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Imposing risk to eliminate risk – does it work?

Writing in the Financial Times, John Kay examines the health and safety regime that has impacted many industries and societies in recent years.

He concludes that, while the ‘health and safety culture’ is often ridiculed, the positive effects are substantial. Road accidents and industrial accidents have shown massive and continuing decline, surpassed now by self-inflicted injury. These improvements have been achieved through public policy – a range of legislation that has made risky behavior both unacceptable and uneconomic for employers to tolerate.

There are analogies here to what has been happening in contracting. Historically, suppliers accepted little responsibility for their products and services. Globalization and the explosion of competition altered the balance of power – and steadily, buyers demanded that suppliers should assume more risk for the effectiveness of their products or services.

The result was that suppliers had to start focusing on how they would extend their commitments (for competitive differentiation) and meet them (to ensure revenue, profit and customer satisfaction). And in consequence, we see an increasing number of contract commitments are being fulfilled, with suppliers frequently taking direct responsibility for outcomes.

Over recent years, many suppliers complained about the ‘unreasonable’ attitudes and demands of their customers in the allocation of risk. But as with health and safety, perhaps this was the only way to drive improvement and change. Faced with unsustainable levels of risk, suppliers have been forced to become more creative and more adept and ensuring their promises are fulfilled.

Risk: Attitudes Are Changing

Business risks often appear endless. The list seems to grow by the day. No wonder it takes ever more time to make decisions and the number of reviewers and approvers increases exponentially.

Yet is this apparently daunting view of risk reflected in reality? Certainly there are many who presume that a career can be built around the growth of complexity and its operational management. But the signs are that most of them will be disappointed.

Business inertia created by worries over risk is perhaps itself the ultimate risk. As the list grows, leading companies and organizations are forcing themselves to re-think the way they look at this problem. Executives are demanding far more intelligent analysis, in particular around assessment of probability. In addition to this, they are pushing for tools and procedures that offer early warning of potential risks and which will prove adaptable when the unexpected occurs.

These more adaptive organizations demand substantial changes to contracts and commercial practices. For example, a growing number of organizations have almost eliminated ideas of litigation from their thinking. Rather than acting as the bottom line assumption for contract terms, it is increasingly seen as an exception scenario that must be discounted in the majority of agreements. This change alone is  liberating in the freedom it gives to negotiators. They can instead turn to focus on the terms that actually define and motivate healthy business relationships. It moves risk from a thing to fear to a thing to be managed – and that management is increasingly a shared activity between trading partners.

Much of this change is evident in the push for new tools and systems. Applications that simply replace administrative staff and perform traditional activities have a limited place in today’s dynamic business environment. The need is for systems that provide data analysis which supports business decision making – for example, which contracts are not tracking to plan, what sets of terms offer greatest economic advantage, which suppliers or customers represent a source of performance risk?

Rather than being a source of despair, the growth of risk is in fact proving salutary. Leading organizations are focused on mastering risk and managing it better than their competitors; the same is true of leading contracts and legal groups. It is indeed a time of outstanding opportunity – but only for those who have the courage to think differently.

Projects depend on commercial skills

The discipline of Project Management has grown at a remarkable pace over the last 20 years. The title ‘project manager’ used to mean little beyond indicating an oversight role for a particular activity or task. Today, most project managers are professionally qualified and equipped with tools and methods that enable consistent oversight of performance.

Yet that consistency itself leads to further questions. For example, now that there is such discipline in managing projects, why do so many continue to fail or under-perform? The answers point increasingly to weaknesses in contract and commercial management – areas in which project managers receive limited training and where equivalent professional discipline is largely missing.

IACCM has been working to fill this gap and has trained and certified several thousand contract and commercial managers in the last few years. But compared with the number of projects and project managers, this is just a drop in the ocean. It is therefore exciting that new programs have been developed which will start to equip project managers themselves with increased commercial knowledge. These are being launched at the APMG showcase event in July, where IACCM will also lead a series of roundtable discussions on some of the issues that most frequently de-rail projects and how these can be avoided. Topics include areas such as scope uncertainty, change management and problem resolution, and the contractual mechanisms that can assist.

