Today sees the start of another World Economic Forum, the annual meeting in Davos, Switzerland.
Davos itself is a far from inspiring town – and this year, the selected ‘leadership priorities’ seem all too predictable. They are based around the demands of a ‘complex, uncertain and anxious world’ which requires that leaders ‘must be receptive to signals that are constantly arriving from an ever-changing landscape’. The agenda calls for leaders with ‘vision and a way forward, so that people can imagine a better future’. The overall theme for the Forum is ‘Responsive and Responsible Leadership’. Perhaps it will start with public declarations of massive pay cuts for the executives attending and a promise of new management and measurement systems that inspire ethical behaviour. But somehow, I doubt it.
While not questioning any of the sentiments that underpin this year’s theme, I wonder what hole any leader unaware of them has been hiding in. Equally, I would expect anyone at Davos to be already far advanced in addressing the ‘five key challenges’ that are being discussed. Those challenges are:
- Coming to grips with the Fourth Industrial Revolution, which is ‘redefining entire industries and creating new ones’. This is the theme generated by ground-breaking technologies such as artificial intelligence, self-driving cars, robotics and the Internet of Things. It not only transforms business, but also adds to social divisions.
- The need for a ‘dynamic, inclusive multi-stakeholder global governance system. This represents a call for collaboration and cooperation on a new scale, reflecting the realities of a globally networked world. Perhaps a good start here might be to announce the scrapping of elitist forums such as Davos!
- Restoring global growth. Quite obviously, growth is fundamental to improved living standards and today’s growing levels of structural unemployment challenge social inclusion and stability.
- A reform of market capitalism, restoring the compact between business and society. Leaders are urged to address the challenges of short-termism, wealth inequality and cronyism. Indeed important goals, yet hard to see that those attending Davos will undertake the self-surgery required to shift their own behavior and values. It may be another, newly emergent group of leaders who will eventually create the vision necessary to address these weaknesses.
- “The pervasive crisis in identity formation” is the final challenge – the erosion of traditional norms and beliefs and ‘a sense of belonging’. This, it is suggested, has generated the populism seen in 2016, which threatens social stability and prosperity. Of course, seen another way, it is exactly the challenge that was needed to force today’s leaders to stop taking the world for granted and to demand a rebalancing of power and decision-making – in other words a good and perhaps inevitable uprising of ‘the masses’.
To me, this list simply reflects the extent to which the leaders at Davos are actually devoid of meaningful ideas. Perhaps the real message is that it is time for new ideas and new leaders – perhaps a group of people who do not need the luxury and extravagance of Davos to demonstrate their concern for broader human welfare.
Are Supply Chain, Procurement, and IT on different Planets from Category Management and Operations?
That’s a question posed by Daryl Fullerton in a recent article. Daryl concludes that the answer is ‘yes’ and that this results in the failure of many performance management and relationship management (SRM) initiatives. He offers some great examples and explores where improvements need to be made.
But it seems to me that the real issue is that each of these entities – Procurement, Supply Chain, Category Managers, SRM managers etc. – sees itself as competing with the others. Rather than recognizing they collectively contribute to an integrated process, they instead fight over relative power and status. I had an example of this just last week when speaking with an executive from a major retailer. He explained how there was an on-going battle between Procurement and SRM over who should undertake supplier selection on major projects. His story was typical of the tensions I encounter in so many organizations, where confrontations are about power, not business interests.
I remember the days when I came at business problems from the perspective of organizational design. It seemed that if only you could wrestle power away from those idiots in sales, or project management or wherever, then everything would be great. It took a very wise and seasoned senior executive to help me understand that organization is actually the last thing you should look at, because it is always an area of contention and political in-fighting. He taught me to think in terms of the overall process, since it is much harder for people to argue against improvements to process.
Many of the ‘specialisms’ we see emerging are really more about the urge for individuals to gain influence and security than about a business need. Hence it is not surprising when many fail to improve business performance – indeed, as Daryl observes, they may even damage performance. The complexity of procurement today – and its potential to add value – is being jeopardized by a failure to think in terms of the overall process. As my mentor observed, ‘Never let good business judgment get in the way of internal politics’.
How to remain competitive? That is the challenge for every business. And unless you happen to have some unique form of advantage, competition tends to depend on sources of commercial differentiation – greater reliability, superior support services, lower prices or a recognized brand. So part of the journey towards competitive differentiation is the development of new commercial models and contract offerings.
As-a-service contracting is an example of this journey. It is another step in the evolution away from a world where suppliers offered products and made the customer responsible for their use and performance. It was only 25 years ago that the technology sector denied even basic commitments such as interoperability between products. Customers were required to sign ‘Selection and Use’ clauses that eliminated supplier responsibility for the results achieved. Then, we started to see the emergence of solution selling, where products and services were bundled. Much of the drive behind this was price pressure and ‘commoditization’.
