In the last week, I have met with the General Counsels from three large, international corporations. Each of them is challenged by questions over the future role of the law department and its delivery of business value.
One consistent theme has been that the business increasingly demands facts, not opinions. Another is the pressure to cut costs, increase efficiency and relate legal services to economic value and ‘ease of doing business’.
For most law departments, these demands are challenging. The law is rarely precise – it is based on matters of judgment. Lawyers look for precedent, but they tend to view each case on its merits. They do not think in terms of packages or portfolios or processes. ‘Big data’ and analytics are not familiar concepts. Yet it is precisely these things that are now fundamental to business success and which must therefore be added to legal capabilities.
One area where this becomes especially evident is that of contracting. Historically, lawyers develop contract models; they draft terms and conditions; they review and approve exceptions. Many times, they either support or engage in negotiations. But rarely have they been challenged to explain or justify the business impact of their decisions. It has been enough that they protect the business from harm and get deals done; no one has asked whether those terms or contracts could have been better designed, whether there were opportunities to drive improved bottom-line results.
As IACCM research continues to reveal, the answer to these questions is that contracts do make a real and measurable difference, especially if they are placed in the context of a holistic contracting process. Then, the question becomes who should take ownership of that process, who should gather all the fragmented strands, who should push for appropriate automation, skills, people? Historically, General Counsels have mostly shied away from the challenge such a role represents. Today, that is changing; for many, contracting and contract management are being seen as increasingly relevant to their future as a high-value business function.
Smart organizations exploit uncertainty to create value. They do this by implementing approaches that allow them to manage uncertainty and – as Ian Heptinstall commented in response to my last blog – this is not achieved simply by shifting risk to the other party.
In last week’s webinar with David Hillson, we discussed the growing challenges of ‘uncertainty’, which result from a variety of factors – volatility, complexity, ambiguity being prime amongst them. David commented that there is a difference between precision and accuracy and that contracts cannot anticipate every eventuality. Therefore in dealing with uncertainty we must think about a range of contract and relationship models.
If substantial change is likely, the contract needs to embed terms that allow active scope management rather than seeking to nail it down and place onerous performance responsibilities onto the supplier.
Selection criteria should be adjusted to reduce the risk of conflict or non-performance. In other words, select a supplier that exhibits the experience, culture and appetite to handle uncertainty. This is unlikely to be the low price bidder, but may well turn out to be the low cost bidder.
A recording of the webinar with Dr David Hillson is available in the IACCM Member Library
Risk is about uncertainty – and good risk management is about distinguishing the uncertainties that matter from those that don’t.
This was just one of many valuable insights offered by Dr. David Hillson in an IACCM ‘Ask the Expert’ interview on ‘Bringing a risk perspective to Contract Management’. He was explaining that those who assess risk often focus on future uncertain events and fail to consider factors such as variability and ambiguity.
David made these useful distinctions:
- uncertainty of an event is based on the question will it or will it not happen?
- variability occurs when we can be sure the event will happen, that the goal can be achieved, but key parameters are uncertain – for example, how much it will cost or how long it will take
- ambiguity occurs when we are not quite sure what it is to be done, or what capabilities or competence it may require
These characteristics of risk demand different contractual terms or approaches. They should affect how a deal or relationship is structured, the pricing model, the termination rights etc.
Dr. Hillson also challenged use of the term ‘risk probability’ because, as he pointed out, probability relates to how likely it is that something will or will not occur. It does not take account of frequency. Therefore he suggested that we should think in terms of ‘risk likelihood’, which embraces both probability and frequency.
With these background concepts in place, the discussion moved to their application in the world of contracts – but I will write more about that tomorrow.
Recording of this webinar is available in the IACCM Member Library
Yesterday I ran a feedback session to an organization that had completed the IAACM capability maturity assessment. It illustrated the scale of opportunity facing those in contract and commercial management.
The company strategy is strongly focused on alignment with markets and customers, as part of which ‘ease of doing business’ is seen by executives as key. This has resulted in their sponsorship of an integrated, consistent approach to contracting, including the creation of a worldwide contract management function. For the first time, the company will have a standard process, with simplified contract frameworks and templates and the implementation of supporting systems and software.
