Organizations continue to disaggregate. The traditional ‘integrated enterprise’ has eroded and current thinking is that organizations are more agile, more efficient and more creative if they use external suppliers and contractors, rather than invest in large-scale ‘owned’ resources.
We know this change is happening because the data shows increasing volumes of purchasing spend. Indeed, data from Proxima (a consultancy) has suggested that almost 70% of the average company’s revenue is now expended on external suppliers.
But are the assumed benefits occurring? It is hard to find data that answers this question. Traditional procurement measures focus on negotiated savings, rather than broader business benefits of cost over time, impacts on efficiency, speed or value. There is growing realization that disaggregation does not mean abandoning responsibility: in other words, you can eliminate resources, but you still have to engage and manage your new source of supply.
This pattern of change is leading to rather more fundamental impacts on business thinking. Management is awakening to the need for increased collaboration with its ‘outsourced’ resources. Relationships that are based solely on measures of input cost and compliance may appeal to the Finance department, but do not create a high-performing organization. This means also that greater care must be taken in the selection of suppliers and in the subsequent management of interactions. Hence we are seeing new measures introduced – often more qualitative in nature – and a major focus on broader skills of relationship management and contract management.
The implications of this change are significant. For one thing, it transforms traditional thinking that ‘contracting’ and ‘relationship management’ are separate activities. Increasingly, they are integrated and interdependent. Secondly, it also challenges the old view that contracts and relationships are a sub-element of procurement or sourcing. Today, contract and relationship management are the life-cycle activities which generate value; procurement and sourcing are sub-elements of them.
In the background, we see a growing amount of data illustrating the need for – and consequences of – change. But as a recent study from Vantage Partners shows, there is still a long way to go. Their survey of supplier relationship management (SRM) shows that almost two-thirds of participants don’t know how to measure the value achieved from their SRM investments. Over half indicate that their organization needs to execute a ‘major change of attitude’ if it is to generate greater value from its supply relationships.
For those who are interested in SRM, there is another major study currently underway. State of Flux is undertaking its annual survey, probably the most comprehensive in the industry. It can be reviewed and completed at https://www.surveymonkey.com/s/state-of-flux-2015-srm-survey
‘Collaboration’ is a big theme for management in many organizations. There are many factors at play in driving this direction. One is growing interdependency between organizations. Another is the trend away from product purchases to an increasing volume of services and solutions (or ‘indirect spend’ in procurement terms. Then there is concern over reputational risk, which makes the quality of relationships far more important. And finally we have innovation and the recognition that this is more likely to occur in a collaborative relationship.
I spent some time this week reviewing the state of collaborative working and it is clear that most organizations face a significant gulf between aspiration and reality. They seem to fall into two camps:
- There are some who focus on developing internal mechanisms and measurement systems to encourage greater cooperation with their suppliers or customers, but fail to translate these into revised approaches to contracting. The policies and practices that underlie terms and conditions (and the way they are negotiated) show little sign of alteration. While this does not necessarily destroy the possibility of collaboration, it certainly makes it harder.
- There are others who believe that they can change organizational behavior simply by introducing new forms of contract. Not only does this not work, it actually increases frustration and risk.
Another important disconnect is that many programs designed to deliver more collaborative relationships fail to consider the extent to which most suppliers now operate within an interdependent network. If that network is not operating collaboratively, all the aspirations will be undermined.
What can we do to address these disconnects? Common wisdom is that the contract is an output and comes at the end of process and organizational design. I suggest that the opposite is the case – the contract should come first. A thorough assessment of goals and markets leads to an understanding of the characteristics that surround collaboration – for example, commitments to communicate, share data, develop joint systems, agree mutually acceptable payment terms, acceptance provisions, responsibilities, security etc. The contract can be used as a method of assessing the extent of disconnect between collaboration characteristics and collaboration capabilities. This understanding is then used to drive internal reengineering to ensure alignment between ‘the market’, ‘the contract terms’ and ‘the ability to collaborate’.
It is often thought that unethical behavior is driven by the profit motive and is therefore largely the result of sales practices. However, might it not be that it is aggressive cost controls that undermine ethics?