At about the same time, ‘outsourcing’ started to develop – moving entire processes or business activities to a supplier and thereby shifting responsibility for performance. But still the results were often disappointing, the costs higher than expected and the levels of flexibility and innovation challenging. ‘As-a-service’ models seek to address some of those issues – though it seems they are having varying levels of success.
A survey being conducted by IACCM and advisory firm ISG is revealing some fascinating insights to the realities of ‘as-a-service’ contracts. It illustrates a significant divide between customer expectations and aspirations and business reality. For example, in many cases anticipated savings are not being realised because customers do not implement use controls; levels of flexibility are often not as great as expected or carry a higher cost; security concerns may be hard to address unless the customer is willing to think in new and different ways.
One of the key challenges that has emerged is the short supply of individuals with the knowledge needed to structure and negotiate ‘as-a-service’ contracts. In a webinar yesterday, it became evident that this model remains relatively complex and high-risk because there are not yet any industry norms or standards (what should the terms and conditions look like? What are the characteristics of a good supplier?) and both suppliers and buyers are having the wrong conversations (sales people either don’t understand the key issues or are reluctant to discuss them with their customers).
The IACCM/ISG survey remains open for input until the end of January and it promises valuable insights and advice for both suppliers and customers of ‘as-a-service’ offerings. Those who participate will receive a copy of the report.
As we enter the new year, it is worth taking a moment to consider where we are coming from. I don’t support the view of many that 2016 was a year to forget. Certainly it was turbulent, unsettling and carried its share of human suffering and distress. Yet those are points on which we should reflect because they represent the challenges – and the opportunities – that we face going forward.
In general, society has embraced digital technology. It has permeated so many aspects of life and business. One key area is globalization, whether in the context of opening world markets or creating greater international awareness. But as with all innovation, the consequences are often unexpected and hard to predict. Research in 2016 pointed to one of the growing divides in human society – the fact that people in emerging markets increasingly see themselves as global citizens, while the trend in industrialized nations is in general the reverse. This is proving divisive within communities and has driven unexpected political consequences. Some view these as temporary set-backs, but perhaps they are indicators of something more fundamental and the need to question prevailing assumptions of economic and social progress.
As I look at the world from the perspective of those responsible for contract and commercial management, I see some fundamental threats and opportunities. The business landscape seems certain to remain turbulent, with uncertainties affecting geopolitical conditions and established trading terms and relationships. This demands far more intelligent risk management; far more agile capabilities; far greater commercial imagination; far better structured contracts and trading relationships. Those who win will be those who develop adaptive approaches to commercial innovation and governance, handling risks rather than avoiding them.
If this is the environment confronting senior management, they will certainly be looking for talented individuals to develop answers. Will they turn to their commercial staff – procurement, legal, contract management – as a source of creativity? Or will they see those functions as a source of the problem – rigid, oriented towards the rules and compliance policies of the past?
The quality of contract and commercial management will be a major competitive differentiator in the year ahead. One of the big and exciting changes that started to emerge in 2016 was the nature of the technology now available to support these disciplines. The growing power of automation and analytics is transforming the insight that a modern contract management function can deliver. It represents a potential turning point for business operations and the potential to end the outdated views of classical legal and procurement theory.
When I look at the year ahead, I cannot fail to recall a conversation that I had last year with a Turkish entrepreneur. I commented on how challenging it must be to run an established business in Turkey, surrounded by such high levels of political and social disorder, warfare on its borders, tense relationships with most international trading partners. He looked at me strangely before saying “Times of uncertainty are times of real opportunity. While others worry about risk, I take advantage of it.”
Those sentiments should be at the forefront of contract and commercial management thinking as we enter 2017.
So what happens when you ask a child to hurry up, or criticize a teenager for not getting a job done? Is their automatic reaction to jump right to it and promise to do better next time, or to find an excuse (or better still, someone else to blame)?
Whenever we are told we need to do something faster, most of us have a tendency to find fault in others. Certainly lead times for getting to contract are a case in point; there are a myriad of factors, multiple stakeholders and endless good reasons why decisions can’t be made more quickly. But executive impatience is growing and competitive forces are unrelenting, resulting in a growing number of IACCM members wanting to know ‘how do we develop an agile organization?’.
I am confident that this will become a steadily more pressing topic in 2017 and commercial groups – legal, procurement, contract management – will need to focus more on how they empower the business, far less on how they physically intervene. In order to do this effectively, they must fully understand the process of which they are part and the outcomes the business is trying to achieve. Here is a brief example.
