There are those who would argue that the scale of fines being imposed by US courts and regulators on major corporations reflect high principles and a determination to raise ethical standards. Others take the view that this is a cynical way to raise cash and that it damages longer-term US economic interests.
The United States is certainly unique in the degree to which it claims ‘extra-territorial’ rights. In both the extent and the scale of the penalties it imposes on foreign businesses and their top management, it presents itself as an imperial power, policing the world stage. While many other nations may applaud and adopt the ethical principles which these reflect, none comes anywhere close to the scale of the financial levies imposed by the US judicial system, nor do they act so freely in extraditing and imprisoning foreign citizens (indeed, it is impossible to imagine the US ever operating to such arbitrary rights with regard to its own people).
Recent judgments such as those against France’s BNP or the UK’s BP have generated increasing concern in European capitals and warnings to the US authorities that their legal system is seen as lacking balance. Certainly these high profile cases add to the perception that the US operates with a high level of unpredictability and that operating and investing in is markets is therefore risky. Ironically, it is the sort of reputation that causes hesitation about investment in markets such as China, India or Russia – that is, doubts over the extent of the ‘rule of law’.
Part of the problem is the extent of localism in the US – there really Is not a national legal system until you reach the Supreme Court. Another is the entire culture of litigation and excessive numbers of lawyers chasing fees, regardless of the merit of their cases. A system controlled by lawyers, who are then major beneficiaries of that system, always runs the risk of lacking balance. Certainly the BP case appears to lack equity and is enriching people who are undeserving.
But on the counter-side, this same system has also imposed major penalties on US corporations and this tends to undermine arguments of institutional prejudice against foreign firms. On balance, I believe that the intentions behind the system are honorable and are driven by a genuine desire to raise ethical standards.
The challenge is this issue of balance and how external behaviors are influenced. I think the US does try to operate as a force for good in the world, but in order to gain credit for this position it must be seen to operate fairly and with reasoned judgments. The decisions of its courts do not consistently meet these standards; they need to be better controlled and there needs to be a central authority that can step in far faster when review is required.
Max Bazerman is a behavioral economist and he has recently written a book, The Power of Noticing: What the Best Leaders See. He draws from his personal experience in failing to notice things, which he attributes to his tendency to focus.
In the book, Professor Bazerman offers many illustrations from the world of business, including examples related to negotiation and contract terms. For instance, he highlights a case study involving Walmart, which one of my colleagues has summarized thus:
“In their contracts with Walmart, suppliers must agree to accept any financial or criminal liability resulting from the sale of their products. …Perhaps because it is protected from liability, and its value proposition is so firmly focused on low prices, Walmart historically had limited incentive to act on issues related to quality.
It is stated that, back in 2006, a company called Blitz presented a revised gas can design to Walmart that would prevent explosions and burn injuries by installing an “arrestor,” a device that would prevent a flame from flowing into the can, at a cost of between 80 cents and $1 per can. According to testimony, Walmart rejected Blitz’s design on the basis of the price increase, and Blitz halted its redesign project because it would be difficult to launch a national product that Walmart refused to purchase.”
The root of the problem seems to be that a narrow focus on price and risk allocation stood in the way of broader business or ethical judgment. And before we are too critical of Walmart in this regard, we must ask how many negotiations (and business decisions) are similarly driven by narrow value criteria and measurements that cause the negotiators either not to notice or to ignore the bigger picture.
The key to good commercial decisions and effective contracting is to ensure breadth of perspective. As Professor Bazerman points out, this is challenging, but essential to achieve.
“Outsourcing is moving backwards; it is tired and outdated”.
“I see no future for the major outsource providers: they have become trapped in out-tasking.”
These are just two of the comments I have recently heard during conversations with experts in the outsourcing field. There is no doubt that many client organizations are questioning the value of outsourcing and that many providers are struggling to make a decent margin. Add to this on-going questions about the integrity of the provider community and there appears to be a volatile mix of negative sentiment.
Managing internal relationships is hard; managing external relationships is even harder. And few organizations have yet grasped what it takes to build productive and sustainable relationships with an external partner. Providers are often caught in the dilemma of customization versus standardization; the former appears responsive, but actually adds dramatically to costs and to risk of poor performance.
So is outsourcing in decline? Will its use become more selective and more limited?
I believe that outsourcing offers many potential benefits, but realising these will take a continued shift in attitudes and behaviors. A few things that need to be addressed are:
- Establishing requirements: clients must know what they want and express it clearly. This requires engagement with the market to establish and evaluate capabilities. Needs must be properly documented to avoid regular disagreements over scope and goals. Current measurement and motivation systems do not help; they should be altered to rewards based on results, not on getting a contract signed.