While a professionalized Contract and Commercial Management community is clearly important, it is also essential that groups like Project Management are better equipped with the knowledge they need to recognize – and avoid – the many potholes that lie in wait for the unsuspecting.

Details matter

For those who are having big thoughts, big ideas, the details often seem irritating and irrelevant. But in the world of contracts, it is the details that often spell the difference between success and failure.

This was illustrated in a presentation today at an IACCM meeting in San Diego. Professor Nancy Kim, from the California Western School of Law, presented on the effects of electronic contracts on negotiated terms. She was making the point that many organizations enter into long and exhaustive negotiations to establish their trading terms, but they may ignore the way that suppliers then contract for subsequent supply of software or service through various forms of electronic acceptance that could add or amend terms in a substantial way.

Suppliers have sought to cut costs and raise compliance through the adoption of web-based contracts. Electronic ordering is accompanied by the need for the user to click ‘I agree’. Professor Kim explained the various legal decisions that have defined the acceptability of this approach, but went on to explore the implications in a b2b environment, where the parties may already have a negotiated master agreement 0r contract terms. In that case, could the actions of a user who clicks ‘I agree’ override the negotiated terms?

The answer, according to Professor Kim, is potentially yes. So if you do not want your carefully negotiated terms (and more importantly, the assets or principles they may be protecting) to be at risk, there are several things a buyer should consider:

- coordinate internally to develop contract provisions that invalidate clickwrap modifications

- address the possibility that a third party integrator may be involved and consider their impact on issues such as authority to contract and related indemnity coverage

- recognize that your approach for software may not be applicable for services (in the US especially, aspects of UCC may not apply)

One area for attention is the Entirety of Agreement clause, where you may wish to specify that a negotiated and signed agreement will always prevail over an electronic agreement.

Of course, if you are a supplier of goods and services, the opposite of this advice may be true; you need to check carefully whether key electronic terms – either current or future – may have been excluded as a result of some past negotiated agreement with a customer.





The rise of localism: them and us could threaten your job

Recent elections for the European Parliament are just one example of the push-back on globalization and the uncertainties it creates. Unwilling to accept or threatened by change, many people seek the status-quo, even hungering for a by-gone ‘golden age’ lodged in their imagination. This is in no way new; throughout the Middle Ages, populations in Western Europe looked backwards and their aim was to restore the past.  It was only as a result of the ‘Age of Discovery’ in the 16th century that minds shifted, appreciating that a larger world perhaps offered potential for a new era of invention and prosperity.

Populists exploit these sentiments and fears, sometimes romantically and in other cases with extreme and destructive views. In either case, the threat to overall human welfare is significant, whether in terms of economic wealth or in terms of peace and harmony. Increasingly, we see the emergence of a ‘them and us’ world, with those who feel threatened and excluded from the benefits of a more global economy ready to fight against it.

Trade is central to this debate. It is trade that lifted us from narrow tribalism and created understanding that we gain from cooperation. Trade lies at the heart of many of our ethical standards and principles. Without trade, we revert to a world in which the strongest takes all.

Those of us who are employed in the construction and management of trading relationships certainly have an interest in the survival and success of open markets and free trade. This means we must be sensitive to the forces that could undermine them. As we structure deals and negotiate agreements, we should be aware of this wider stakeholder audience and consider how we might contribute to allaying their fears and reconciling them to the many benefits that flow from maintaining global trade and reducing the barriers to it.

Increasingly, our networked world will demand an expanded view of morality, fairness and shared benefits. In many ways, this is a continuing evolution; only 100 years ago, colonialists saw no issue with rampant exploitation of native communities and just 20 years ago, major corporations similarly saw little wrong with the use of child labor. The speed with which we are having to adjust our values is amazing, but the need to do so is urgent.

Major projects for infrastructure, the exploitation of new mineral sources, the outsourcing of services - each of these is an example where we must think holistically about how contracts are structured to be inclusive of the communities that are affected and to allay their fears, not exacerbate them. Good commercial management today demands much broader knowledge and judgment than in the past; without it, the future of trade truly is at risk.

Commercial practices that support trust

Yesterday I asked the question ‘Are you contributing to trust?’ It was based on the most recent PwC CEO survey, which concluded that generating trust is high on the executive agenda. My article suggested that professionals in Legal, Procurement and Contract Management have many ways in which they can contribute to that agenda – or alternatively, their behaviors can do much to undermine trust and organizational reputation.

