On Successful Workplace, Chad Garrett writes about ‘the death of the enterprise salesman’. He describes the growing sophistication of customers, who undertake far more independent research and no longer rely on the sales interface for information or requirement development.
On this blog, I write extensively about change and in particular how it is impacting the way trading relationships are formed and managed. I agree with Chad’s observations – in fact, I would go further. The pressure from regulators is forcing a new era of honesty and transparency, driving the need for far greater integrity and openness throughout the sales process.
As with all periods of transition, there are teething problems. First, while customers are trying to improve the skills of their teams in researching the market, it is clear that areas such as requirement definition and documenting specifications / scope are still problematic. The frequency of a mismatch between a customer’s perceived needs and a supplier’s capabilities seems to be increasing. Also, this new environment means that many contracts are based on ‘customized ‘wants’ rather than ‘market needs'; that undercuts supplier economies of scale and increases the risk of failure.
As the blog points out, this evolution alters the skill set needed for both promotion to and interaction with the market. The role of holistic opportunity assessment and alignment with capability becomes even more critical and the cycle time for doing it is shorter. Meantime, squeezed by current role and measurement system, sales staff become more desperate to win and the likelihood of poor assessment or over-commitment increases …
Overall, this is just one more perspective that adds to the pressing need for improved commercial judgment and the importance of more disciplined ‘commercial assurance’. Inserting this capability at a much earlier phase of opportunity management will be critical to future success.
I don’t know whether future marketing staff will have enhanced commercial and contract skills, or commercial and contract staff will have enhanced sales and marketing skills. But I am sure that greater integration of these competencies will be a feature of the rapidly changing market.
For years the analysts predicted meteoric growth – and it didn’t happen. Now, the complaint I hear is that the analysts largely ignore contract management software and see it as a sub-set of ERP.
So what went wrong? Why did contract management software fail to meet expectations – and is it doomed to be the success that never was?
Let me start by saying that I believe there is still massive market opportunity, but realizing it will require a significant shift of approach.
Software developers started in this space with the myth that contract management is a largely administrative discipline. This led to a focus on basic functions such as document management, repositories and monitoring milestones and events. The software automated existing processes, rather than challenging businesses to think differently about the issues associated with contracting. The early analysts added to the problem because they focused on high volume procurement contracts, largely in sectors such as retail, and saw the potential return on investment coming primarily from increased efficiency.
This meant that the industry failed to recognize the spectrum of relationships typical to most companies and actually ignored the higher value, more complex agreements that represent strategic significance. Hence, most implementations resulted in high levels of software customization accompanied by expensive consulting services. The resulting software was rarely capable of dealing with an organization’s overall contract portfolio and was not user-friendly, resulting in low adoption levels. Many large corporations implemented multiple packages, none of which gained enterprise status.
Providers and analysts saw contract management software as a tool to manage transactions, missing the point that businesses actually establish relationships and operate with a portfolio of contracts. This meant that they overlooked the big opportunity and the core return on investment – the issue of contract effectiveness and usability.
Struggling to establish a market, the industry has been driven by customer wants, rather than helping to shape their understanding of needs. Even now, most projections of return on investment make contract management software at best marginal and in many cases irrelevant.
To succeed, focus must change (and some providers have already started to grasp this). Here are five key areas that can revive opportunity:
- Contracts are related to relationships. Software must facilitate the various relationships through which a business operates.
- Many contracts are interdependent; that is, the performance of when depends on the performance of others (supply networks, teaming arrangements, sub-contractors etc.). Software must create and oversee these connections.
- The software must be designed to facilitate business users, supporting their ability to make effective decisions and to oversee contract performance.
- Rather than operate as an adjunct to ERP, it must focus on overcoming the problems created by ERP. Contracts are about interoperability between organizations, not internal efficiencies.
- Contracts and their performance are one of the great untapped bastions of data. The potential for generating critical management information is only now starting to be grasped – and it can be revolutionary in terms of value, quality and competitive advantage.
These factors cause me to have continued optimism that contract management software will succeed. But which suppliers are the best bet? Well, that is a different question – and a topic for another day!
There are those who would argue that the scale of fines being imposed by US courts and regulators on major corporations reflect high principles and a determination to raise ethical standards. Others take the view that this is a cynical way to raise cash and that it damages longer-term US economic interests.
The United States is certainly unique in the degree to which it claims ‘extra-territorial’ rights. In both the extent and the scale of the penalties it imposes on foreign businesses and their top management, it presents itself as an imperial power, policing the world stage. While many other nations may applaud and adopt the ethical principles which these reflect, none comes anywhere close to the scale of the financial levies imposed by the US judicial system, nor do they act so freely in extraditing and imprisoning foreign citizens (indeed, it is impossible to imagine the US ever operating to such arbitrary rights with regard to its own people).
