Anne Kohler wrote an interesting article on The MPower Group News. In it, she suggests that Purchasing does not gain the acknowledgement it deserves.
Anne makes the following comment: “In a nutshell, Purchasing is the “Glue” that holds the buying function together. They play liaison to internal business partners, suppliers and customers and are the face of whatever you call your “Procurement” function. When Purchasing works, everyone up and down the supply chain is happy.”
In principle, I am sure that Anne may be right in this assertion. But as she states “When it works …” …. and as she also observes, Purchasing seldom receives the respect it deserves. I think these two comments go together. Whether or not is can or should act as ‘the glue’, it is rare that it does so. Why is that?
It seems to me rare that Purchasing has significant liaison with external customers. The resultant lack of awareness of market intelligence is certainly a problem, since it seems tome that many purchasing professionals lose sight of the fact that they exist only because of customers. Without sales, there is no need for Purchasing. But another big problem is the internal image of a group that is associated with rather rigid, rules-driven process and over-focusing on front end savings. Of course it isn’t altogether fair to blame Purchasing for the role that executive management has given it, but I do feel that far too few groups try to break out of the mould. If they want to be seen as ‘the glue’, they need to be far better at understanding and reconciling the divergent viewpoints of the various stakeholders.
For any function to gain the status that Anne describes, they must operate with commercial judgment that balances the multiple forces and interests that compete for attention. They must be capable of making the contention that is present in every organization into a creative force for new ideas and solutions. I’d welcome input from Purchasing groups that are achieving this status. Indeed, they should be among those competing in the 2013 IACCM Innovation Awards.
It is a challenge for many groups or individuals within business to describe the precise value they bring. For some – like Procurement – it is a claim of savings relative to a price that they might otherwise have paid; for groups like Contract Management or Legal it is often an expression of costly risks avoided. But in each of these cases, the baseline of ‘what might have been’ is hard to prove and therefore the claimed benefits have limited credibility.
It is now about a year since IACCM issued its study on ‘The ROI of Contract Management”. Our goal was to gain insight to the cost of poor contracting, based on typical experience today. The resulting report had application for anyone directly involved in the formation or management of trading relationships. It generated a number that was higher than our expectations – a figure of 9.2% of annual revenues. This was the average loss or ‘value erosion’ that businesses were suffering from weaknesses in their contracting process and practices.
Those who are familiar with the study will recall that this was an average. Individual business and industries are operating at significantly different levels. But the causal patterns were similar.
Over the last year, a growing number of IACCM member companies have been using this base data in the way it was intended – as a baseline from which they could undertake their own specific research and generate a benchmark. We do not believe any company will fully eliminate losses associated with contracting, but the report indicated a massive range in current performance, suggesting that many could achieve improvements equivalent to 3 – 10% of their annual revenues.
So how are the case studies turning out? Some have been conducted on the sell-side, some on the buy-side. I am not yet aware of an enterprise-wide analysis covering all contract types. But those that have been conducted are broadly validating the original study. For example, this weekend I was reading a report from a global corporation with a high value of capital projects. It reinforces the point that the biggest exposures apply to companies with significant capital or services relationships, where durations are longer and there is greater room for misunderstanding or disagreement. In these conditions, the role of the contract is critical, ensuring clarity of goals and the framework for on-going governance. This buy-side report exemplified our earlier study. Following an audit of a significant cross-sample of contracts, it found repeated examples of losses that were occurring due to:
- Inappropriate form of contract, or omission of key terms
- Incomplete or non-existent Statements of Work
- Poor controls over change management
- Work commenced without contract in place
- Poorly drafted or managed payment schedules
- Misalignment between contract requirements and supplier capabilities
- Inadequate performance criteria and / or no defined performance management regime
- Absence of warranty management
On the contracts reviewed, the costs of poor contracting at this point represent 26% of original anticipated contract value.
A similar sell-side analysis by a major international technology and services company identified now familiar issues: contract terms that mismatched the project goals; poorly defined scope; weaknesses in change management; obligations that were not actively managed; imprecise and contentious performance metrics. In their case, the combined impact was that anticipated margin was 4.2% below plan.
As we look across the range of companies where analysis has been undertaken, we see a substantial variation in performance based on whether contracting is viewed as a coherent discipline and process. The high performers are those where there is more consistent definition and control. The poor performers have limited insight to who produces key contract documents (for example, statement of work) and generally lack effective tools or training to support the contracting process. Without these, they only discover weaknesses in contracting when disasters occur. They have no insight to the steady drip of lost value that is happening every day.
Stephen Ashcroft posted on Supply Management on the topic of ‘high risk’ procurements.
According to the media, most procurements these days are ‘high risk’. Stephen captured a number of key points, setting out some common weaknesses in many procurements. For example, he starts by highlighting the need for good quality specifications. Our research at IACCM shows that the main cause of disputes is due to poor specifications or scoping. This will only be avoided if Procurement acts as a facilitator of discussions between users and the business, rather than as a barrier. It must also ensure proper documentation of whatever is agreed and recognise that requirements are likely to change – so facilitate that within the contract.
Next he focuses on selection. What are the important characteristics you want from your supplier? If you select on price alone, you will have a relationship that reflects this principle. Don’t expect quality, value, flexibility, innovation because nothing you said or did suggested those were important – and the price does not allow them. If they were important, you should have established different selection criteria.
And as for contracts, another of his areas for focus, a high proportion of the templates used by Procurement have little relationship to the bid or the desired outcome. Many Procurement groups really do not understand contracts or their role. They accept templates provided by Legal that are based on risk allocations, not on outcomes. Far too many Procurement groups consider the contract to be an administrative requirement, rather than a critical tool in performance definition and management. So it is hardly surprising when results are disappointing.