From an industry perspective, the retail sector frequently takes the spotlight for its trading practices. Unrelenting price competition translates into regular mistreatment of the supply base – withheld payment, onerous claw-backs and, until recently, unprincipled labor practices appear endemic to consumer-facing companies.
IACCM’s recent study of payment terms discovered almost 20% of large corporations operate with payment terms of 90 days or more and most of these are in the consumer / commodity sector. The smaller the supplier, the harder it is to get paid. It seems that muscles count when it comes to fair or ethical treatment.
Many sales negotiators complain about the lack of balance in buyer attitudes. A failure to consider value, or to question the longer-term impact of their actions. seems to impact the procurement agenda. But of course, those buyers are only responding to the demands of senior management, especially the CFO.
For years, procurement groups have been encouraged to commoditize every purchase. They try to unbundle supply proposals in order to drive the lowest price. They also work to allocate maximum risk onto the supplier and to minimize their own commitments. Such attitudes rapidly lead to questionable ethical standards – and a by-product is often that the supplier also cuts corners or drives similar practices into their supply base.
So at a time when procurement is pushing issues of sustainability and compliance, it should perhaps also consider the extent to which its own actions may reflect the very behaviors that it is seeking to eliminate.
Success is defined as an accomplishment, or the meeting of an aim or objective. In a recent article, Jonathan Cooper-Bagnall of Proxima Group challenges Procurement to re-think its measures of success. He might have posed the same challenge to all those involved with forming or managing trading relationships.
To quote from Jonathan’s observations: “A study by Oxford Economics highlighted the significant disconnect between the measures for success (of executives versus Procurement practitioners). The survey of 500 C-suite executives and 500 procurement employees across the world showed that 72% of C-suite executives ranked cost savings and cost avoidance as their primary measure for procurement success. Inventory turnover was second with 50% and supplier performance came in just below that at 49%. Procurement practitioners however, have different priorities according to the results of the study. Around 56% of practitioners ranked touchless transactions as their premier performance indicator. Cost savings and order cycle time tied for second, with 52%.”
Based on this, Jonathan rightly highlights a growing disconnect between executive expectations and the value that Procurement delivers. He suggests that management is increasingly concerned about the damage to brand and reputation that results from high-profile supplier failures to perform. While I agree with his conclusion, it does not seem to me that it is supported by the Oxford Economics findings – and it is miles away from the direction that most Procurement groups appear to be taking. Again, however, I must observe that the problem of defining and measuring success is common to most commercial groups – buy and sell.
My perspective is that executives are indeed concerned about business performance in terms of revenue, profit, brand and reputation. Each of these items is a measurable outcome. In itself, none of the measures mentioned by Oxford Economics is an outcome – they are inputs which may or may not lead to a positive outcome.
And that is the core problem with the measurements used by Procurement, Legal and contracts / commercial staff. They have no real insight as to whether their actions in selecting suppliers, drafting or negotiating terms or managing contracts actually drive better business outcomes. They contribute to a process, they do not oversee or manage it. So Jonathan is right to call for change – but I suggest that cost savings and cost avoidance are ‘success indicators’ that have been tried, tested – and failed.
With each passing day, the need for new commercial capabilities becomes more evident – and to support this, commercial groups must change.
Gone are the days when business to business relationships were marked with adversarialism and contention. The narrow views typified by sales and procurement (to a high degree) and legal (to a significant degree) are destroying value. Trading parties must increasingly cooperate to deliver efficient and effective results.
Adversarial and arm’s length behavior carries a tremendous cost. It frequently results in selection of the wrong supplier or confusion over requirements. It prevents proper definition of scope or goals and the creation of effective performance measures or governance techniques. This results not only in expensive claims, disputes and changes, but it adds enormously to operating costs through inefficient use and deployment of resources.
At this week’s IACCM Europe conference, sales guru Neil Rackham acknowledged how the world of selling must alter, with the need for a new ‘commercial’ breed of relationship managers and developers – people who can sit with their client as a partner, mutually committed to developing workable business solutions.
But who will this ‘commercial expert’ sit with? Certainly not old-school procurement, with its continued focus on savings. Unless procurement also recognizes the importance of shifting away from its focus on control, compliance, categories and process. it will rapidly become irrelevant. While the associations representing procurement are increasingly talking about change, they seem unable to define what that really means and to assist their members in making the transformation needed.
