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Are KPIs past their sell-by date?


Key Performance Indicators – or KPIs – are held up as critical elements for driving contract success. They bring clarity and discipline to complex situations, allowing both supplier and customer to monitor progress and performance.

But do they? Are KPIs of practical use, or are they in fact a distraction, often contributing to failure?

Pro’s and Con’s

KPIs are essentially a measurement system and, as with any measurement system, they impact behavior. Their intent is to drive a desired outcome and they can be very effective in doing that. But there are problems that frequently arise, especially as the complexity of the contract grows:

1) what are the real priorities and is it possible to build consensus across the major stakeholders?

2) what is a manageable number of KPIs without them causing confusion?

3) how do we ensure that the things that are left out are not ignored?

4) what process will we follow to update or amend KPIs over time, to reflect changing needs or circumstances?

These problems often become evident in poorly performing contracts where either there are just too many KPIs, or the selected KPIs are being met but are not delivering user value, or the original KPIs are outdated and have not been amended.

Are there alternatives?

I am seeing growing interest in finding an alternative approach, especially when the contract is long-term and / or where there are significant areas of potential change and uncertainty. Two methods that can work are relational contracts and agile contracts.

The relational contract focuses on establishing a robust governance framework where there is continuous communication and evaluation of performance against a clearly defined business goal or objective. In this context, the integrated team may be more focused on qualitative indicators of performance and they manage through more dynamic data exchange. This may involve the use of technology to ensure consistent data flows and early warning of problems or issues, leading to more proactive planning and mitigation. While KPIs may still feature in some way, they are not essential and certainly they are regularly revisitied and adapted.

Agile contracts tend to be driven by milestones rather than KPIs. By breaking the contract into short-term components, their continuation depends on reaching specific goals or deliverables. Payment is also tied to those milestones.

In conclusion, KPIs do have a continued role as one method of performance management, but they are not always the best approach. This is an area that would probably benefit from greater research and guidance on leading practices. Do let me know if you have encountered any useful material on this overall topic of the options for managing contract performance.

 

 

 

 

 

Procurement is NOT Commercial


I am observing a growing trend for Procurement teams to adopt the title ‘Commercial’. While I understand the reasons for this, it is typically misleading and misrepresents the true purpose of Commercial Management.

What is Commercial?

The International Association for Contract & Commercial Management (the world’s only Commercial Management association) has a very clear and comprehensive definition of ‘commercial’. In essence, it is about ensuring that an organization’s policies and practices are aligned with market needs and business goals. Ultimately, it is an integrationist function that reconciles the multitude of (often conflicting) stakeholder perspectives and interests to better understand both opportunity and risk, operating to support both buying and selling.

in an excellent article, Bruce Everett has illustrated what disastrous consequences can occur when that overarching alignment is missing – the human, social and economic cost.

So why isn’t Procurement ‘commercial’?

I am not suggesting that individuals trained in procurement can’t be commercial managers. On the contrary, I know many who have made the transition, along with others from functional specialisms such as Legal, Finance, engineering and project management. But here we have the point: Commercial is cross-functional in its nature. It cannot be some bolt-on to specific functional activity.

Why is that? The answer essentially lies in functional purpose and measurements. As Bruce’s article points out, performance measures such as lowest price and compliance are not compatible with long-term value or ethics. Similarly, if we think about this in the context of lawyers, a contract that is legally watertight is often not going to generate a collaborative relationship or future innovation. That doesn’t make typical Procurement and Legal roles less important – it simply acknowledges they represent functional positions, which are not the same as holistic business and social interests.

Into the future

I understand why functions like Procurement want to re-brand as ‘Commercial’, because this high-value, analytical role is where the future lies. More formulaic and repetitive activities that today are performed by functional specialists will in many cases rapidly become automated. I welcome the wish people have to make this change and IACCM is here to assist with membership, training, mentoring and advice.

Commercial Management is a critical role that reconciles economics, ethics and innovation. Making the shift requires much more than simply changing your name or job title.

