According to research by The Hackett Group, the second highest priority for Chief Procurement Officers in 2015 is to increase scope and influence. This was among a range of data presented today at the Zycus Horizons conference in Florida.
This finding begs a number of questions. First, why do CPOs see raising their influence and expanding their scope as a priority? Beyond personal or functional ambition, is any one actually calling for an extension to their role? What benefits are expected to flow as a result? Presumably this ambition is driven either by a perceived need to fill gaps, or by the belief that the work currently undertaken by others can be done better by Procurement.
The second question relates to these areas of benefit. One would expect that other 2015 priorities would give some clue as to the new values that will be achieved as a result of greater influence. Reduced costs tops the list – and this is certainly not a new area of endeavor. Reduced supply risk comes third – again, hardly new, but certainly an area where there is room for improvement. At 32%, ‘deeper influence on complex market spend’ is a legitimate ambition for many; complex relationships often operate with limited Procurement involvement. Innovation – an area which you would think could yield significant extra influence – comes in at only 21% on the list of priorities.
So there are some useful indicators here regarding the possible approach to increased influence and scope. The main opportunities are likely to be earlier engagement and increased market insight, selecting suppliers on value and competence more than on price. And then also expanding performance oversight and the management of on-going change, including innovation. Together, these areas would actually tackle all of the objectives listed above.
But the question remains, does Procurement have the skills and tools needed to execute on these improvements, or the ambition to acquire them? I will comment on that tomorrow, in my second report from Horizons 2014.
Yesterday’s mid-term elections did nothing to resolve the underlying political inertia that has gripped the US for years now. The inability to enact any meaningful political reform, together with the adversarial social divisions between Democrat and Republican voters, promises a continuing vacuum in meaningful legislation.
The UK is in many respects in a similar position, with coalition government and the need for consensus having inhibited action beyond that of deficit reduction.
So it is interesting and worth noting that the US and the UK, among developed nations, are leading the way in terms of economic growth. Countries like France, with a highly interventionist government, are struggling to come out of recession.
On the other hand, high growth countries in the developing world often show opposite traits. A country like China flourishes as a result of government policy and intervention (though it might be argued that the growth actually results from a relaxing of control, thereby supporting the point that economic expansion is directly inverse to levels of government activity). But in many of these countries, strong government is needed to provide stability and the foundations for investment and productivity.
So what can we conclude? It seems to me that the US and UK have sufficient social strength to flourish without political intervention – indeed, politicians actually create disruption by many of their actions. A big difference in these countries is the strength of the rule of law, itself relatively independent of politics. Since Common Law does not depend on statute, it can offer a stable yet evolving framework for commerce. In many emerging economies, the principles of law – and especially commercial law – are weak and uncertain, often open to corruption. Therefore strong government becomes essential for business confidence.
Hence the continued deadlock in US politics is probably a good thing for US economic growth and overall world trade. Similarly, the probability that no single party will emerge with a majority in next year’s UK elections may also be good news for business.
One of the questions asked most commonly by contracts and commercial groups is how they should be organized and where they should report. These are not the right questions. The fact they are asked so frequently is in fact an indicator of the real problem – which is lack of clarity over purpose and goals.
It is in a way ironic that the biggest cause of lost value in contract management is disagreement over scope and goals. This is precisely the issue that ails many contracts and commercial groups. No one is quite sure of their purpose, or there are widely divergent opinions. This leads some executives to perceive no value at all, while others will have quite varied views and expectations. This inevitably means the function will disappoint many in its contribution or achievements.
In a recent IACCM workshop we provided four options regarding the primary value that comes from effective contract management. These were related to risk and opportunity; reputation and trust; revenue and profit; and operations and performance. We know, in reality, that high performing contract management processes contribute significantly to all these things. But the problem is that few executives see contract management as a process; in consequence, the debate over organization is generally focused on a much narrower area of value delivery – typically associated with either control and compliance, or with assisting business units to work around controls in a managed way. The workshop resulted in lively and healthy debate, leading to much greater understanding of the potential benefits and a refreshing discussion on what this might mean to the way contracts are formed, drafted and communicated within the business.
