mistreat customers;
2) The key decision made by a buyer is whether or not they want the product or service; the ability to negotiate terms with major suppliers is largely non-existent;
3) Many of the terms and conditions are simply industry posturing – for example, to safeguard against major court battles over IP rights.
He observes that the real problem with ‘unreasonable’ terms and lengthy contracts is because of weaknesses in public policy, which assumes that agreements are negotiated “between informed and consenting parties, and enforced through adherence to the contract provisions, if necessary through the courts”. As the article goes on to say, these assumptions are illusory – “The reality is that the terms of exchange in a market economy are defined by social expectations and enforced by the mutual need of the parties to go on doing business”.
So does this imply that contracts are in many ways an irrelevance, or that smaller parties should simply sign and move on? Are they essentially just a way for large corporations and public sector bodies to protect their selfish interests? I think we all know there is a degree to which that is true, but it is not the only consideration. While Mr Kay’s observations are applicable to global brands such as Apple, they are not valid in situations where there is greater balance in the power of the parties and where public interest considerations are unlikely to protect the disadvantaged party. And in fact, even powerful entities need to have evidence that their contracting process had integrity, or they are increasingly liable for substantial fines and possible compensation (for example, the big banks and mis-selling of insurance products). In addition, as one respondent to John Kay’s article points out, if you do not read the contract you may miss important options or areas where you may wish to mitigate your risks.
In the end, I think the issue is one of balance. I agree with John Kay’s observations and reasons for suggesting contracts are not always worth reading – but we have to consider the nature of the supplier, the nature of the product or service and the extent to which these shift the balance of risk.
For those who are unfamiliar with large international projects or investments, the terms ‘counter-trade’ or ‘off-set’ may be unfamiliar. But in industries such as aerospace and defense, oil and gas or mining, they are a fact of life – and fundamental to winning contracts.
A recent headline in the Financial Times reads: “Defence company sweeteners hit $75bn”. It went on to list some of the major commitments that leading defense contractors have entered into – for example, providing help to Omani fishermen and financing a beachfront metropolis in the UAE. In other cases, especially within oil, gas and mining, the obligation is to procure major project elements from local suppliers.
In concept, these conditions of contract are designed to boost the local economy and raise capabilities. In practice, there are questions over how effective they are, whether this is an efficient way to achieve these laudable goals, and the extent to which such programs are open to abuse. A powerful group of bodies that include the US government, the EU, and the WTO oppose these arrangements, questioning the extent to which they distort the market. Transparency International believes they also create a greater likelihood of corruption.
Once again, this topic represents one of the issues of integrity that contract negotiators often face. It is quite clear that winning many projects or deals depends on such arrangements. But they are typically kept hidden, there is little reporting on which of them go ahead or what benefits they actually bring, and hence no meaningful evaluation of ‘good practice’.