When should training begin?


CAPS Research issued a study result that ‘only’ 72% of companies offer supply management training within the first 12 months after hiring a new employee. The commentary implies this is a problem; but is it?

i must acknowledge that I don’t know precisely how CAPS worded their questions, but the published result appears to be specific to supply management training, rather than training more broadly. So if, say, an employee undergoes an on-boarding program, that probably doesn’t count.

There’s also no reference to hiring policies. To the extent that organizations are making experienced hires, or selecting supply chain graduates, they may well feel no urgency in providing specific training on supply management. What they will care about is that the new employee understands how to apply their knowledge in the context of the business. And IACCM research suggests that is often knowledge acquired ‘on the job’, from colleagues.

People often work within teams, or on specific projects, or gain informal mentoring. They are being trained, but not in a traditional, structured context. Increasingly, there’s also a view that employees must take personal responsibility for filling gaps in their knowledge. And often these days, it isn’t functionally specific skills or knowledge that they lack – it’s broader business or personal skills.

IACCM will shortly be issuing its findings – and observations – on trends in training and skill development as one of its series of benchmark reports. It’s an important topic, but one that is increasingly answered through growing diversity of approach.

 

 

 

Please, no more contracts


I have just spent two hours reading about trust and governance, the need for agile projects, the importance of collaboration. I’ve also been answering questions on how parties can best maintain alignment over a multi-year agreement and the role of optimism in ensuring success.

Ostensibly, none of these things has much to do with contracts. In fact, a fairly consistent theme in each of them is that contracts are either irrelevant or an impediment. We’d probably be better off without them. That’s a sentiment with which I strongly sympathize – yet violently disagree. The contract should actually be the framework for all these things. The fact it is not is because we use the wrong form of contract.

Humans will be humans

Trust, governance, agility, collaboration are all important principles, but they are not innate to human or organizational behavior. There are limits to trust; our perceptions of rules and procedures are different; we do not innately adapt and adjust to change; we do not automatically and consistently collaborate. Those who believe we just need to say or write the words and then rely on ‘relationships’ to see us through are quite simply unrealistic. By dismissing contracts, they lose the fundamental tool that frequently represents the difference between failure and success.

Challenge our beliefs

Too often, we’ve come to accept that contracts are formulaic templates, poorly structured, obtuse, almost impossible to understand. There’s no reason why they have to be this way, other than traditional custom and practice and a failure to push for something different.

So what if business executives and project owners started to demand contracts that are designed to support and enable trust, governance, agility and collaboration. Would that be impossible to achieve? Far from it – such characteristics are entirely achievable. IACCM works with its members every day pursuing and increasingly realizing these goals.

Fitness for purpose

Contracts and the process under which they are formed and managed is frequently based on presumptions of risk that assume bad faith, that seek to impose unilateral rights or obligations, that ignore key aspects of governance and view change as opportunistic. In other words, the complete opposite of the traits we actually believe are needed for success. The answer to this is not to eliminate contracts, but instead to revolutionize their application and design. 

Contracts are manufactured to support a purpose. If they are failing to provide what you need, it’s time to reflect on the production process. Either you’ve got the wrong people producing them, or you’ve failed to adequately define your purpose.

Don’t dismiss the tool – make it fit for purpose!

 

International Association of Contract and Commercial Management | www.iaccm.com
Join us at our 2019 Conferences – Creating Value Through Change: Contract Economics, Ethics, Innovation

 

16th Annual Europe Conference | May 13-15, 2019 | Madrid, Spain
IACCM’s 9th Annual Asia Pacific Conference | July 24-26, 2019 | Sydney, Australia
IACCM’s 18th Annual Americas Conference | November 4-6, 2019 |

Contracting for impact


It’s great news that impact investment continues to grow, with latest estimates published by the Financial Times (April 1st 2019) showing fund values are now more than $500bn.

