The recent comments by UK Government CPO Bill Crothers reflect sentiments felt by many customers towards their suppliers – that they are exploitative and cannot be trusted.
Mr Crothers was commenting in the wake of some highly publicized incidents in the UK of extensive over-charging and poor contract performance. He was careful to limit his remarks to ‘some’ suppliers and not industry as a whole.
Buyers in many organizations have an innate distrust of suppliers. I recall speaking to a group of supplier relationship managers at a major international bank who universally took the view ‘all suppliers are evil’. There is no question that customers and suppliers often go through rituals that ultimately detract from the value both could achieve – and that certainly includes a tendency by some suppliers to over-commit or deliberately under-price.
A significant part of the problem is that many buying organizations simply have not adjusted their business model to deal with the changing nature of what they buy. Most of the problems seem to arise in relatively long-term service or solution contracts, where success is determined by an output or an outcome. Many buyers appear still to be using selection criteria and negotiation approaches that are suited to commodity purchases. They fail to undertake fundamental research regarding supplier organization, measurement systems or performance capabilities that are key indicators of underlying management culture. They do not alter the weightings for evaluation or consider the contract terms that are needed to drive performance. Instead, they rely on tough price negotiation and risk allocations that impose negative incentives.
Further, in many cases the oversight of performance is passed to business groups with few qualifications to undertake the task. Even honest suppliers often struggle to perform when the quality of interaction and management is poor – and for the less scrupulous supplier, there is a strong temptation to take advantage and to make up margin.
My observation – as yet untested by research – is that one warning sign for buyers may be the strength of the Finance function within a supplier. It seems to me that this is often related to weak ethical standards, especially if the Legal function is weak or subordinated to Finance. Another indicator may be the reporting line of the contracts or commercial staff. These organizations can place such strong emphasis on financial targets and goals that they overwhelm good judgment and result in the sort of ‘appalling behavior’ that Mr Crothers highlights.
I know that the UK Government has been taking steps to address these problems and organizational weaknesses. Other governments are pursuing a similar path. But businesses generally seem to struggle with adjusting their organizational design and capabilities to deal with new commercial and relationship models. And meantime, there are some unscrupulous suppliers who will take advantage and thereby damage the supply environment for everyone.
It is now almost 6 years since I wrote a blog ‘The Role of a Contract Manager’. It has attracted more than 100,000 views and, in that sense, seems to be the authoritative description of a contract management job.
In 2009, I prepared an update, which explained how the role was changing in the face of tough economic conditions and the growing importance of contract management in securing business performance.
It seems to me that it is once more time to review the contribution of contract management and how the practitioner community and its role are evolving.
The business environment continues to change at a rapid pace and many of those changes are of direct and immediate relevance to contracting and commercial management. For example:
- Since the financial collapse of 2008, there have been wild swings in relative prosperity and trading patterns within the global economy. This has led to substantial shifts in where trade is undertaken and there is no sign that this volatility will end soon.
- Outsourcing appeared unstoppable several years ago, yet increasingly is being questioned and the size, duration and location of outsourcing arrangements continue to alter. This has impact not only on the outsourcing agreements themselves, but also on underlying procurement policies and attitudes.
- The power of the buyer was taken for granted back in 2008, resulting in sharp focus on price and risk allocation onto the supplier. Today, there is far more understanding of the destructive nature of such an approach. Supplier power has returned in many industries and increasingly there is recognition that success depends on greater collaboration and a sharing of risk.
- The continued growth of regulation is forcing organizations to face up to the issues created by inappropriate or poorly managed trading relationships. Regulatory and reputational risks are pushing management to ensure greater transparency and visibility into organizational behavior both internally and within their suppliers and customers.
- Automation increasingly replaces people in the performance o f mundane or administrative contract management tasks. It also supports a growing wave of improved management and performance data, enabling contracts professionals to anticipate problems and manage, rather than administer, contracts.
- Executive management has awoken to the costs associated with poor contracting, especially in failure to secure the anticipated benefits or, as highlighted above, through failure to ensure appropriate forms of governance and performance management.
Taken together, these and other factors are transforming the role of contract and commercial management. Today, it is not simply an operational function overseeing transactional negotiation, implementation and management of contracts. Increasingly it is a critical vehicle for high value management information that supports strategic decision-making.
A result of this is the steady emergence of two types of contract or commercial manager. A majority still performs a role that has changed little from that set out in the original blog, though it is important to note that the required knowledge, measurements and skills required to perform that role have evolved at a rapid pace (I will write more on this is a future blog).
