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A new approach to contracts: finding the right balance


A recent article in Harvard Business Review added to the long running debate on ‘relational contracting’ and advocated ‘a new approach to contracts’.

As a long-term proponent of relational contracting, I welcome the advocacy for their use, but question the article’s proposition that such agreements should rely on legal enforceability. Indeed, while acknowledging that this is an option the parties may wish to pursue, my experience to date is that it is not necessary and often may be undesirable.

For many years, practitioners and scholars have mused over the relative importance and influence of ‘the contract’ versus ‘the relationship’ in generating positive outcomes. Most business people have tended to argue that it’s the relationship that matters; contracts only really become important when things are going wrong.

In this context, contracts have been viewed by both scholars and practitioners as ‘formal’ and ‘fixed’, whereas relationships have been seen as ‘informal’ and ‘adaptive’.

In the modern world, there are many reasons to challenge this traditional view and to point at the importance of the contract in establishing a platform of certainty, without which disputes are almost inevitable. Much has been written about what constitutes a ‘good’ contract, particularly since today they are far more pervasive and comprehensive than in the past.

My experience (which accords with the article) is that relationships require greater formality because of the scale of adaptability that is required in today’s long term or high value agreements. But if that formality is made contractual, there is a risk that it results in a loss of adaptability or is simply ignored by the post-award operational team. Indeed, it also entails the inevitable involvement of legal teams, which often means that momentum and the essential elements of collaboration are lost.

There are solid grounds for considering recourse under relational contracts at several levels which include:

  • renouncing legal enforceability for the entire contract and utilising some form of mediation, such as an independent neutral
  • developing relational principles that are separate from the contract and not formally incorporated within it. Mediation may be incorporated as an initial step in issue resolution.
  • incorporating relational principles in the contract and agreeing some form of ADR.
  • incorporating relational principles and retaining resort to legal enforcement. 

Such a discussion seems to me an important element of the process when seeking to build a shared accord and mutual trust. By recognising this type of adaptability we truly do start to introduce ‘a new approach to contracts’.

Contract Management Automation: Making Progress?


Back in 2017, IACCM published a report on the state of contract management software. Since then, its findings have been much cited by analysts and consultants. This is what we said:

”A March 2017 survey by IACCM revealed that levels of satisfaction with current contract management automation systems is low, with a rating of just 4.2 out of 10. Organizations have struggled to gain adoption and for many, integration with other systems is proving problematic. As a result, functionality is generally limited – for most, the repository functions of accessing and having visibility into agreements is the primary benefit.”

Have things improved?

Our latest polling of IACCM members does indeed reveal growing levels of satisfaction – a significant increase to a score of 5.1. But is that because the value of the systems is improving, or that expectations are changing? The answer seems to be a little of both.

Certainly the technology being deployed is now in some cases more mature and vendors are becoming more realistic in setting expectations. Functionality is also improving as digital technologies and early forms of artificial intelligence are incorporated. In addition, both customers and suppliers are learning from past mistakes. Increasingly, they understand the weaknesses highlighted in our 2017 report and are more likely to address the issues around process fragmentation, integration and disrupted data flows.

Reduced expectations are a threat

In lowering their expectations, the buyers of contract management technology are becoming more pragmatic. But there is a real risk that they will lose sight of the bigger picture and, as a result, invest in systems that deliver only short-term benefit. This is indicated by analysis of those who have been using the IACCM Contract Automation Comparison Tool. 

In more than 3,000 searches over the last 3 months, the primary functionalities being sought are for repositories, approval flows and drafting. These core capabilities are of course essential ‘plumbing’ for any contract management tool, but they are not the things that generate real market value over time. Analytics, portfolio management, obligation management and inter-firm collaboration are examples of the things that offer potential for competitive advantage – and in almost 50% of cases are being ignored.

Plan for the future

Given the history of contract management software and the many false starts, it is understandable that the ambitions of buyers have reduced. They are right to focus on the basics and ensure a practical, working system. But they should not lose sight of the longer term and the functionalities that, within 2 to 3 years, will become the norm. By narrowing their search, buyers could focus their choice onto a group of rather basic suppliers, who may lack the resources or broader understanding needed for long-term survival. The winners here will be those who develop a clear vision of the potential value from streamlined and intelligent contract management – not those who continue to see the challenge purely in terms of administrative efficiency.

Listen to IACCM’s webinar “Technology – how much, how soon?”

Commercial & Contract Management 2020


A new decade is almost upon us. It’s the decade of RRP – Relationship Resource Planning – when a great wave of efficiency and cost reduction will be achieved through streamlining the management of external relationships.