To qualify as an ‘impact investment’, assets must be deployed in a way that ensures societal and environmental impacts are equal to financial returns. It is therefore a far more balanced view of economic benefit, recognizing that focus on financial returns alone is often at a high cost to society overall.

Mirroring a vision

In the context of IACCM, this development is exciting because it mirrors the Association’s vision of ‘a world where all trading relationships deliver economic and social benefit’. And it’s worth remembering that all these funds and associated investments are surrounded by contracts which must be designed to deliver these balanced outcomes.

Achieving the goals of IACCM and impact investments depends upon a fundamental shift in contracting practices and attitudes. Those responsible for their drafting and negotiation must move away from underlying assumptions of bad faith to a model where we design to support and encourage good.

A new realism 

Such a shift is not based on wishful or unrealistic thinking. Rather, it recognises the need to construct agreements that generate shared obligations for cooperative governance and mutual benefits, rather than a foundation of unilateral control and punishment. We need to face the fact that today’s approach to contracting simply doesn’t work. Except in the simplest transactions, it creates the wrong operational conditions, resulting in cost overruns, delays and contention. Research increasingly shows the inevitability of these results if we continue with current methods. Yet rather than learn from our mistakes, many practitioners simply try to exert even more control, impose even harsher penalties and retreat behind the myth that ‘compliance’ can somehow fix the problem. It can’t and it won’t. So let’s do something different.

Stronger together

Sally Guyer, IACCM’s CEO, has written on a similar theme today, emphasising the rationale behind her #strongertogether mantra. Ultimately, humanity flourishes when people pull in the same direction, when they care not only about personal power and status, but recognise that sustainable wealth and prosperity depends on caring about outcomes and the impact on others. This means we must set more demanding goals and aspirations, then commit to agreed mechanisms for their realisation.

Contracts are foundational to our world. By contracting for impact, we truly can make it a better place.


Understanding commercial innovation


‘Commercial innovation’ is increasingly recognized as a critical discipline for business survival and the delivery of value. Back in the 1940s, Nobel prize-winning economist Joseph Schumpeter made the observation that to achieve success, technical invention must be accompanied – sometimes even led – by commercial innovation

But what exactly is it and why is it so hard? In meetings with groups who have a commercial management title, I find they are often bemused by the ‘innovation’ term in the context of their work. That’s because so many have been diverted from creativity and capability building and are instead focused on risk and compliance, mostly at a transactional level.

So what is ‘commercial innovation’?

So far as I know, there is no coherent definition of the term commercial innovation. It’s actually extremely broad. Here are some examples:

  • it may embrace the creation of an entirely new industry (for example, the insurance industry was at one time a commercial innovation; more recently a concept such as ride-sharing and the emergence of companies such as Uber are similarly commercial innovations);
  • it covers new methods of performing traditional tasks, such as the technology-enabled transformation of payment systems;
  • it includes differentiated contracting and financing models, such as the emergence of ‘as-a-service’ software, or outcome-based charging;
  • it is achieved through new methods of customer or supplier interface, delivering increased options for self-service or enhancing ease of doing business;
  • and it could be as simple as changing a single contractual term that generates positive differentiation, such as developing an alternative to liquidated damages or providing added performance guarantees.

Clearly, the scale of complexity and investment needed across these very different examples is enormous and the responsibility for identifying innovative ideas is – and will remain – diverse and unclear. Arguably, everyone within a business is responsible. So does that make ‘commercial managers’ irrelevant? Where do they fit in the innovation cycle?

The commercial management role in innovation

I see four critical activities or roles that commercial teams should be playing. These operate in part at a transactional level, but also must be applied at operational and strategic levels, supporting business goals and objectives.

Identify: a commercial manager should be a key source of identifying the need and opportunity for innovation. They will do this by observing areas that are damaging customer or supplier satisfaction. That may be through complicated payment procedures, or onerous terms and conditions, or practices that cause delay. Simple things like interfaces that lack authority to negotiate, or invoicing procedures that cause high rejection rates are examples that any good commercial function should be on top of.