The start point for any business activity should be a clarity over its purpose and value. From this flows a definition of process, measurements and the skills or knowledge required for performance. Then – and only then – can there be meaningful discussion over the size, nature and reporting line of any associated group or function. A failure to follow this approach results in confusion, regular change and lack of investment – and hence the regularly recurring question ‘How should we be organized and where should we report?’
To gain respect and status, contracts and commercial groups need to rise above these organizational questions and challenge senior management with the much more fundamental question regarding their potential purpose and value. The good news is that IACCM offers extensive data to illustrate how substantial that contribution can be, if only management addresses the core issue of investing in a business competence.
When GT Advanced first spotted a major opportunity to supply Apple, I am sure their management were excited by the prospect. This could surely be a route to rapid growth. When they won a contract, the market clearly agreed – the stock price rose rapidly. Now, with the declaration of bankruptcy, the post-mortem begins …
For small and mid-size companies, the allure of the big deal with a major corporation never diminishes. Yet as the story of GT Advanced and Apple shows, it is fraught with risks and danger. Pierre Mitchell has written an excellent analysis of what went wrong, pointing out that even a highly acclaimed supply management function can show poor commercial judgment in how it structures and manages relationships. The problems here appear to have been badly defined and managed scope, inappropriate contract terms and absence of effective performance management.
I must confess that I do not know much about Apple’s supply management function. I am aware that it wins awards, but I have the impression that much of Apple’s innovation has been internally driven, or based on partner relationships which are relatively standard. I wonder to what extent the Procurement organization suffers the challenge of many – that it is far better at overseeing control and compliance than in managing innovation.
But what about GT Advanced? How did their management get things so wrong? After all, they did not have to sign the contract that was offered. Surely they must have had contacts at a senior level and could have influenced the structure of the relationship and the risk terms. However, like many others, they doubtless did not want to cause delay, did not want to risk derailing the deal and probably believed in their ability to manage the situation. Such over-optimism is not uncommon; as is the failure to grasp the importance of the contracting process, especially in an environment of considerable uncertainty and innovation.
Senior management in most organizations has not ever been exposed to the importance or potential contribution of effective contract management. It just does not feature in the majority of business schools or executive training. The wider topic of ‘commercial judgment’ is not really taught much either. That is probably because teaching still operates in functional silos and there is little integration or explanation of how disciplines interact or interconnect – finance, law, marketing, project management, operations. It is these interactions that should be caught in the commercial evaluation and within the contract terms.
The GT Advanced / Apple case study will doubtless be used extensively in the next few years and hopefully will lead executives to better understand the role that contracts and contract management can perform in ensuring thorough opportunity assessment and subsequent oversight of the performance of their key relationships. Even in SMEs, where management attention may be less distracted, the value of these disciplines is enormous – and their absence can, quite literally, cost you the business.
In a recent exercise, we had groups of business people discuss different aspects and attributes of contracting. They discussed the role and value of the process in managing risk, in establishing reputation and trust, in delivering revenue or profit and in supporting operations and outcomes.
Feedback revealed broad consensus that good contracting delivers benefits in all of these areas – or alternatively, poor or disjointed contracting causes damage and under-performance. Yet despite this realization, it rapidly became evident that few organizations have a well-defined process. For example, participants quickly highlighted major problems with input (unclear or badly defined scope and goals) and with transitions (transfer from pre-award to post-award teams). They mostly felt that contracts are not effective governance tools and often lack the terms needed to manage flexibility or change.
How much does this matter? What is the business case or the economic return from ‘good contracting processes’?
