As corporations face growing levels of risk, many people anticipated an explosion of demand for legal resources to assist its management. Yet the market feedback I am receiving suggests, with notable exceptions, that is not happening – in fact, the reverse is often true.
The range of risks facing top management today often appears inexorable. Fast-changing, unpredictable markets, geopolitical conditions, the explosion in regulation, an increasingly intrusive media, shifting social expectations, the erosion of trust, greater demands on Board performance and integrity, growing dependency on global supply networks – the list seems endless and those who are trying to promote their careers or sell their services on the back of risk are ever more vocal.
Traditionally, the law department – and external law firms – have been a bastion in the approach to risk management. Their role in review and approval has grown, as well as the more obvious support in the case of major claims, disputes, regulatory issues or litigation. So why is it that we are hearing from country after country that in many industries, the number of lawyers is decreasing, or they are having to shift into different roles and functions?
Quite simply, top management seems to have concluded that specialist attorneys are too expensive and too narrow in their focus. Management needs people who actively find solutions to risk and who support improved, streamlined processes. Market and competitive pressures demand increased empowerment at the front-end of the business – they need knowledge and capability transfer, not centralized review and approval.
Therefore the trend is towards dynamic systems which support decision making and consolidate reporting. And it is towards placing relevant skills and resources at the front-end of each business. Hence, disciplines like contract and commercial management are growing, while specialisms like Legal and traditional Procurement and Finance are shrinking.
This doesn’t necessarily spell good news for established contract and commercial staff because today’s environment demands new skills and attitudes. In addition, they face growing competition from displaced lawyers.
There are exceptions to this trend, which often mask what is happening. Regulation in industries such as financial services and pharmaceuticals has driven massive demand for lawyers and law firms. But this is not sustainable. The resulting costs and inflexibility destroy competitiveness. They are being replaced by new organizational models – for example, within the pharmaceutical industry the emergence of ‘commercial excellence’ executives and functions.
The truth about risk is that it is either managed, or it puts you out of business. Executives value their risk advisors, but only in small doses and only if they bring practical solutions. The revolution in organizational design is only just beginning.
Continuing this week’s theme of the ‘big issues’ facing contract and commercial management, Martin Loenstrup made a comment that included a number of questions he rightly suggests must be answered.
So in today’s blog, I will provide my thoughts on those questions.
– will compliance play a role in justifying Contract Management in 2015? I think compliance is always a key part of the role of any robust risk management regime. However, the real issue in my mind is the extent to which contracts / commercial professionals are simply monitoring compliance, versus evaluating the consequences of non-compliance and making or assisting in judgments over this. Some professionals see their role as being about the management of deviations or exceptions from the standard; some even see that role at a strategic level, as the champions of the evolving policies on which compliance standards are based. This is a very wide spectrum of difference, ranging from the high value strategic role in managing change to a low value administrative role in preventing exceptions.
– is the collaborative approach just a highflying ideology or just still ahead of time? It is happening, whether or not contracts staff care to acknowledge it. Again, do we simply dismiss this trend and say we have heard it all before, or do we take the time to understand it and help the business appreciate how it can occur? We go back to my earlier comment – are we strategic enablers, or administrators?
– is contract/commercial management yet another definition of similar roles depending on industry and geography? These terms are unfortunately confused because they do vary significantly in their role and meaning depending on geography and industry, even by company. But the scale of those differences tends to be exaggerated, because it often serves people’s interests to position themselves as ‘different’. However, from the perspective of professional status, greater consistency is critical and that has been – and remains – core to IACCM’s purpose and achievements. We perhaps confuse core methods and techniques and code of practice (which are core to any profession) with the issue of specialist knowledge (which varies by job role). However, right now, we are observing a growing divide between the typical commercial role (broader, more about business judgment) and contract management role (more transactional, oversight of specific deals).
– should Contract Management be located as a separate department in the organization or is this actually a limiting factor? The answer depends very much on purpose. Clearly, if the role is administrative, it can be anywhere. If the focus is on adding value, the extent of that value will be constrained by organizational reporting line. Our research points quite clearly to the impact of reporting line on the quality and value of output.
– is the new trend of Contract Management certifications worth the money or do we need a global standard to avoid individual and varying quality? We have a global standard – that is what IACCM brought to the world. In this age of globalization, most professions are trying to move towards global standards. Contract and commercial management was possibly the first ‘profession’ to have such a standard. It is therefore ironic that we are seeing emergence of ‘local’ variants which threaten to undermine the status and standing of contracts and commercial practitioners by once again raising questions over what they do, what they know, whether they have meaningful qualifications. Many times, the providers of these certificates are opportunistic,, for-profit organizations, riding on the back of the work that has been done to raise the profile of this field of practice. However, others have a valuable contribution to make in bringing new ideas, new methods and local availability of training. IACCM’s approach is to collaborate with such organizations, to maintain a global certification standard but to support the availability of local delivery.