Most of us will have observed the growth in recent years of the use of NDAs (non-disclosure agreements). Whether correectly or not, organizations have decided that it is a good risk management procedure to establish NDAs with many of their counter-parties in conjunction with any form of bid or proposal activity. As the volume has grown, most organizations have developed standard templates. Some have automated the process, enabling completion in just a few hours. Others have delegated. A couple of weeks ago, one of my colleagues was talking with a group in the delegation camp. They explained that their legal function had issued some standard templates with the instruction that they must be used whenever there might be any exchange of commercial information. Unfortunately, that was the limit of their guidance. Therefore this particular group maintains no record of what information is received or provided. They agree exceptions or changes to the templates without any point of reference. And, as a product research team, they give no thought to the risk that they may already be developing ideas or products very similar to those being shared from outside(and hence an NDA is absolutely not the thing they want to put in place). So in summary, the NDA process has become a major source of risk – but the good news is that it no longer causes delays.
In this instance, as in many others, commercial teams need to develop their inventory of knowledge and then consider how to apply that knowledge more effectively and efficiently. In the example above, it is clear that the legal team had not considered the level of knowledge among those to whom delegation was being made, nor the context in which it was being applied. As a result, there was no attempt at knowledge transfer and there is no on-going monitoring of performance.
In a recent edition of his Spend Matters newsletter, Peter Smith supports this view of the importance of speed. Writing about Procurement, he makes the following observation: “One prediction – we’re going to hear more about speed and agility in the procurement context in the year ahead. Organisations and our internal stakeholders won’t put up with procurement taking months to choose suppliers or put contracts in place. The world is moving too fast now, organisations must move and change with it, so it is going to be about making good decisions – but making them quickly”. (I wonder whether Spend Matters will soon be re-christened ‘Speed Matters’?)
Certainly, at IACCM, we recognize exactly this need and seek to equip our members with agility through a combination of thought-provoking modules (our ‘Becoming Agile’ series) and wide-ranging advisory and benchmarking services. I’m not sure I entirely agreee with Peter when he says of technology ‘we have not seen anything truly disruptive yet’. Our analysis of the products coming to market in 2016 is that several of them truly are disruptive – but only a few people are grasping the opportunity they represent. Most others are still busy finding excuses for why things are not getting done.
For 15 years, IACCM has been publishing a list of the most frequently negotiated contract terms – and highlighting how these are more focused on risk consequence than on risk probability.
In a workshop last week, a participant asked “So what are the most risky terms”.
To a degree, this depends on the definition of risky, and the nature of the supply, but if we mean those provisions where disagreement most often occurs (impacting financials and relationship) they are probably scope and goals, change management, acceptance, KPIs/service levels, termination.
That answer is certainly true across services contracts. But if I was answering this in a pre-award context, I’d think a little differently because I’d want to consider risk as it relates to the behavior and culture of my trading partner – so things like payment terms, IP, gain share, dispute resolution might be high on my list. In other words, I’d want to be sure the incentive systems were appropriate and that I was taking into account the history of their reliability and integrity as a supplier or customer. Industry or geography would also influence what I deem risky – for example, data protection, cybersecurity, regulatory compliance would be of particular concern in some industries or geographies.
So unfortunately the answer to this question is ‘it depends’. The one certainty is that the most negotiated terms are generally not the most risky – and arguably we worry so much about the consequences because we are not very good at assessing / judging where the greatest risk likelihood will occur.
“Today, it seems to me, we are competing on our ability to take on risk.”
Those are the words of a Chief Operating Officer with whom I met last week. They encapsulate perfectly the trend in thinking that I have observed this year. To win in the market, organizations need to distinguish themselves through a readiness and demonstrated competence at risk acceptance.
Why is this happening and why does it matter? I think it is happening because of the growing shift to ‘as a service’ offerings – the continued extent to which suppliers are stepping up to responsibility for their customers’ operational performance. It matters because those services reduce costs, raise reliability and introduce innovation. In other words, they lie at the heart of the customer’s value proposition.
It is almost 10 years now since IACCM started talking about ‘the end of caveat emptor’ and this current trend is part of that continuing journey. The implications to commercial functions – buy and sell – are fundamental. They need to become highly proficient at understanding the factors that underpin competitive advantage and how, through their contracting practices, those factors can be enabled.
For those on the sell-side, this means it is not enough to identify the risks inherent to customer or market requirements or to monitor challenges to compliance. The role instead must be to identify how those risks can be contained and managed. It is about defining the capabilities needed to meet requirements and leading projects to deliver them.
For those on the buy-side, the need is to ensure understanding of market requirements and opportunities, then ensuring requirements and supplier selection criteria are developed accordingly. Procurement’s responsibility must be to confirm that they have assembled the right suppliers, on the right terms and with the right on-going performance and governance regime.
Essentially, for commercial teams, risk is opportunity. It represents a field that demands innovative thinking and where the prize is differentiated business capability and value.