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?
Many organizations claim to have a process for contract management, yet this claim often does not stand up to scrutiny. This becomes evident as soon as anyone starts to ask questions about process efficiency or effectiveness; quite simply, there is no data because ‘the process’ lacks an owner and is typically quite fragmented in its operation and oversight.
This issue is becoming more evident as executives awaken to the importance that contract management has in the delivery of business results. As they ask more questions, it is rapidly obvious that no one has answers and no one actually feels accountable (or capable) of providing them. Examples range from wanting to know how effective the contracting process is in handling business risks; what types of contract should be deployed to optimize business results; how the contracts and contracting process compare with those of competitors …. the list goes on and right now, very few organizations have answers.
Of course, some turn to IACCM and we are able to assist with broad industry information. In a growing number of cases, we are asked to conduct specific research or to advise on the best way to improve the process. But in many cases, the challenge is much bigger. Executives are calling for ‘increased competence’ in contracting or commercial management – and that is a relatively undefined concept. When responsibilities are fragmented and business units see the process as somewhat optional, when process steps lack definitive guidance on timing and when there is little data flowing on actual operation, it is very hard for anyone to step forward and take accountability.
Major improvements depend upon ownership. And that ownership has to be at a sufficiently senior level that the broader organization takes notice. This does not imply that any specific individual or function has unilateral decision rights – there are many stakeholders involved in contracting (and this is a key reason for the problems). However, it does mean that there is a focal point for the efficiency and effectiveness of the contract management lifecycle. With that ownership comes a more holistic view that starts to yield meaningful data on performance and a focal point for driving continuous update and improvement.
A process that lacks data is not really a process at all. It is a set of loosely connected activities that may or may not operate in the organizational interest. Today, contract management far too often falls into the latter category.
As buyers, we probably all wish that suppliers were more accountable for their sales practices and commitments. Whether it is the promises made when we buy a new car or the cost and timing of a house extension, most of us have suffered from the frustration of dealing with sales people who seem somewhat untroubled by truth or accuracy.
In the world of business, buyers often try to drive performance through onerous risk terms, ranging from liabilities, to liquidated damages, to rights of termination. But in general, this approach does not work well. So now we appear to be moving to a new era of control, requiring suppliers to sign up to even more specific undertakings of integrity.
As in the past, Government seems to be the driver of change. Exasperated by repeated performance exposures, several Governments are exploring the idea of forcing senior management in key suppliers to confirm that their internal processes have included thorough validation of contract commitments and their capability to perform.
In theory, this capability assurance is a role that should be performed by Contract or Commercial Managers. In practice, it often is not. Commercial staff may be involved too late; they may lack the skills or authority to mount effective challenge; their concerns are ignored or overridden. But soon that may be changing, with the creation of an integrated ‘Capability Assessment function’. Quite where that leaves the contracts or commercial manager remains to be seen. Some may be at the forefront, identifying and leading the necessary changes within the business. Others may simply be swept aside or absorbed by this new assessment and sign-off group.
The world is changing and the days of the commission-based sales organization are numbered. Business integrity will continue to advance and steadily will become a pre-requisite for winning significant contracts.
“What should I read into the trend from customers to specify that they want an outcome-based contract. Is this just another way they want to load more risk onto the supplier?”
That was the question I faced when meeting with the Commercial Director for a large, international service provider this week. His experience of ‘outcome-based’ has not been good. He cited examples where the customer has been quite specific about the work they want done, but then added a clause that essentially offers them carte-blanche to enforce on-going rework at no cost. They specify requirements, but essentially say that if the outcome they achieve is not in line with whatever they may then need, the supplier must undertake work to deliver that outcome.
Clearly, this is indeed an unacceptable burden of risk. Essentially it abdicating responsibility for defining business needs and saying “I don’t really know what I want, but give me xyz and if I then decide I really wanted abc, you will do the conversion work for free”.
Given the speed of change in today’s markets and technologies, it is quite understandable that customers will struggle to define precise or static requirements. Indeed, in many cases, a key requirement is flexibility and change. It is not reasonable to expect that a supplier can absorb the consequence of that uncertainty. This situation demands a different approach to contracting and contract management.
In IACCM’s view, the first requirement is to undertake an honest and thorough analysis of the potential sources of uncertainty and to assess their severity and impact. We have developed a standard questionnaire to assist in this. Based on those findings, the parties need to review the right contract model – for example, the blending of performance-based, outcome-based or agile. This also predicts the level of collaboration and shared responsibility that will be appropriate.
However, suppliers are not absolved from responsibility in addressing today’s business environment. Few have worked on developing appropriate contract models or assessing the shift in internal competencies needed to negotiate or manage such agreements. Equally, they are reluctant to address the internal measurement and motivation systems that incentivize acceptance of unrealistic commitments and unaffordable risks.
In addition to the questionnaire, IACCM has developed new approaches to negotiation and guidance on producing relational contracts through either internal or multi-party workshops.
Without decisive action, suppliers are indeed right to fear many outcome-based contracts and the risks associated with them. But the answer is to help educate and develop the market because the forces that are driving this need for change will not go away. Ignoring them is an even bigger risk that responding with the wrong solution.