This is of course encouraging. But an assessment of the overall business strategy reveals so many other areas where improved contracting and commercial management can assist in achieving goals – and it is interesting (from the assessment) how little the executives understand that potential. For example, as they move towards becoming a ‘trusted adviser’ to customers; as they develop strategic account strategies; as they shift towards providing measurable customer benefit; as they consider enabling an on-demand customer experience – all of these and more demand and can be enabled through improved contracting process and practice.
So a critical step in achieving world class maturity is for those who lead contracts and commercial groups to help executives understand the major contribution that contract management can offer in realizing their goals.
What is the purpose of contracts and to what extent does a good contracting process contribute to business results and outcomes?
According to a recent IACCM survey, weaknesses in contract terms and negotiation have a major impact.
- 63% report that they are frequently a cause of cost overruns
- 59% report that they are frequently a cause of project delay
- 28% report that they are frequently a cause of reduced future business opportunities
So what should you be doing differently? The IACCM ‘Attitudes to Contracting’ study provides a useful contribution in answering this question, as well as indicating what purpose contracts should be serving.
- It confirms that the quality of contracting – both process and document – has a material impact on project outcomes.
- It highlights the practices that frequently contribute to avoidable project failures and under-performance.
- It offers insight to the areas and approaches that, if improved, would generate better business results.
The study is unusual in that it combines views from a variety of functions, industries and geographies, offering perhaps the most objective view of the role of contracting yet undertaken. There are clear messages for industry and public sector bodies, especially with regard to project contracting. Among them are:
- Failure to establish and / or communicate clear objectives is a major issue in subsequent contract negotiation and contract management.
- This issue, together with late engagement of commercial resources or the imposition of industry standards, frequently contributes to use of risk-averse contract terms that distract from establishing key performance criteria and processes.
- Problems with defining project scope cause subsequent disputes and disagreements over change management, charges and payment.
- The use of traditional, legally-driven forms and documents renders most contracts of little practical use to delivery teams and project managers, thereby undermining their primary value as instruments of communication and understanding.
- Few organizations appear to make effective use of past contracts as a source of learning. Procurement contracting is especially weak in this regard.
- Only 16% of respondents feel that their contracting process ‘always’ achieves a positive impact on the relationship between the parties – suggesting there is major opportunity for improvement.
Can projects succeed in spite of poor contracting? The answer is yes, of course they may. But the study confirms there are many ways that the likelihood of success is undermined in the absence of an effective process.
The IACCM study ‘Attitudes to Contracting’ is available in the member library at http://www.iaccm.com
- Growing use – and potential misuse – of e-procurement, including electronic reverse auctions
- A more inclusive assessment of price, attempting to look at overall ‘cost of ownership’
- The use of non-price factors in evaluation, especially qualitative value judgments
- Framework agreements – and in particular, who gets the business when there are multiple suppliers under a single framework?
- Complaint mechanisms for vendors – are they effective, do they inspire trust?
- Process for exclusion of bidders – on what grounds and how discretionary?
- Negotiations with vendors – how extensive can and should these be; what constitutes ‘negotiation’?
- Domestic preferences and preferences for (domestic) SMEs – the extent and economic desirability of such policies
Data security is a big issue for business today. The risks of non-compliance are substantial, both in terms of regulatory exposure and reputational damage. This has resulted in data-related topics being among the most important and the most contentious in contract negotiations.
In this context, the findings of a recent survey published by In-house Counsel magazine are interesting. The study reveals that IT professionals do not understand how to handle data compliance and therefore prefer to outsource to Managed Service Providers. Of course, in some cases it may be less an issue of understanding and more a desire to get out of the line of fire if something goes wrong.
It is entirely logical to hire a specialist to do something when underlying complexity demands specialist skills or knowledge. It seems that the uncertainties of today’s data protection rules, plus the innate risks associated with systems vulnerability, have moved data security into this category. Obviously a buyer of such services will place heavy pressure on its supplier to validate their capabilities. Part of this pressure is in the form of onerous liabilities for failure.
Contention is perhaps inevitable in such a sensitive area. But it seems to me that buyers also increase the risk of failure when they demand highly customized terms. The more variations that a supplier must manage, the greater the risk that something will go wrong. Smart buyers are those who allow their supplier (being chosen for their expertise) to guide them on the optimum terms and conditions. Or to put it another way, if your potential supplier shows a readiness to be highly flexible on data protection services, that should be seen as an indication of riskiness.