The IACCM Europe conference felt to me like a true turning point for those who have embraced the future of commercial excellence. It is an exciting and energizing time – only too evident in the enthusiasm – indeed the passion – of those who attended. Watching professionals from both buy-side and sell-side embracing the need for a new collaborative spirit was uplifting. For these people, the next few years hold true challenge, but also great excitement.
This week’s IACCM Europe forum brings together more than 200 senior managers from across industry and the public sector. They are exploring and discussing the theme ‘2015 – the year of Commercial Excellence’.
There is wide agreement about the pressures facing business and the need for rapid and substantial change. Indeed, during one of the executive workshops, Jonathan Cooper-Bagnall, from Proxima Group, made the observation that many business functions had spent 10 or more years undergoing reengineering. Similar fundamental shifts were now being demanded of commercial teams (contract management, legal and parts of procurement), yet in a much shorter time period of perhaps 2 or 3 years. This creates massive challenges, especially with regard to the development of skills.
Jonathan’s point reflects the sense of challenge at the conference. Many delegates recognize the nature of the commercially transformational pressures in their markets, but are struggling to shift from current roles, tasks and behaviors. As a result, they are overwhelmed by the workload that results form change, yet lacking the people or tools to adapt. Commercial processes, policies, practices and systems (to the extent systems exist) often pull in a direction opposite to that of the market. This means that existing commercial resources can be seen as the enemies of change, resisting the needs of the business.
This conference is therefore very much about how to deal with the change agenda, how to start making the rapid shifts that are necessary. It focuses on issues such as the almost universal shift to performance and outcome-based agreements, to new payment models, to a role of business enabling rather than business review, to a need to segment market and relationship types rather than deal with transactions and individual deviations. It places commercial teams in a role as leaders and instigators of change, rather than a force focused on compliance. Risk management becomes far more holistic and an innate element of practice, rather than today’s rather selective and inefficient approach to selective risk avoidance. Overall, Commercial Excellence sits right at the hear of the business. This year’s event is helping commercial teams to fill the current vacuum and take ownership of their destiny – in a time-frame that is dramatically faster than that experienced by any other business function.
I have written several blogs recently on the topic of performance or outcome-based contracts. This reflects growing pressure on suppliers to take responsibility for results and the momentum is especially strong in the public sector.
As with all contract models, the key question is whether their use drives greater levels of success. IACCM research (a recent report is available from the IACCM website) suggests that performance-based contracts have a substantial positive impact – reducing the percentage of ‘failed’ agreements by almost half. But this depends on a shift in the behaviors and management systems of the contracting parties. If they do not invest time in clarifying requirements or fail to establish the right governance mechanisms and incentives, most or all of the benefits will be lost.
Yesterday I presented to an audience of project managers from the Canadian Department of Defence. Canada is just one of the countries moving steadily towards increased use of performance-based agreements. I also sat in on a presentation by Deloitte, which revealed the results of their audit of US performance-based logistics contracts. The US DoD started switching to this model about 15 years ago, but (as with many organizations) kept no data to show whether there was overall benefit. About 5 years ago, Deloitte developed a methodology and ran a pilot review of 11 contracts. Subsequently, they added a further 11 to the list. Based on their analysis, 21 of the projects reviewed were generating improved availability and responsiveness at significantly lower cost. These findings have helped support the steady expansion in use of performance-based agreements.
Among the many interesting insights that Deloitte shared was the fact (and their surprise) on how little performance data is generated in respect of contracts. They had great difficulty in extracting demand data, cost data, consolidated availability or supply data from either the customer or supplier. In other words, no one know whether a different form of contracting was generating any real improvement in results, at either a transactional or portfolio level.
To me, this was once again the critical point. IACCM research regularly points to the substantial effect that improved contracting can have on business results. Our frustration is the absence of solid data. Our only method to establish impacts is through ‘crowd sourced’ input. When member organizations go away and test this data by undertaking their own in-depth audits, they actually find the results are quite accurate. But sadly, they remain the exception and many contracts groups prefer to dispute the results than to undertake the research. Hence, the move towards performance and outcome-based agreements will doubtless remain slow – and in many cases will be driven by other parts of the business.