What are the topics exercising the minds of contract and commercial professionals? What issues are enlivening their conversations?
Of course, to many non-practitioners, it is probably hard to associate the subject of contracts with any concept of ‘being enlivened’. But in reality, there are many active and important debates going on, reflecting the many tensions and the significant growth in importance of contract and commercial management.
Yesterday I started a series of blogs aiming to highlight and agree ‘what are the top issues we need to address?’ My initial list has already drawn some great comments and material for further options. Today, however, I want to offer another pre-prepared list of the ‘top ten issues for contract and commercial management. Please keep your ideas and comments coming – to make real progress, we first need a debate that establishes the greatest priorities. Our community must build consensus on the things that matter and solutions to them. That is what being a professional is all about!
10 TOP ISSUES FOR CONTRACT & COMMERCIAL MANAGEMENT
– should the law department ‘own’ contract management?
– does contract management software serve any useful purpose?
– what’s the difference between a contract manager and a commercial manager?
– can suppliers ever be trusted?
– can Procurement ever behave reasonably?
– is it possible to show an ROI from contract management?
– the only way to get compliance / better business decisions is to force ‘the business’ to get approvals / force them to involve us earlier
– the allocation of risk is the most important thing in contracting so we will always need to spend our time on that issue
– senior management doesn’t understand what we do (implicit in this: “and that is their fault”)
– “it’s impossible to define the role of contract / commercial management – we do so many different things”
Given their growing importance, it isn’t surprising that more and more people are showing an interest – even claiming ownership – of these fields of business activity. Suddenly they are buzz terms in many organizations and we discover all sorts of people who were apparently experts in this field all along!
This naturally causes some contention with the people who were actually performing contract and commercial tasks. But the truth is that these are broad disciplines and they touch the business in many areas. So contention is inevitable – and should be welcomed. It offers the opportunity to re-define contract and commercial management and how they contribute to organizational performance.
What are the areas of contention or critical interest? That is the key question – and it is something I have been asking a number of leaders in this field. So this week, my blogs are going to focus on this topic – and here is the first list that was contributed:
TOP ISSUES AND DEBATES FOR CONTRACT AND COMMERCIAL MANAGEMENT (List #1)
- The importance of price vis-à-vis Total Cost of Ownership and risk in a contracting decision
- The organizational placement of the Contract / Commercial Management role
- The value of adapting to global standard templates versus using one’s own templates
- Whether CCM needs to be primarily proactive or reactive; tactical or strategic
- Should best practices be pursued top-down or bottom-up?
- Is Big Data a realistic and useful tool or just another fad?
- How can organizations measure their ROI from the CCM investment?
- Is Relational Contracting a viable approach to contract negotiation?
- Are stakeholders a help or hindrance?
- What is Commercial Excellence?
So please weigh in. Do you think these issues are important – and if so, how important? What would you add to the list? Thoughts and opinions on this topic will fuel debate and research for IACCM’s agenda in the year ahead.
As businesses struggle with managing their diverse and volatile trading relationships, is increased use of relational contracting almost inevitable?
Extensive data points to the fact that businesses are becoming more inter-dependent. On average, external spend as a percentage of revenue is growing. The extent – and volatility – of partnering and teaming is also increasing, as is the diversity of sales channels and routes to market.
All of this leads to growing complexity and a shifting risk profile for business management. Cloud computing is an excellent example of this. In the past, the enterprise bought or leased hardware and then developed or licensed software. The IT department was large and relatively autonomous. Cloud services fundamentally altered this dynamic. Hardware needs are slashed; licensing transforms to use-based charging; and ease of acquisition means that just about anyone in the business can start using external programs or apps.
The challenge for the CIO is very different. They need to develop an overall strategy and plan for technology services and they need to institute some form of control over internal policies and purchases. In addition to this, they become far more dependent on managing external relationships and integrating those relationships to ensure coherent service delivery.
That is where a big player like IBM tries to step into the scene. If they can “create an ecosystem of technology partners”, they offer to simplify the world for the CIO – and of course establish IBM as the partner of choice. Commenting on this strategy, Colin Cram wonders how IBM will manage this ecosystem and asks whether it may lead to the creation of a Relationship Management Office.
Certainly Colin is right to highlight the key challenge that relationship management represents to businesses as their inter-dependency grows. While corporations like IBM have some outstanding relationship managers (and accompanying tools and processes), they operate for a selected group of customers and ‘relational competence’ is an evolving discipline. IBM’s strategy with regard to ‘ecosystem development’ is not new. I recall in the 1990s a similar approach to the application development market. At that time, it was Hewlett-Packard (and the now disappeared DEC) that managed to ‘surround’ IBM through its strategy of partnering with application developers. IBM raced to catch up with a diverse range of agent and remarketer programs targeting especially the application development community.
