There is at present lively debate within academia about the meaning of innovation and, in particular, whether ‘disruptive innovation’ really exists. As with many academic discussions, it is quite likely there will be no final resolution, but the topic is timely because it reflects similar confusion within the commercial world.
“Innovation is this year’s big thing”, according to a headline from Spend Matters. Unless my memory serves me badly, I seem to recall many others making similar assertions for at least the last 5 years. Indeed, at IACCM we have been extolling the importance of innovation in contracting and commercial practices for many years and introduced specific Innovation Awards three years ago.
But what does this actually mean? Are we talking about functions that lead innovation, or perhaps more about enabling innovation? And when we use the word ‘innovation’, what exactly qualifies – when does a ‘change’ become an ‘innovation’? One has only to look at many of the initiatives hailed as ‘innovative’ to recognize that the bar today is set pretty low. So does this confirm that ‘innovation’ is yet another meaningless fad, or that those in groups such as Procurement, Contract Management and Legal can ignore it since it simply does not apply?
Innovation applies at many levels and is often evolutionary. Mobile phones would be a good example, since mobile communications had been around for many years. Also, just because something is innovative does not mean it is beneficial or successful. Many claimed ‘innovations’ would more properly be classified as ‘imitations’ – just because it is new to me does not make it new to the world. And innovation is certainly not limited to technology. Commercial innovation can have just as much impact on the market.
So far as I can tell, innovation tends to come from a readiness to ask questions. It requires a degree of observation and a belief that things could be done differently and better. Sometimes it is a reaction to outright failure or perceived impossibility; other times it is about improvement. For example, when financial institutions sought to expand into India and Africa, it was quickly evident that traditional bricks and mortar offices were not the answer. Alliances with mobile phone providers were a good example of commercial innovation. Today, partnering between traditionally non-aligned industries is a common path to innovation.
Disruption is often a consequence of new entrants to a market, but this is not always due to innovation. Companies from China and India are now penetrating global markets at a rapid rate and proving more flexible and nimble than their long-established Western competitors. But in general, their success is driven more by their commercial flexibility. They are not inhibited by traditional views of risk, compliance and bureaucratic analysis. At some point, they may feel a need to institute stronger controls, but in the meantime their success is forcing many Western corporations to re-evaluate their processes and practices.
Overall, I would suggest that much of what we term ‘innovation’ is actually more about change or about differing perspectives. However, that does not mean the concept is unimportant. Indeed, a readiness to question, challenge and generate new approaches is fundamental to survival – whether as a business or as a function.
Average savings that exceed 25% of contract price are impressive, especially when they are achieved through cost reduction, not through slashing supplier margin.
Too good to be true? Not according to two organizations I met with last week, each of which has unearthed a wealth of opportunity buried in their contracts. Quite simply, they are buying the wrong thing in the wrong way, driving up costs and ensuring buyer / supplier contention.
In reviews of more than 40 contracts, these organizations discovered a pattern of poor requirement definition and badly defined scope. Often, there were endless instructions on how to perform tasks, rather than clear descriptions of what needed to be done, or the desired outcome. These practices were frequently resulting in avoidable complexity, contention and focus on a raft of largely irrelevant performance measures. In one instance, the supplier was being challenged for using too few staff to perform the defined tasks, rather than being applauded for increased efficiency. In others, the scope definitions were so poor that work was re-tendered – and price reductions averaging 34% were achieved.
These stories illustrate the problem with contracting process and practices in many organizations. Both buyers and suppliers suffer from poorly defined roles and responsibilities, limited cooperation and failure to adopt good practices. The result is incremental expense for both parties. IACCM’s studies of the most negotiated and the most important terms and conditions have illustrated this divide for many years. While contract negotiators have focused on issues of compliance and risk allocation, value has been undermined through poorly defined scope, responsibilities and performance measures. In many cases, the answer to poor performance has not been to tackle its source, but to increase the resources dedicated to its oversight.