Beyond the strategic and operational areas that I suggested can be influential, I wanted also to touch on a more fundamental question of business role. This highlighting of ‘trust’ and ‘ethics’ takes me back to my days at IBM in the late 1980′s. At that time, IBM was growing fast and still held what many considered a dominant market position. It was also operating in the wake of a major anti-trust settlement which had arisen from its ‘bundling’ of products and services, in ways that were deemed to lock out competition. As part of the settlement, IBM created a function known as Business Practices – essentially a group that was charged with overseeing ethical standards and compliance with the settlement.

The Business Practices department acted as reviewer of any significant new marketing or sales initiative, including review of new product introduction and the crafting of any related contracts and terms and conditions. It oversaw questions of integrity and sustainability, in many ways acting as ‘the voice of the market’ in assessing proposed actions.

There were weaknesses in this. Some staff struggled with the judgment needed between enforcing standards and responding to market needs. It became known as ‘Business Prevention’ in some quarters. But as I look back, I think this role brought tremendous strength to the company and, with the right measurements, it could have remained a very powerful force for business benefit. Indeed, I think IBM has retained many of those standards within its culture, even though the function is long-gone.

I just wonder whether we might see the emergence of new ‘Business Practices’ groups as a component of the need to build trust; I think it would be a good thing for organizations to consider.




Are you contributing to trust?

“The impact of today’s global trends is radically changing society’s expectations of business. And the extent to which a business behaves in line with these expectations determines how trustworthy it is perceived to be. Trust is pivotal because it is the basis of every human relationship, every transaction, and every market. Trustworthiness is the foundation of a business’s “license to operate” in any region or industry.”

This is the major conclusion from PwC’s most recent survey of CEOs. It is driving them to think not just about growth, but about ‘good growth’. That means growth that is ethical, sustainable and can be realistically positioned as representing social benefit. Many CEOs feel that things are already improving, that the collapse in trust that accompanied the financial collapse of 2008 is reversing. The most recent trust indicators suggest they are right, with the latest Edelman Barometer showing 58% of people now trust business, versus just 50% in 2009.

This shift in emphasis may explain why so many executives are talking more about collaboration and why IACCM’s top negotiated terms survey has started to show a subtle change in the focus of negotiations. Last year, we observed some reduction in the adversarial, risk-allocation style and increased attention to governance and performance oversight. This perhaps reflects an even greater unwillingness to engage in litigation – high-profile lawsuits are unlikely to help either side in the battle for trust. So if contracts are not about litigation, it further reinforces the point that they are primarily about creating certainty and enhancing relationships.

But it seems to me that ‘the trust agenda’ begs questions that go beyond the purpose of contracts or the way they are negotiated. It should be causing all those in Legal, Procurement and Contract Management to reflect on their precise role and contribution to the business. The answers vary a little. For example, in Procurement it must surely mean that efforts at cost reduction must be tempered by questions of social consequence; that purchasing activity will often be driven by the benefits to market image through longer term partnering or visible investment in socially desirable business. On the sell side, there are already growing trends in establishing off-set agreements or local content. Projects are assessed for community impact and stakeholder concerns are addressed through socially beneficial investments or development activities, such as improved schools or medical facilities, or boosts to local employment and skills.

Going beyond these transactional elements, business leaders are also looking for new commercial offerings that can alter the image of their business. A great example is in the energy industry, where leaders have understood that growth and profitability can actually come from reduced energy use. Therefore, rather than simply operating as a volume-based commodity supplier, large energy companies are developing contracts that offer facilities management and shared benefits from cost reduction. It helps them grow; it assists their customers in reducing costs; and it shows leadership in the social and political agenda for reduced energy use and environmental protection.

All of this implies that there are exciting opportunities for professionals in Procurement, Legal and Contract Management to be active contributors to the trust agenda. But I think there is actually an even bigger question regarding our potential role – and I will write about that tomorrow!

Meantime, I’d love to hear examples where you have observed a shift in approaches to contracting or trading relationships that illustrate this response to ‘changing social expectations’.


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