I recall the excitement that many small providers felt when they signed a partnering agreement with one of these technology giants. They believed their break-through moment had come. The problem was, for around 90%, nothing ever happened. There was no effective way to integrate or promote their software to a global Salesforce. The central program owners at IBM or at HP had few levers to create awareness and lacked resources to offer any meaningful ‘relationship management’.
Has anything changed today? Certainly the networked technology now available will increase the chances of visibility and success. But I somehow doubt that IBM will be investing a whole lot of money in developing a ‘relationship management office’. I also suspect that they are providing this approach as a customer convenience and that they are careful to limit their liability for the quality or results achieved from these third party offerings.
While sharing Colin’s enthusiasm for relational contracting, I rather doubt that IBM’s approach to selling cloud services represents the break-through moment.
Did you know that monitoring compliance remains a key focus for contract management groups and the most common area for reporting? Would you have guessed that only about 8% of organizations typically succeed in always imposing their standard terms or that, for the average company, around one third of contracts are completed without any negotiated amendment?
These are just a few of the many statistics emerging from the 2015 IACCM Benchmarking Study, which looks at a wide range of performance and management data related to contract and commercial management. At a time of growing executive interest in contract and commercial capabilities, having benchmark data is becoming increasingly important.
How many contract managers does it take to write a contract?
Part of the challenge is around efficiency. For example, At one extreme, a contract manager may be overseeing as many as 250 separate contracts, while at the other there may be an entire team dedicated to a single mega-deal. Benchmark data gives answers across this spectrum. For example, it tells us that the average bid and negotiation cycle time for low complexity agreements is under 6 weeks – though for bottom quartile companies this stretches to over 8 weeks. We also gain insight to other factors, such as the fact that ‘international’ contracts typically take 25% longer to close than purely domestic agreements.
Is my contract management organization delivering value?
In leading-edge organizations, executives are becoming far more interested in contract and commercial effectiveness. That means they want to know whether their contracts are delivering the right outcomes and optimizing financial results, as well as protecting against risks. Here, benchmark measures are quite varied, but include comparisons of how time is spent, the reports provided to management and the skills of staff. Our data tells us that the quality of market research is generally low, with less than 20% having significant insight to competitive terms and contract structure. Many organizations still deploy substantial resources on low complexity contracts, whereas in high performers more than 70% of contract management time is spent on high complexity deals. Another benchmark is training and skills development, where there are dramatic differences in investment, with staff in bottom quartile organizations receiving an average of less than 2 days training a year.
Some useful benchmarks relate more to market trends. For example, we often hear that the average duration of contracts is reducing, yet according to the survey that is not the experience of most organizations. Just 24% report this trend, against 31% who say the term of their contracts is increasing. Another confirmed trend is the steady shift towards web-based and distance learning, which is now twice as likely to be used as classroom programs. However, even though we now have access to on-demand programs, the overwhelming favorite for training remains on the job experience and learning from colleagues.
Where can I get this benchmark data?
The IACCM benchmark studies currently in process are detailed below and remain open for input. Click on the link to access the survey. Participants will receive an early copy of results:
- Performance Measurements: This survey looks at headcount, contract complexity, measurements used to gauge both individual and functional performance and a range of efficiency indicators (e.g. cycle times, number of contracts per professional etc.)
- Primary Areas of Activity: This survey looks at scope of role, where responsibilities are performed, time allocated to different activities and use of outsourced or offshore services.
- Value Proposition: The survey you are about to complete focuses on the value that you deliver to the business. It looks at reporting line, objectives, challenges you are facing, the use of automation and skills
Society, ever less tolerant of ‘bad behavior’, seems to welcome regulation. Perhaps this is an inevitable consequence of the breakdown in trust, itself caused by the erosion of traditional loyalties and communities. So while regulation has influenced many aspects of human tolerance in a positive way, general levels of polite behavior often appear to have fallen.
What exactly are the standards when it comes to a 5-year-old’s birthday party? That is the question being put to the test in Cornwall, England, where no-showing for a party has resulted in an invoice and threats of court action to recover resulting costs. The offending child (or parents?) accepted the invitation and then had second thoughts. Their host incurred fees of approximately $25 which could have been avoided if there had been a cancellation.
Justified annoyance? Probably. Appropriate reaction? I suspect not. And indeed, not only is this attempt at recovery most likely doomed to failure (for background and expert opinion, click here), but the host parents would seem not to have undertaken effective stakeholder analysis when launching their attempted recovery. For example, what will other parents think? What will other children at their son’s school say? There is every chance that next year, the boy will celebrate his birthday alone. Play dates? Forget about those – they are too risky.
In the end, every smart individual (and organization) must weigh their desire for recovery (or revenge) against the wider impacts on their brand or reputation. That is why litigation is so rare. Most times, it is far smarter to simply write off the losses and forget about them, or to seek compensation through reasoned discussion.