But never mind. Lost savings this time round can be claimed all over again with the next Procurement!
“It Only Takes Seconds To Lose A Customer” is the title of a recent blog on Successful Workplace.
Citing the work of Vivek Ranadive, the article emphasizes the importance of empowering the customer interface to answer questions rapidly and accurately – or risk losing a sale. It is not just a matter of customer impatience; it is also about credibility and perceptions of competence.
I recall research that I encountered some years ago to support this point. It related to Chief Financial Officers and examined factors that made them trust information. When asking for data, they were profoundly influenced by the time it took to provide an answer. I forget the precise statistic, but the tolerance level for delay was low – and the longer it took, the less faith they had in the eventual answer.
This supports Ranadive’s point that “A little bit of the right information just a little bit beforehand … is more valuable than all of the information in the world six months later”. Throughout my career, I have witnessed this point – and the fact that delays not only reduce the value of information, but also typically result in increased demands and expectations.
The application of this ‘need for speed’ is evidently important for the world of contracts and commercial management. Indeed, the principle complaint about Procurement, Legal and Commercial functions is that they slow things down. They are knowledge and information roadblocks.
But in an increasingly complex world, surrounded by a multitude of risks, can we really ‘empower’ the sales interface? We all know their propensity to exaggerate, to give false or incomplete information … And with the growth of interactive technologies, the number of people who interface with the customer has grown, so the challenge of empowerment extends far beyond the sales representative.
Commercial and Legal groups are becoming steadily busier as the demands for support grow. Their current model of operation is not sustainable. They must start to work on new and better structured approaches to supporting and enabling the business. This means steps such as codifying information, segmenting the areas of information need, providing remote access via technology, developing apps for mobile devices. To get started, they must begin to analyze the nature of the topics and issues on which information is needed; this means ending the idea that every situation is unique and seeking patterns for sales enquiries and customer issues.
‘The 2 second advantage” is a powerful concept – and it is something we really must take to heart. Today would be a good day to start.
Research shows that a majority of people dislike contracts because they cannot understand them.
When you think about how important a contract can be – the effect it can have on people or their business – this is quite an indictment. Surely it must be in everyone’s interests to produce contracts that are clear and offer a useful source of guidance.
Regular followers of this blog and of IACCM will be aware of the support we are giving to the proactive law movement and its work to encourage more useable contracts. Their campaign continues with an excellent article published by the Cornell University Law School. This sets out much of the background and history related to the use of visualization in contracts and the growing role of Information Designers.
As the article points out: “Lawyers are communication professionals, even though we do not tend to think about ourselves in these terms. Most of us give advice and produce content and documents to deliver a specific message. In many cases a document — such as a piece of legislation or a contract — in itself is not the goal; its successful implementation is. Implementation, in turn, means adoption and action, often a change of behavior, on the part of the intended individuals and organizations.”
With a growing number of examples from which we can draw, there is no good reason why contracts professionals should not be leading the charge to improve the quality of contracts. Indeed, if we could make them easier to understand, many people might start to like contracts – and think what a pleasant knock-on effect that could have for the people who write them!
IACCM research identified a 20% increase in the frequency of claims and disputes last year. The reasons for this are becoming steadily more apparent.
The ‘boom and bust’ cycles of the economy are inevitably reflected in business behavior. Anyone in Contract Management or Procurement is only too well aware of the swings between laissez-faire pursuit of growth and the stringent push for tight controls and cost reduction.
But current conditions are different. Past downturns in the economy have typically been accompanied by relatively short-term measures. The prolonged nature of this downturn – now into its fifth year – is resulting in more sustained action. Businesses face the twin challenge of maintaining or growing revenue and maintaining or growing margin. The former points to the need to enter new or more risky markets; the latter depends on a combination of cost reduction and extracting greater value from existing contracts.
As highlighted in previous blogs, these conditions have led to a new level of appreciation for the importance of contract and commercial management, both buy and sell. One area for particular focus is post-award contract management. The old perception of ‘administration’ is fast giving way to a far more proactive – and aggressive – pursuit of value.
In the case of Procurement contracts, this may mean either ensuring that anticipated savings are realized, or alternatively a greater focus on decommitment in situations where needs have changed. For those overseeing Sales contracts, there is particular pressure to protect and grow revenue, which means preventing no-charge scope creep and seeking compensation for changes.
The potential for conflict and disagreement is obvious and therefore the greater frequency of claims and disputes should not be a surprise. The real question is therefore ‘What next?’ Will organizations continue to invest in confrontation, or will they start to explore ways to avoid the need for claims and disputes?
Periodically, companies ask whether there are good examples of b2b loyalty or ‘preferred customer’ programs.
The question seems mostly to arise when and organization is struggling to achieve differentiation. Facing an erosion of their negotiation a power and influence, they wonder whether they can achieve heightened status through ‘preferential’ terms and conditions.
This approach always seems to run into problems. One is the difficulty of segmenting customers. A public program carries significant risk; for example, will a ‘gold’ customer feel especially flattered and how will you explain to a ‘bronze’ customer why they are receiving worse service – and why they shouldn’t move to one of your competitors?
A second challenge is usually to identify tangible benefits for the high-status customers. They have already pushed you on price and risk – that is usually why the program is being considered. So what do you offer next?
It seems to me that loyalty programs in the business to business environment are a sign of desperation. Essentially, they are an admission that the company has no real distinguishing value and is struggling to develop a coherent approach to marketing and market segmentation.