The second contract management role is far more strategic and is about business enablement rather than tactical operations. In this role, the contract manager is both an adviser to executives and a vehicle for implementing organizational goals. Essentially, the strategic contract manager ensures that contracts and contracting procedures are used to execute business strategies – for example, with regard to desired levels of risk, or through the creation of market competitive commitment capabilities, or via more relational or collaborative forms of agreement with trading partners. But this strategic role also informs management about trends or issues that are observed as a result of more thorough analysis of the contracts and their performance. For example, what are the types and severities of different risks and where are they occurring? What are the market trends with regard to the sort of commitments expected by customers or resisted by suppliers? How can the business overall be empowered to exercise better commercial judgment and to reduce regulatory, reputational or margin risks?
Today’s trends suggest that the role of contract management is secure and will become increasingly pervasive. It will be recognized as a life-cycle discipline, with measurements reflecting its impact on revenues and the bottom line. In leading organizations, it will also be an integrated discipline, quite probably part of a shared services unit, that oversees contracting for all trading relationships – buy, sell and distribution channel (even though operational resources may remain embedded within business units).
With this transition, contract management will offer an interesting and fulfilling career path, increasingly supported by structured education and training from university level upward. But with growing sophistication and an increasingly strategic role, the volume of the more administrative, operational tasks will reduce and in many cases will be performed via automation or through greater competence in other groups, such as Sales, Project Management and Procurement.
Therefore, while the job itself will become more highly valued, the numbers bearing the title may over time start to reduce. Those that remain will be more highly paid, have greater status and – of course – will be endowed with skills and knowledge that go beyond the traditional role of a contract manager.
The International Association for Contract & Commercial Management undertakes extensive cross-industry, international research to monitor trends and needs in the field of contracting. It identifies best practices and undertakes extensive benchmarking, as well as offering thought leadership in training and assessment services.
In my blog yesterday, I suggested that the owner of contracting in any business must be prepared to take accountability for the quality and effectiveness of the overall process. That means acquiring an understanding of the impact that contracting has on business performance and optimizing the balance of multiple stakeholder views to ensure that it is driving the best possible results.
This means, among other things, an appreciation of the market and bottom-line effect of the way contracts are structured, negotiated and managed.
Several in-house lawyers responded to my blog, suggesting that it is not reasonable to expect lawyers to take on such a broad role – a point on which I neither agree nor disagree. This is not about what is reasonable, it is about what is necessary. Some lawyers are anxious to develop their business role and contribution – contracting represents perhaps their biggest opportunity to show bottom-line impact. But not all of them want to do this; they prefer their more traditional advisory role. Either position, in my opinion, is easily defended. The one that I do not find defensible is when in-house teams reject the wider role that contracting demands, but also stand in the way of others performing it. This latter group takes the position that contract terms are themselves risky and that no one outside the law department has (or could ever have) the competence to make sound judgment on them. They therefore either mandate standard terms or they insist on situational review and approval. Either way, they stand in the path of both efficient and effective contract management.
I have seen some great examples of legal groups showing initiative and leadership in overseeing the contracting process and being able to explain the business value they have delivered. I observe many others who lack the courage to let go of control and the imagination to see how they could empower others to make better decisions. The irony is that these controllers are creating risk for their business, because their lack of holistic understanding generally results in higher frequency of downstream claims and disputes and inferior economic performance from their contracts. In fact, early IACCM research suggests that these ‘business impediment teams’ may be responsible for around 30% higher levels of claims than the average and a negative impact of up to 5% on profit margin. That is a big price to pay for little or no demonstrable benefit.
This research data is something I will expand upon next week.
I spent yesterday chairing a conference on Advanced Contract Risk Management.
There were some excellent presentations and much lively discussion – but many of the exchanges involved heated discussion over the organizational reporting line and whether contract managers should be lawyers.
These days, it seems many lawyers are becoming more assertive about not only the ‘right of ownership’ they have over anything contractual, but also suggesting that legal skills are somehow uniquely suited to the role.
But what role? Here is where we have the problem. Such debates between the lawyer and non-lawyer fundamentally miss the point over the role of contract managers, the purpose of a contract and the value contribution from a contracting process. These questions must be answered in advance of a decision on the necessary skills or the best organizational reporting line. What value can be achieved from contracts and what value do executives want to achieve? I find that those who claim ownership rarely have answers to these fundamental points.
For those who wish to own contract management, my question is whether they are ready to accept accountability for the quality and outcomes of the overall contracting process. If they are not, then they are not a suitable owner.