It seems that even top consultancies such as McKinsey are now converts to the need for improved contract management. This means that it is increasingly on the agenda for top management as an area to be fixed. This realization should not be a surprise to anyone who has followed the work and research undertaken for the last 10 years by IACCM and its members. What is unfortunate is the extent to which incumbent contract management and procurement groups are missing the opportunity to drive improvement. For many, the chance to be seen as leaders is now out of their hands and management is turning to others to re-engineer the contracting process.
IACCM provides a wealth of guidance, research and support materials to organizations that wish to improve their contracting and commercial capabilities. The research points to potential for major improvements to bottom-line performance and competitive advantage.
At this week’s IACCM Europe conference, approximately two-thirds of the participants acknowledged that their company does not have a consistent workflow or process for contracting. In many cases there is no formal definition; in others there are wide variations between countries or operating units.
Since many of the companies represented are large, sophisticated organizations, this finding is surprising. It reflects continued lack of appreciation by top management of the impact on performance of good (or poor) contracting processes. Of course, this lack of process inevitably also means a lack of data, so there is no perceived reason to change or improve.
One major consequence of undefined workflow is a high level of internal contention. Delegates noted the extent to which lack of clear process acts to undermine a sense of responsibility and creates a tendency to allocate blame. This is evident at many levels – for example why contracting takes so long, why negotiations are hard to resolve, why implementation of contracts is poor, why obligations are not met. Everything is someone else’s fault and no one takes ownership to drive improvements.
When asked whether there is an ideal point of ownership for contracting, conference participants had mixed views. Current reporting lines are quite varied – Legal, Finance, Operations, Procurement. A significant number report to the head of a business unit and some consolidated groups have a direct line to the CEO. Clearly, more senior reporting lines reflect a bigger role in forming and implementing commercial policy and strategy; others are constrained to perform a tactical operational role supporting specific contracts.
Absence of workflow carries a big cost in terms of competiveness and financial performance. The conference debated these issues in great depth, illustrating through many examples the benefits that can be achieved through consolidation and process definition. Many left the event feeling inspired to highlight the opportunities that can be realized; IACCM will be supporting and monitoring progress.
Writing in the Financial Times, John Kay examines the health and safety regime that has impacted many industries and societies in recent years.
He concludes that, while the ‘health and safety culture’ is often ridiculed, the positive effects are substantial. Road accidents and industrial accidents have shown massive and continuing decline, surpassed now by self-inflicted injury. These improvements have been achieved through public policy – a range of legislation that has made risky behavior both unacceptable and uneconomic for employers to tolerate.
There are analogies here to what has been happening in contracting. Historically, suppliers accepted little responsibility for their products and services. Globalization and the explosion of competition altered the balance of power – and steadily, buyers demanded that suppliers should assume more risk for the effectiveness of their products or services.
The result was that suppliers had to start focusing on how they would extend their commitments (for competitive differentiation) and meet them (to ensure revenue, profit and customer satisfaction). And in consequence, we see an increasing number of contract commitments are being fulfilled, with suppliers frequently taking direct responsibility for outcomes.
Over recent years, many suppliers complained about the ‘unreasonable’ attitudes and demands of their customers in the allocation of risk. But as with health and safety, perhaps this was the only way to drive improvement and change. Faced with unsustainable levels of risk, suppliers have been forced to become more creative and more adept and ensuring their promises are fulfilled.
Business risks often appear endless. The list seems to grow by the day. No wonder it takes ever more time to make decisions and the number of reviewers and approvers increases exponentially.
Yet is this apparently daunting view of risk reflected in reality? Certainly there are many who presume that a career can be built around the growth of complexity and its operational management. But the signs are that most of them will be disappointed.
Business inertia created by worries over risk is perhaps itself the ultimate risk. As the list grows, leading companies and organizations are forcing themselves to re-think the way they look at this problem. Executives are demanding far more intelligent analysis, in particular around assessment of probability. In addition to this, they are pushing for tools and procedures that offer early warning of potential risks and which will prove adaptable when the unexpected occurs.