Automation is key

Just like ERP (Enterprise Resource Planning), RRP will be driven by automation. In developing this term, IACCM identified how a new wave of technology is starting to provide the platforms and intelligent systems that are needed as an overlay to, and interface between, existing enterprise software. This increased flexibility is already starting to impact attitudes towards commercial and contract management and generating a set of ‘big themes’ for 2020 and beyond.

1. From documents to data. The traditional view of contracts as ‘documents’ is fast giving way to an appreciation that they are in fact a critical source of ‘data’, at both transactional and portfolio level.

2. From Risk transfer to Economic value. Traditional approaches to contracting and negotiation focus on contracts as mechanisms for risk transfer. Over the next decade, as research and analytics help us better understand the balance between risk and opportunity, we will witness a shift to contracts becoming instruments for economic value.

3. From boundaries to pathways. Contracts today tend to set boundaries, often influenced by an approach that seeks to impose responsibilities and establish protections for when things go wrong. Our new era of increasingly open, transparent data flows will see contracts establishing pathways through better structured and more formal relationships that place greater emphasis on creating the conditions for success.

The broader impacts

Underlying these major changes will be a number of important enablers, for example in areas such as contract design and structure. Current trends towards visualization and graphics will accelerate. Similarly, advances in the use of blockchain will create platforms that generate visibility across supply chains, while initiatives such as Robotic Process Automation will hasten the push towards ‘self-service’.

Perhaps the biggest change that’s occurring is growing appreciation that contract and commercial management are frequently out of step with corporate goals and strategies. They often lag behind shifts in priorities. For example, while executives may promote speed, flexibility and collaboration, such initiatives typically take time to be reflected in commercial and contract terms and practices. In the 2020s, supported by dynamic market intelligence and contract analysis, commercial management will increasingly inform and shape corporate strategies, assuming a position of leadership in the execution of change.

Value for money presents challenges


A shift in procurement practices from awards based on price to awards based on value is much discussed and, for most people, long overdue. All the evidence suggests that many organizations continue to struggle with making the change.

Awards based on lowest price and measured on negotiated savings are simple to assess and manage. For many commodity products, they continue to make sense unless a supplier can prove otherwise. But more complicated acquisitions, and especially those involving services, demand a rather more holistic approach that takes account of lifetime costs and benefits (not all of which may be directly financial in nature).

Barriers to change

Several factors are impeding progress. The change is more dramatic than it sounds and impacts many areas of the business, as well as the supply base. Finance must buy in and contribute, often validating the benefit assessments. Business units need to supply relevant data and often product management or engineering will be required to provide input. This demands levels of collaboration and data that are hard to achieve. Also, suppliers need to buy in to the process and provide reliable information – much of which they may not possess.

Ultimately, many see the short-termism of markets as the major barrier. CFOs are reluctant to promote the shift from ‘negotiated savings’ to ‘’value’ because of the short-term impact this would most likely have on purchase price. However, this is neither inevitable nor insuperable. One contributor can be the shift from products to ‘as-a-service’. Another may be the need for buyers and sellers to negotiate shared-benefit agreements.

Making the transition

Transitioning to value for money represents a benefit to both customers and suppliers. Its achievement requires increased openness around financial data and a greater readiness for partnering. Until then, value for money seems set to remain the exception, rather than becoming the norm.

Do you have examples of ‘value for money’ contracting that you can share, and how they were achieved?

 

‘Contract Management is more important than Procurement’


This quote, taken from the latest edition of Supply Management magazine, will be welcomed by many as recognition that it’s actually the results of an acquisition that matter. For too long, they will say, Procurement has been happy to oversee inputs, ignoring the fact that it is contract management that oversees outputs and the actual delivery of value.

I have never forgotten the words of one very senior executive who recognized this issue when he observed that “organizations frequently undertake a perfect procurement and achieve completely the wrong outcome”. He understood that ‘procurement’ is actually just one element of a much bigger process.

Many contribute to disappointing results

There can be little question that traditional procurement practices are increasingly misaligned with business interests and have not adjusted to the realities of today’s markets. However, it would not be fair to heap the blame for that onto Procurement functions. They do what they are told and trained to do. Well-managed procurements are frequently let down by others – for example, Legal providing inappropriate templates, the CFO demanding draconian savings, the business unit failing to manage supplier performance. If Procurement has failed, it is a failure of its leadership to challenge and be adequately vocal in pushing for change. In this, they have often been let down by external experts – the consultants, advisory firms and training organizations that should be assisting in preparing their teams and processes for the future but instead have focused on issues like compliance, commoditization and category management. Procurement has been led down far too many blind alleys.