Research: seeing opportunities for internal improvement is not in itself going to generate competitive advantage. High performing commercial teams undertake regular market research, not just of competitors, but also in understanding the needs and pressures on their customers or suppliers. They look at other industries for ideas. They commission research studies so that their ideas are backed by facts. It is not hard to do. A professional association like IACCM provides many channels for gathering research data or forming research networks.

Evaluate: a key attribute of any commercial manager should be their ability to evaluate change and innovation proposals. What is the implication? Who is affected? What is the strength of the business case? Are there better ways of achieving the same goal? Thorough analysis is needed to assess impact and ensure there is overall understanding of implications.

Implement: finally, any commercial innovation needs to be implemented. It will have impact on a range of business capabilities and may need to be reconciled with other offerings or practices. Often there will be a need for new contracts or terms and potentially impact on business systems or skills. Without strong sommercial support, the innovation is likely to fail or under-deliver.

The truth about invoicing


There is compelling data from a number of sources indicating the scale of invoicing error in business. In some cases, organizations are over-paying their suppliers by 5-7% – an amount that, if corrected, would transform their financial performance. 

There’s also another aspect of error and that is the cost associated with the extent and frequency of invoice rejection. As organizations introduce new systems, such as robotic process automation (RPA), they are starting to track the number of invoices that are wrong, not just in terms of the amount billed, but because of factors such as incomplete and missing information, incorrect coding or simply the wrong address. This too represents a cost which, for a large organization, can run into millions of dollars.

We have a problem

But there is a problem with much of the data on this topic and that’s because too much is written from a procurement perspective, implying the fault always lies with the supplier and that increased accuracy would therefore somehow translate to yet more ‘procurement savings’.

Why is that a problem? Well, for several reasons. Let’s start by looking at two factors that challenge the issue of overpayment. 

1. Overpayment

First, except in the public sector, buyers are also providers of goods and services. So unless they are absolutely lily white in their own sales invoicing, an increase in accuracy will often mean those ‘savings’ are likely to be matched by a corresponding reduction in the revenue they receive. This obviously isn’t a bad thing, but it’s important to recognize that there are two sides to this equation.

And second, there tends to be an assumption that invoicing error is always one way, always benefitting the supplier. Certainly there are examples of padding, even of gross and deliberate over-billing, and I have little doubt this sometimes occurs, especially in fields such as professional services where accurate tracking has traditionally been hard to achieve. Yet I know of many instances where suppliers undercharge. In fact, especially in more complex projects or services, IACCM data suggests a similar level of 5 – 7%, often because business units have no incentive to charge for ‘extras’ or to challenge additions to scope. They tend instead to put such items down to ‘good will’. So this too points to the fact that greater rigor in invoice accuracy will lead to a probable reduction, if not elimination, in the amount of any savings.

2. The cost or errors

Moving on to the question of broader errors and invoice rejection, this again is often positioned as though the supplier is the culprit. Yet in reality, suppliers are of course victims. They have no interest in spending time reworking invoices or suffering from payment delays. Much of the evidence points back towards a high degree of customer incompetence or actions that deliberately generate ‘errors’, presumably to extend payment periods. For example, slow and bureaucratic contract and purchase order processes frequently mean suppliers are pressured to start work early, with assurances from the customer ‘just send an invoice and you’ll get paid’.  When it comes to deliberate action (or inaction), invoicing procedures are often vague or ill-defined, including things like address data or submission methods missing. It isn’t uncommon for the ‘error’ to actually be internal, with accounts payable rejecting payment because of mistakes within the purchasing business unit.

So what’s the real problem …. and outcome?

Overall, it’s fair to say that invoicing remains an untidy and costly activity. Streamlining, especially through shared billing systems perhaps powered by smart contracts, ought to save a lot of time and generate substantial reductions in operating costs. For many businesses, it will also have a net positive impact on cash flow. But if I had to guess the eventual balance when it comes to reduced spend versus increased revenue, I’d have to say the likelihood is that it will prove close to neutral.