Recent judgments such as those against France’s BNP or the UK’s BP have generated increasing concern in European capitals and warnings to the US authorities that their legal system is seen as lacking balance. Certainly these high profile cases add to the perception that the US operates with a high level of unpredictability and that operating and investing in is markets is therefore risky. Ironically, it is the sort of reputation that causes hesitation about investment in markets such as China, India or Russia – that is, doubts over the extent of the ‘rule of law’.
Part of the problem is the extent of localism in the US – there really Is not a national legal system until you reach the Supreme Court. Another is the entire culture of litigation and excessive numbers of lawyers chasing fees, regardless of the merit of their cases. A system controlled by lawyers, who are then major beneficiaries of that system, always runs the risk of lacking balance. Certainly the BP case appears to lack equity and is enriching people who are undeserving.
But on the counter-side, this same system has also imposed major penalties on US corporations and this tends to undermine arguments of institutional prejudice against foreign firms. On balance, I believe that the intentions behind the system are honorable and are driven by a genuine desire to raise ethical standards.
The challenge is this issue of balance and how external behaviors are influenced. I think the US does try to operate as a force for good in the world, but in order to gain credit for this position it must be seen to operate fairly and with reasoned judgments. The decisions of its courts do not consistently meet these standards; they need to be better controlled and there needs to be a central authority that can step in far faster when review is required.
Max Bazerman is a behavioral economist and he has recently written a book, The Power of Noticing: What the Best Leaders See. He draws from his personal experience in failing to notice things, which he attributes to his tendency to focus.
In the book, Professor Bazerman offers many illustrations from the world of business, including examples related to negotiation and contract terms. For instance, he highlights a case study involving Walmart, which one of my colleagues has summarized thus:
“In their contracts with Walmart, suppliers must agree to accept any financial or criminal liability resulting from the sale of their products. …Perhaps because it is protected from liability, and its value proposition is so firmly focused on low prices, Walmart historically had limited incentive to act on issues related to quality.
It is stated that, back in 2006, a company called Blitz presented a revised gas can design to Walmart that would prevent explosions and burn injuries by installing an “arrestor,” a device that would prevent a flame from flowing into the can, at a cost of between 80 cents and $1 per can. According to testimony, Walmart rejected Blitz’s design on the basis of the price increase, and Blitz halted its redesign project because it would be difficult to launch a national product that Walmart refused to purchase.”
The root of the problem seems to be that a narrow focus on price and risk allocation stood in the way of broader business or ethical judgment. And before we are too critical of Walmart in this regard, we must ask how many negotiations (and business decisions) are similarly driven by narrow value criteria and measurements that cause the negotiators either not to notice or to ignore the bigger picture.
The key to good commercial decisions and effective contracting is to ensure breadth of perspective. As Professor Bazerman points out, this is challenging, but essential to achieve.
“Outsourcing is moving backwards; it is tired and outdated”.
“I see no future for the major outsource providers: they have become trapped in out-tasking.”
These are just two of the comments I have recently heard during conversations with experts in the outsourcing field. There is no doubt that many client organizations are questioning the value of outsourcing and that many providers are struggling to make a decent margin. Add to this on-going questions about the integrity of the provider community and there appears to be a volatile mix of negative sentiment.
Managing internal relationships is hard; managing external relationships is even harder. And few organizations have yet grasped what it takes to build productive and sustainable relationships with an external partner. Providers are often caught in the dilemma of customization versus standardization; the former appears responsive, but actually adds dramatically to costs and to risk of poor performance.
So is outsourcing in decline? Will its use become more selective and more limited?
I believe that outsourcing offers many potential benefits, but realising these will take a continued shift in attitudes and behaviors. A few things that need to be addressed are:
- Establishing requirements: clients must know what they want and express it clearly. This requires engagement with the market to establish and evaluate capabilities. Needs must be properly documented to avoid regular disagreements over scope and goals. Current measurement and motivation systems do not help; they should be altered to rewards based on results, not on getting a contract signed.
- Executive sponsorship: client organizations must appoint a sponsor with experience of developing or managing contracts and supplier relationships. Too often, those in charge may be technically proficient and understand the subject area, but they often fail to test the commercial issues or capabilities of either organization and thus end up with the wrong supplier, or inadequate internal competencies.