IACCM has approached this challenging question in several ways. The reason it is challenging is that data is limited – not least because so few organizations have a coherent process with regular performance measures. Research in 2012 focused on the scale and reasons for value leakage and identified that on average weaknesses in contracting are resulting in losses equivalent to 9.2% of annual revenue. In companies with the most integrated process, this reduced to as low as 3.4% – an impressive difference.
One finding from this study was that there are substantial differences between industry sectors. Therefore more recent research has compared companies within specific industries, exploring whether there is a link between overall profitability and the maturity of the commercial and contracting process. The answer is clearly yes. For example, in the outsourcing industry, profit margins are highly variable, even for companies offering similar services. In examining their approach to contracting, it was quickly evident that some saw this as a life-cycle process, while others viewed it more narrowly as an activity to oversee compliance or control. A few had little evident control; they delegated authority to business units and operated with many variants in contract terms.
Those who viewed contracts as control instruments or who operated with very few controls showed similar results and struggled with their market reputation. They were viewed either as inflexible or unreliable and failing to meet commitments. Both suffered from a high degree of fire-fighting and their contracts were not useful operational tools. They were also perceived as less creative or innovative – too busy fixing things to have time for added-value conversations.
In one select group of 10 companies, the typical margins of those with poor contracting processes were in the range 2% – 5%. Those with holistic approaches to contracting were recording margins of 14% – 16%.
Conclusive proof that good contracting pays a healthy dividend? Perhaps not; there are of course wider factors to take into account. But there seems little doubt that the quality of contracting is a significant contributor to profitability – or failure to develop competence in this area carries a heavy cost.
There is growing appreciation that collaborative relationships generate better results. On one level, it is surprising that anyone ever thought otherwise, but market pressures over recent years have caused fundamental realignments in buyer / supplier relationships. These changes have undermined trust and often created a high level of contention and adversarialism.
Now, the pendulum is swinging back, there is a new level of openness in business relationships and a greater readiness to discuss shared risks and responsibility. Achieving this demands a shift in the negotiation agenda and greater focus on governance and performance management principles and process.
However, the transition is not easy. Today I have been leading a workshop on collaborative supply relationships and the participants shared what they saw as the major barriers to change. Top of their list came a lack of trust – but of course this is a symptom of other things and will not be fixed without addressing the causes. Here are the top five (by frequency) that they identified:
- Resistance based on the view that collaboration takes too long (to reach decisions) and undermines accountability
- Different objectives / mismatched KPIs / silos between stakeholders
- Competitive bidding / re-tendering practices
- Unclear process, especially with regard to roles and responsibilities
- Unclear benefits of collaboration – both organizational and personal
I find it interesting that the group saw internal barriers as the major challenge. No one mentioned resistance or reluctance by the counter-party (though this audience was from the customer side and I suspect a supplier audience might generate a different list).
Fortunately, we were able to work on some immediate practical steps that will increase collaboration – but it is clear that there are significant obstacles to be overcome before the benefits can be realized.
“Optimism is the enemy of action”, according to a recent article in The Atlantic Magazine.
The article reviews a recent book by Dr. Gabriele Oetiggen which questions the benefits of positive thinking. Based on some 20 years of study, Dr. Oetiggen concludes that ‘positive thinking’ often equates to unbridled optimism and leads to a failure to recognize or address obstacles. She therefore introduces a new concept which she calls ‘mental contrasting’.
It seems to me that any experienced contract or commercial manager will already be familiar with this particular syndrome. Indeed, any successful business already addresses the issues highlighted by Dr. Oetiggen through its organizational structure and management systems. Groups such as Sales are recruited and paid to be optimists; commercial staff in contracts, legal and finance are there to address realities. The key is of course to achieve balance – or ‘mental contrasting’.
Problems arise mostly when senior management is over-optimistic and either does not seek or chooses to ignore commercial advice. This again has been identified on a number of occasions, including work undertaken by ICCPM in partnership with IACCM, which led to a paper, ‘The Conspiracy of Optimism”. The good news is, it did not take 20 years, a book, or a new nomenclature to identify the issues!