Where IACCM enters the picture

The International Association for Contract & Commercial Management was founded precisely because of these chronic issues. Procurement – like Sales – is just one of many specialist disciplines. ‘Contracting’ is an overarching competence and capability. It needs ownership. When it’s left to chance, things go wrong. Often badly wrong.

For 20 years, IACCM has worked to overcome entrenched attitudes and innate resistance to change. During this time, it has directly engaged with and trained over 200,000 people who understood there must be a better way. Its research, training and advisory services have enabled massive progress for the organizations which have grasped the fundamental truth that customers and suppliers depend on each other for success and are working to develop open, cooperative relationships, founded on honesty and integrity. IACCM espouses collaboration and believes in inclusive behaviors that generate mutual, shared benefits for customers and their suppliers.

In the end, does this mean that contract management is ‘more important’ than Procurement? No, it doesn’t. They are different disciplines and they must complement each other. What is true – and the real issue here – is that both are subservient to the overarching ‘contracting process’ and must align with commercial goals and strategies. Unless there is focus on holistic development of commercial capability, simply changing names or expanding the Procurement remit delivers at best marginal improvements and could even make things worse.

IACCM’s recent benchmarking report provides insight to the current state of contract and commercial management organization and performance, highlighting also the leading practises that generate improved results.

Are you really a negotiator?


Most business-to-business negotiations are destroying potential value. Rather than engendering trust, they sow the seeds for discord.

The problem

Ask any hostage negotiator about how to achieve success and they will tell you that it isn’t through intransigence, threats or deliberate tabling of unacceptable terms. Yet examine typical business negotiations and these are traits that frequently occur. The more powerful party tables one-sided terms and demands compliance. They typically claim ‘everyone else accepts these terms’ (I.e. if you don’t, we won’t do business); and in many cases, the counter-party responds by tabling their similarly one-sided terms.

This isn’t negotiation. In many ways, it is negotiation avoidance. It is based on a lack of trust and a fear of failure.

A different approach

If we want better results – and I hope we all do – there’s a need for a different approach. Here are three principles to consider:

  • Confront perceptions. It is clear that many negotiations are compromised by unspoken assumptions or beliefs. Unless these ‘elephants’ are addressed, there will not be trust and without trust, confrontation is inevitable.
  • Send negotiators, not roadblocks. Often, suggesting that negotiations are occurring is a bad joke. One or both parties frequently send people whose job is to enforce compliance. They lack authority and have no interest in showing empathy or acting as an advocate for the other side.
  • Build common ground. Ultimately, high performing relationships are built on shared principles and goals. Yet because the elephants aren’t addressed and because the negotiators have limited authority, it is very unlikely that common ground will be explored or established.

Ultimately, while organizations are responsible for performance, it is people who set the scene. Until these three principles are addressed, we can’t expect results to improve.

 

Contracts as sources of innovation


“Trade is the spark that lit the fire of human imagination, as it made possible not only the exchange of goods, but also the exchange of ideas. Trade also encouraged specialisation since it rewarded individuals and communities who focus on areas of comparative advantage. Such specialists had the time and the incentive to develop better methods and technologies to do their tasks.”

That quote comes from an edition of The Economist, almost 10 years ago, reviewing a book by Matt Ridley that addressed the importance of human optimism (a major theme for IACCM this year, with further research to be unveiled at the IACCM Americas conference in November).

Contracts and trade

Contracts sit at the heart of trade. They are the ‘boundary objects’ that define roles and responsibilities, reward and consequence. In addition, as other recent research by IACCM confirms, they influence whether or not innovation and continuous improvement occur (report available on the IACCM website).

It is this culture of striving for continuous improvement that drives and provides incentive for innovation, enabling human aspiration to become a reality. However, such aspiration is rapidly undermined in an environment that is seen as punishing or risk averse – the characteristics of many of today’s contracts. Assumptions of failure or disaster are frequently self-fulfilling. The IACCM research confirmed that those who place their primary focus on protecting against risk thereby discourage cooperation and limit the exchange of ideas.

A heavy responsibility

If indeed it is trade that sits at the center of our future success and, more broadly, our ability to prevent disaster (including, for example, from climate change), then the contracts community has a large and heavy responsibility to ensure it is not only removing barriers to innovation, but that it is also itself innovating in the methods through which trade occurs. We have a duty to ourselves and others to ensure that we contribute to the cultural and economic forces behind human progress.

“Thanks to the liberalising forces of globalisation, innovation is no longer the preserve of technocratic elites in ivory towers. It is increasingly an open, networked and democratic endeavour”, says Ridley. Contracts can – and must – create environments where openness, transparency and networked communication are encouraged and rewarded and where cultures of blame, risk allocation and punishment are avoided.