- Executive sponsorship: client organizations must appoint a sponsor with experience of developing or managing contracts and supplier relationships. Too often, those in charge may be technically proficient and understand the subject area, but they often fail to test the commercial issues or capabilities of either organization and thus end up with the wrong supplier, or inadequate internal competencies.
- Use of third parties: if a third party is really needed, they should be very carefully controlled. In my view, third party involvement has been one of the major causes of value erosion in outsourcing. If they act as an expert mediator or facilitator, there can be major benefit. If they act as a partisan representative, they distort negotiations and performance, often creating an adversarial environment.
- Outcomes: if the only goal is cost reduction, then out-tasking existing activities may be fine. But if the aim is continuous improvement or innovation, it will be achieved only through focus on outcomes and continued discussion as these evolve. That means the parties must focus on what is to be done, not on how to do it. If the supplier is not expert in the field, why are they being hired?
- Governance and performance management: good relationships need the right structure – and this needs to be provided through an appropriate form of contract. The adversarial, risk-consequence focus on many contracts and contracting processes means that the parties lose their fundamental business management tool. After so many years, it is remarkable that there are so few examples of good performance based / outcome based contracts which integrate ‘the contract’ with ‘the relationship’. Yet given the factors above, perhaps this is not surprising ….
So can the industry survive and prosper? This depends on significant shifts in the way that outsourcing is approached and handled. Meanwhile, Shared Services will increasingly represent a dynamic alternative.
The Canadian Bar Association is the latest to come out with a comprehensive report advocating fundamental change in the structure and management of law firms and the delivery of legal services. Jordan Furling has provided a useful summary for those, like me, who do not have time to read the entire document.
In line with trends in other countries, the report recommends that there can be non-legal ownership of law firms (though it goes further in this than is common practice today). It therefore also envisages that such firms will offer a wider range of services – which is again the case in some other countries. And it is this area of what constitutes a legal or non-legal service that especially interests me.
The report itself acknowledges a certain greyness, yet persists with the view that ‘non-lawyers’ need to be supervised. It has relaxed the requirement for supervision from ‘direct control’ (which implies detailed review of work) to one of ‘effective control’ (which may be taken to reflect a need for more general oversight and governance standards).
The field of contracts is a perfect example of the dilemma. It could be argued that since a contract is a legal instrument, a lawyer should ‘directly or effectively’ control its creation. But in reality, they do not perform such a task. In most cases, there are multiple participants in contract creation and frequently key documents are prepared and used without any legal intervention or review – for example, service level agreements, product specifications, statements of work. So what elements of a contract – or its negotiation – constitute a protected ‘legal service’?
Moving to the future, we see law firms (and in-house lawyers) increasingly expand their field of operations. Indeed, there is growing interest in taking on the wider ‘business’ aspects of contract development and then potentially adding services such as post-signature data extraction or even full contract management. So does that now become a ‘legal service’? Are we seeing job scope creep here?
With that expansion, there are obvious areas for contention, confusion and re-definition of required process and controls. On one side, there is the question of how much lawyers will attempt to expand the definition of things that constitute a ‘legal service’. But on the other side, I believe a more fundamental question is ‘what qualifies lawyers to make business judgments?’ While many lawyers are talented business-people, this is not intrinsic to their knowledge base or skills. There are many aspects of business process or commercial policy to which the average lawyer is blind. Many cannot even answer fundamental questions, such as what makes a specific contract or term ‘fit for purpose’.
So as they stray from traditional activities into a broadened role, who is going to ensure ‘effective control’ over lawyers?
Many contracts, procurement and legal staff want to increase their influence. Many complain about not being involved earlier, or not being part of the ‘core team’.
Research has shown that one key element of being respected and included is to bring incremental knowledge and connections that others do not have. That is one aspect of ‘professionalism’ – being connected to a professional network, having access to a respected body of knowledge.
But that is not enough. Many contract managers and lawyers are knowledgeable and well connected, yet still do not feel these attributes are fully recognized. As Cendrine Marrouat points out in a recent blog, professionalism is also about showing care and respect for your audience, especially in how you communicate. If we appear arrogant, or dismissive, if we fail to pay attention to their views, it should not surprise us that we are not included – because our behaviour is then not inclusive. Key to being wanted is the sense that we listen, ask questions, take time to appreciate the views of others and why they hold them. We need also to explain the rationale for our position based on what we know the other party’s interests to be.