I enjoyed reading a recent paper from Horses for Sources Research, which draws on research by Proxima to highlight the fundamental shift that has occurred in business operations and the challenge this represents to organization and skills. Essentially, the study found that the average business spends some 70% of its revenues on non-labor costs and this has generated a critical dependency on services supply chains. This has generated a need to fundamentally alter the way that supply relationships are managed.
The paper by Phil Fersht reiterates the case for a value-based approach to key supplier relationships and confirms the view that traditional approaches used for direct procurement are damaging business results. Its main contribution comes from some original research suggesting many organizations are already adopting new business models; but unfortunately it does not explain in any depth what these models are or how organizations might achieve them.
The ‘Six Characteristics of Companies of the Future’ are translated into a series of Procurement competencies that are once again interesting and reflect many of the areas that IACCM has been promoting for several years. Where the paper fails is in explaining its assertion that the future will be achieved through a ‘hybrid outsourcing and shared services’ operating model and quite how this connects to future Procurement. Indeed, it seems to imply that the main change is in re-skilling and re-focusing the efforts of the traditional Procurement workforce. But is that really achievable and is it in fact adequate?
I fully agree that supplier relationships are key to business success. But so are customer relationships, because without those, there is no need for suppliers. The real issue with current business models is the continued fragmentation of how we see and manage ‘the market’. I agree with many of Phil’s assertions, but in my view the real need is for an integrated market management service that oversees the alignment of trading policies and practices for both customers and suppliers. Continued separation of those who buy things and those who sell things is one of the unresolved tensions within most businesses. They operate with fundamentally different views of the world, rather than ensuring the internal collaboration that would generate a consistent value focus.
Indeed, as I mentioned in one of my blogs last week, recent research by the Chartered Institute of Purchasing and Supply found that the most serious weakness in today’s Procurement staff is a lack of commercial awareness. That, I suggest, is because they operate in relative isolation from the core business purpose, which is to be successful at selling goods and services. By consolidating contracts and commercial resources into a single services group, skills, processes and systems could be dramatically overhauled to ensure coherent and integrated management of external trading relationships.
On the Public Spend Forum, Jonathan Messinger produced a wordcloud to identify ‘the seven most over-used words in Procurement’.
I was interested to see that ‘contract’ came top of the list. Now Jonathan, to his credit, dismissed that as an over-used term because, he said, it is ‘what we are all about’.
Spot on, Jonathan, but interesting that while the word may be so much used, it is in my experience so little understood. I would be fascinated to see how a majority in Procurement would define the word or, more important, explain the purpose of a contract. I bet most see it simply as a legally-driven document generated by the procurement ‘process’ (another term that features high on the list).
If indeed ‘contract’ is core to what Procurement does, why are so few trained in contracting? Why is the management of those contracts still so rarely a valued discipline? Why do so few Procurement professionals appreciate the impact of terms and conditions on supplier motivation, behavior and the value that is achieved?
According to the Procurement Leaders’ 2014 talent survey, the number one skill gap for procurement professionals is commercial awareness.
Procurement Leaders is just one of the organizations that is jumping onto the ‘commercial skills’ bandwagon. Suddenly – it seems – Procurement professionals need to broaden their knowledge and perspectives in order to deliver sustained value and to be seen as core to business activity.
For the 12,000 Procurement professionals who have chosen to be members of IACCM (and especially the 5,000 who are engaged in obtaining formal certification), this may not come as a great surprise. In fact, what probably does surprise them is how long it has taken the various analysts, consultants and associations to wake up to the reality of current business conditions.
Business models have changed; social expectations and regulatory environments are transforming; executives have grasped their fundamental reliance on sustainable relationships. Many of the Procurement mantras of recent years are seen as narrow, constraining, inflexible. And that is because they were developed to meet the needs of the moment – cost-cutting, compliance, controls – and were not designed to adapt to the fast-changing conditions that had made them necessary in the first place.
Smart leaders in the Procurement community grasped this dilemma and saw the need to create a new generation of commercially aware professionals, strong on analysis, communication, relationship skills. These professionals also understand the need to take responsibility for outcomes and to ensure that suppliers assist the business to achieve its wider goals.
The slight irony in this sudden awakening is that those who have commercial awareness are in a position to lead, precisely because they are aware of wider trends and developments. Commercial awareness lies at the core of any professions continued relevance, its ability to adjust and adapt. It must therefore be a fundamental component of the skills in any leadership body or team.
IACCM offers a range of programs for those seeking to raise their commercial capabilities and knowledge. These range from a Foundations program, through a range of formal certification offerings, to a Commercial Skills for Leaders class.