- Use of third parties: if a third party is really needed, they should be very carefully controlled. In my view, third party involvement has been one of the major causes of value erosion in outsourcing. If they act as an expert mediator or facilitator, there can be major benefit. If they act as a partisan representative, they distort negotiations and performance, often creating an adversarial environment.
- Outcomes: if the only goal is cost reduction, then out-tasking existing activities may be fine. But if the aim is continuous improvement or innovation, it will be achieved only through focus on outcomes and continued discussion as these evolve. That means the parties must focus on what is to be done, not on how to do it. If the supplier is not expert in the field, why are they being hired?
- Governance and performance management: good relationships need the right structure – and this needs to be provided through an appropriate form of contract. The adversarial, risk-consequence focus on many contracts and contracting processes means that the parties lose their fundamental business management tool. After so many years, it is remarkable that there are so few examples of good performance based / outcome based contracts which integrate ‘the contract’ with ‘the relationship’. Yet given the factors above, perhaps this is not surprising ….
So can the industry survive and prosper? This depends on significant shifts in the way that outsourcing is approached and handled. Meanwhile, Shared Services will increasingly represent a dynamic alternative.
The Canadian Bar Association is the latest to come out with a comprehensive report advocating fundamental change in the structure and management of law firms and the delivery of legal services. Jordan Furling has provided a useful summary for those, like me, who do not have time to read the entire document.
In line with trends in other countries, the report recommends that there can be non-legal ownership of law firms (though it goes further in this than is common practice today). It therefore also envisages that such firms will offer a wider range of services – which is again the case in some other countries. And it is this area of what constitutes a legal or non-legal service that especially interests me.
The report itself acknowledges a certain greyness, yet persists with the view that ‘non-lawyers’ need to be supervised. It has relaxed the requirement for supervision from ‘direct control’ (which implies detailed review of work) to one of ‘effective control’ (which may be taken to reflect a need for more general oversight and governance standards).
The field of contracts is a perfect example of the dilemma. It could be argued that since a contract is a legal instrument, a lawyer should ‘directly or effectively’ control its creation. But in reality, they do not perform such a task. In most cases, there are multiple participants in contract creation and frequently key documents are prepared and used without any legal intervention or review – for example, service level agreements, product specifications, statements of work. So what elements of a contract – or its negotiation – constitute a protected ‘legal service’?
Moving to the future, we see law firms (and in-house lawyers) increasingly expand their field of operations. Indeed, there is growing interest in taking on the wider ‘business’ aspects of contract development and then potentially adding services such as post-signature data extraction or even full contract management. So does that now become a ‘legal service’? Are we seeing job scope creep here?
With that expansion, there are obvious areas for contention, confusion and re-definition of required process and controls. On one side, there is the question of how much lawyers will attempt to expand the definition of things that constitute a ‘legal service’. But on the other side, I believe a more fundamental question is ‘what qualifies lawyers to make business judgments?’ While many lawyers are talented business-people, this is not intrinsic to their knowledge base or skills. There are many aspects of business process or commercial policy to which the average lawyer is blind. Many cannot even answer fundamental questions, such as what makes a specific contract or term ‘fit for purpose’.
So as they stray from traditional activities into a broadened role, who is going to ensure ‘effective control’ over lawyers?
Many contracts, procurement and legal staff want to increase their influence. Many complain about not being involved earlier, or not being part of the ‘core team’.
Research has shown that one key element of being respected and included is to bring incremental knowledge and connections that others do not have. That is one aspect of ‘professionalism’ – being connected to a professional network, having access to a respected body of knowledge.
But that is not enough. Many contract managers and lawyers are knowledgeable and well connected, yet still do not feel these attributes are fully recognized. As Cendrine Marrouat points out in a recent blog, professionalism is also about showing care and respect for your audience, especially in how you communicate. If we appear arrogant, or dismissive, if we fail to pay attention to their views, it should not surprise us that we are not included – because our behaviour is then not inclusive. Key to being wanted is the sense that we listen, ask questions, take time to appreciate the views of others and why they hold them. We need also to explain the rationale for our position based on what we know the other party’s interests to be.
For example, if we want to promote a new contract management system, our message to the CFO will most likely promote the bottom-lime impacts it can have, as well as the improvements in data flows. The General Counsel will like the idea of being able to access contracts reliably and to improve the quality of insight and governance. But these benefits are not going to have much appeal to the head of Sales. They will most likely interpret those ‘benefits’ as meaning increased control over the sales force – and greater control equals less business. So with Sales the message has to be one of more empowerment, easier access to standard forms and agreements, speeding up of cycle times.
Ultimately, our success is driven not solely by what we know, but also by how we communicate that knowledge to others. But if we don’t take time to learn, then our knowledge is also limited.