For example, if we want to promote a new contract management system, our message to the CFO will most likely promote the bottom-lime impacts it can have, as well as the improvements in data flows. The General Counsel will like the idea of being able to access contracts reliably and to improve the quality of insight and governance. But these benefits are not going to have much appeal to the head of Sales. They will most likely interpret those ‘benefits’ as meaning increased control over the sales force – and greater control equals less business. So with Sales the message has to be one of more empowerment, easier access to standard forms and agreements, speeding up of cycle times.
Ultimately, our success is driven not solely by what we know, but also by how we communicate that knowledge to others. But if we don’t take time to learn, then our knowledge is also limited.
I thought I would share extracts from an internal company report that I just read. I think it will resonate with many.
“Contract Management and negotiation skills and knowledge are increasingly important. Our need to be more flexible in the market, to accept and manage higher risks, to build new solutions and commitment capabilities, is resulting in many groups within the Corporation developing or negotiating contracts.
We have identified approximately 800 people in more than 20 organizational groups whose primary role is contract development or negotiation. There has been no consistent training to help them perform their task. In addition, there are many more employees with either contract or negotiation skills defined as a component of their job and skill requirements (e.g. Project Managers, Procurement, Sales).
Currently, each group develops its own training materials (if any), typically without reference to any other group. Not only is this inefficient (high cost, limited re-use, frequent redundancy), it also creates process inconsistency and organizational conflict. Groups define overlapping roles, they are unaware of tools or databases developed or used by others, they consider aspects of Corporate practice or policy to be optional. To date, we have identified more than 40 different training programs, delivered by a similar number of providers.
This confusion inevitably spreads to the market, where customers and suppliers suffer from inconsistent approaches to the way our contracts are delivered and negotiated, often encountering more than one group involved in the same bid. This is especially the case in more complex, high value business, which typically requires our organization to provide integrated projects or solutions.
Moving forward, the roll-out of consistent education and training modules will be critical to competitiveness and customer satisfaction. To ensure simplification and to maintain consistency, these modules must be available to all relevant groups, irrespective of geography or function.”
The report goes on to describe the steps needed to undertake development and ensure adoption ….
All of this may sound very familiar to many of today’s contract and commercial practitioners, who face similar fragmentation in their procedures and authorities.
This report was written 20 years ago, within a Corporation that was a leader in global reengineering of its contracting process. The improvements supported a major turn-round in its market performance, transforming contracts from a liability into an asset, especially in its growing services and solutions business.
Twenty years on, is your organization still struggling to make these changes?
A key reason for IACCM’s existence is to offer this consistency of organizational training, skills development and certification. Visit www.iaccm.com for details.
An IACCM member asked me for a view on lean contracting – what is it, what impact does it have?
My thoughts on this relate to ‘lean’ in the context of quality – and therefore overall efficiency through error-free activity. To me, that means we can think of ‘lean’ in a number of contexts when it comes to contracts: I believe those responsible for contracts and contracting should be asking these questions:
- Are individual contracts produced and managed in an efficient manner?
- Is the overall contracting process operating efficiently and tackling repetitive quality issues / defects?
- Is the contracting process being used effectively to test the quality of broader business capabilities and their alignment with business or market needs?
For item 1), the parameters may be quite narrow, in the sense of measuring cycle time or compliance. In that regard, something could be ‘lean’, but not necessarily high quality (‘lean’ does not automatically translate to ‘fit for purpose’ – my terms and conditions may be losing me business, but the process through which the contract is created and delivered might be very efficient).
Item 2) should begin to offer more tangible ‘quality’ indicators, because it would start to look at portfolio performance and should include deeper analysis of the effectiveness of contracts. For example, this analysis might reveal you are handling a lot of claims or disputes or a high volume of invoicing errors. The process through which these are resolved could be very effective and the contracts team may consider they are doing a good job – but that is because they do not look at the business consequence of their ‘lean contract’. So item 2) presumes that there is greater consideration of the effect of the contract on the business.
Item 3) almost turns this on its head. It sees contracts as a reflection of business policy, process and practices and uses the contract to test whether business capabilities reflect market needs and values. For example, the market might want truly global commitments, but the internal measurement and management system might frustrate that commitment. This is immediately visible in the nature of the contracts that are offered to the market. The contract becomes a tension point and can be used to highlight such issues to management. In that sense, the contract is a source of lean thinking and tackles the frustrations that otherwise people spend time trying to work around.
What are your experiences of lean in the context of contracts?