We spend many hours worrying about the integrity and enforceability of our contracts and agreements. This leads almost 60% of organizations to still operate with physical signatures and physical mailing, with just 18% regularly using e-signatures. Others most commonly use a signature image which they insert on a pdf document.
Of course, many organizations have attempted to streamline contracting through reducing the need for signing. For example, many Master Agreements include terms that establish future orders and amendments will be unsigned. However, in this case, proof of delivery can be critical and this leads 38% to use courier or mail receipts. Surprisingly, 46% are happy to send important documents by standard email, even though this offers no security when it comes to proof of delivery. (When I say ‘important documents’, there are defined as those documents “When there is consequence if receipt is later denied or there is a dispute about original content“.
These were the findings of a survey that IACCM undertook on behalf of secure mail provider RPost during a recent webinar. These results – and the webinar itself – offer a fascinating insight to the risky approach adopted by many corporations and public agencies, as well as the inefficiency of others. The program (available on the IACCM website) provides excellent insight to the options available and suggests ‘best practices’.
My interest in this topic is because I cannot understand why the traction of secure email has not been faster and more pervasive. IACCM has explored this subject for about 10 years. Indeed, a 2005 conference featured a mock trial, at which an early version of secure mail was tested by a senior group of attorneys and found to meet legal needs in the US. I am led to believe that similar conclusions would be reached in other jurisdictions.
As trading relationships grow in significance, many organizations are recognizing that the integrity and reliability of their communications with their contracted partners is essential. This is not only about enforceability (litigation is, after all, extremely rare), but about ensuring common understanding and operation of requirements and obligations. Given the low cost of a system, it puzzles me that contracts and legal groups would not be at the forefront in advocating a system of Registered Email, which not only streamlines correspondence but makes it secure and reliable. I would be interested in hearing from anyone who can explain!
Last week, just over 100 delegates assembled for IACCM’s Australia conference, hosted by National Australia Bank in Melbourne. The most common question I had from participants was “This is so valuable – why aren’t more people here?”
In the early years of IACCM, I used to worry about the volume of people attending events. But after visiting a number of other professional association conferences, I realized that it isn’t numbers that count: it is the quality of who is there and what the event achieves.
Some conventions are very much about reinforcing the current role and skills of their community. It seems to me that delegates attend primarily to be reassured of their value and relevance, even if it isn’t true. They are comforted by being told that their job is essential and it is only a matter of time before they are recognized as key contributors to their business.
IACCM has always been about leadership and change. It tackles the challenges of the volatile economic conditions that truly are making contract and commercial management critical competencies. In addressing those issues, it confronts its members with the need for leadership and it equips them with the facts and the data they need to drive executive action and support.
As a result, IACCM events appeal to those who aspire to be leaders and change agents. And that is not a role for the majority, who prefer a more comfortable life and to be reassured that they do not need to do anything, the future will come to them. However, with more than 2,500 participants attending IACCM conferences and workshops this year, that groundswell of leadership and change has become quite significant.
For those who have the pleasure of traveling on US air carriers, the fact that they win awards for being the least comfortable will come as no surprise. And just in case you were not already feeling exploited, they are apparently also the world’s most profitable airlines.
The airline industry is a great example of what happens when politicians intervene and competition becomes distorted. It is a story of both good and bad. Interestingly, as the supposed home of market capitalism, the US seems to be the region that has got it most wrong.
Whether you look at factors such as passenger comfort, or the quality of on-board food, or the inconvenience of extra charges, or the reliability of departure and arrivals, US airlines generally beat the rest of the world hands-down for lack of quality, reliability and customer care. As a market that is protected from overseas competition, it seems that airlines compete on the dubious basis of the least bad. Those that seek to break the mold struggle to survive.
Other world regions and carriers are not universally better, of course. Some of the European low-cost carriers can certainly stand shoulder to shoulder with the US airlines when it come to abusing their customers. But the difference is that they do not pretend to offer quality; they are unashamedly low-cost and their customers know what to expect. Yet even they are generally reliable when it comes to arrival and departure; it is rare for their passengers to experience hours sitting on the tarmac.
A reason for the more positive experience in Europe is the impact of consumer-based legislation which requires airlines to compensate passengers for delay. The airlines squealed, but in reality it has driven a tremendous increase in quality and fleet management, benefitting both the consumer and the provider. Also, the extent of deregulation has in most regions added substantially to customer choice and the effectiveness of competition.
However, when it comes to passenger comfort, it is airlines from the Middle East and Asia that are winning awards. It would be nice to report that this is due to inspired product development and outstanding management. But unfortunately that is often not the case. Once again, we see the hand of Government intervening. National airlines are seen as strategic assets and therefore in many cases receive significant subsidies and side benefits, such as cheap fuel.
For the passenger, there is no sign of open competition any time soon and market distortions will continue. Meantime, airlines continue to explore ways to further cut costs and maximize revenues; the latest example is the development by Airbus of a new seat, based on a bicycle saddle. And you thought existing planes were uncomfortable …..