These more adaptive organizations demand substantial changes to contracts and commercial practices. For example, a growing number of organizations have almost eliminated ideas of litigation from their thinking. Rather than acting as the bottom line assumption for contract terms, it is increasingly seen as an exception scenario that must be discounted in the majority of agreements. This change alone is liberating in the freedom it gives to negotiators. They can instead turn to focus on the terms that actually define and motivate healthy business relationships. It moves risk from a thing to fear to a thing to be managed – and that management is increasingly a shared activity between trading partners.
Much of this change is evident in the push for new tools and systems. Applications that simply replace administrative staff and perform traditional activities have a limited place in today’s dynamic business environment. The need is for systems that provide data analysis which supports business decision making – for example, which contracts are not tracking to plan, what sets of terms offer greatest economic advantage, which suppliers or customers represent a source of performance risk?
Rather than being a source of despair, the growth of risk is in fact proving salutary. Leading organizations are focused on mastering risk and managing it better than their competitors; the same is true of leading contracts and legal groups. It is indeed a time of outstanding opportunity – but only for those who have the courage to think differently.
The discipline of Project Management has grown at a remarkable pace over the last 20 years. The title ‘project manager’ used to mean little beyond indicating an oversight role for a particular activity or task. Today, most project managers are professionally qualified and equipped with tools and methods that enable consistent oversight of performance.
Yet that consistency itself leads to further questions. For example, now that there is such discipline in managing projects, why do so many continue to fail or under-perform? The answers point increasingly to weaknesses in contract and commercial management – areas in which project managers receive limited training and where equivalent professional discipline is largely missing.
IACCM has been working to fill this gap and has trained and certified several thousand contract and commercial managers in the last few years. But compared with the number of projects and project managers, this is just a drop in the ocean. It is therefore exciting that new programs have been developed which will start to equip project managers themselves with increased commercial knowledge. These are being launched at the APMG showcase event in July, where IACCM will also lead a series of roundtable discussions on some of the issues that most frequently de-rail projects and how these can be avoided. Topics include areas such as scope uncertainty, change management and problem resolution, and the contractual mechanisms that can assist.
While a professionalized Contract and Commercial Management community is clearly important, it is also essential that groups like Project Management are better equipped with the knowledge they need to recognize – and avoid – the many potholes that lie in wait for the unsuspecting.
For those who are having big thoughts, big ideas, the details often seem irritating and irrelevant. But in the world of contracts, it is the details that often spell the difference between success and failure.
This was illustrated in a presentation today at an IACCM meeting in San Diego. Professor Nancy Kim, from the California Western School of Law, presented on the effects of electronic contracts on negotiated terms. She was making the point that many organizations enter into long and exhaustive negotiations to establish their trading terms, but they may ignore the way that suppliers then contract for subsequent supply of software or service through various forms of electronic acceptance that could add or amend terms in a substantial way.
Suppliers have sought to cut costs and raise compliance through the adoption of web-based contracts. Electronic ordering is accompanied by the need for the user to click ‘I agree’. Professor Kim explained the various legal decisions that have defined the acceptability of this approach, but went on to explore the implications in a b2b environment, where the parties may already have a negotiated master agreement 0r contract terms. In that case, could the actions of a user who clicks ‘I agree’ override the negotiated terms?
The answer, according to Professor Kim, is potentially yes. So if you do not want your carefully negotiated terms (and more importantly, the assets or principles they may be protecting) to be at risk, there are several things a buyer should consider:
- coordinate internally to develop contract provisions that invalidate clickwrap modifications
- address the possibility that a third party integrator may be involved and consider their impact on issues such as authority to contract and related indemnity coverage
- recognize that your approach for software may not be applicable for services (in the US especially, aspects of UCC may not apply)
One area for attention is the Entirety of Agreement clause, where you may wish to specify that a negotiated and signed agreement will always prevail over an electronic agreement.
Of course, if you are a supplier of goods and services, the opposite of this advice may be true; you need to check carefully whether key electronic terms – either current or future – may have been excluded as a result of some past negotiated agreement with a customer.