Back in 2011 I published a blog, ‘The Purpose of Negotiation‘. I had cause to re-read it today because it has had a sudden flurry of viewers – quite why, I don’t know.
The blog set out some perspectives on both what and how we negotiate, drawing a distinction between ‘transactions’ and ‘relationships’. It also highlighted the dilemma of when and where to focus, especially when it comes to the terms typically under the purview of lawyers.
Six years on, the issues have not changed, but there are signs of improved approaches. First, we encounter more and more lawyers who are frustrated by the repetitive nature of their engagement and appreciate this is of low value to the business. Not only in-house lawyers, but also external law firms, are interested in new contract models and ways to introduce ‘balanced standards’ that speed time to signature. IACCM has been at the heart of such initiatives and recently started to publish ‘standard principles’ that deal with some of the most frequently negotiated terms (liabilities, indemnities, service levels etc.).
The new models are being introduced to support alternative commercial approaches, based on outcomes, performance, payment by results and relational agreements. These require far more focus on governance principles – areas that fill some lawyers with horror (‘Are we really suggesting that the contract should detail what meetings need to be held?’). Others recognise that these principles are fundamental to success and seek to enhance them with imaginative approaches to dispute avoidance, appreciating that litigation (especially in a world where interdependent services are becoing more common) is not an efficient or attractive mechanism.
Perhaps to a degree these changes also anticipate the growing role that technology will play in contract negotiation. As IACCM’s imminent report on automation will reveal, there is momentum towards global standard terms that will take key areas of today’s negotiation out of the realm of agreeing words and focus entirely on the discussion of values – for example, amounts of money, periods of time, quantity of resources. Focus will move towards more definitive agreement on areas such as scope, definition of responsibilities, alignment of procedures for change, communication protocols, problem-solving and claim resolution.
‘Negotiating with purpose’ requires alignment within and between organizations regarding their goals for establishing a contract. It means stepping outside functional positions and ensuring overall business benefit is understood and achieved. While such unity may seem obvious, it is often the exception, rather than the norm. The continued absence of disciplined negotiation planning is a major factor, but inappropriate contract templates and unimaginative use of software also contribute to the underperformance of many agreements.
“Every human will disappoint you and you will do the same to them.”
That is the somewhat downbeat – but perhaps realistic – assessment of Alain de Botton in an Opinion column in the New York Times. His point is that the perfect fit is an illusion and many of the ‘faults’ in a relationship will not become evident until we have entered into it. Instead of becoming frustrated or levelling blame, we will succeed only if we recognize the need to manage differences and work through them.
These observations have direct relevance to relationships between buyers and suppliers. Often they engage with each other in a spirit of great optimism and, steadily, disappointment sets in. In a field such as outsourcing, where ‘intimacy’ is essential, failure rates are variously estimated at somewhere between 40 – 60%.
So what do commercial professionals need to do to raise the chances of mutually successful outcomes?
1) Recognize that sutainable relationships must be win-win. Mutual success is a pre-requisite and each party needs to feel the other cares about and respects their goals.
2) Ask searching questions when evaluating or selecting a customer or supplier. Pessimism is no bad thing so long as it creates a healthy skepticism and does not yield to cynicism.
3) Analyse the depth of interdependency that will be needed. Not all relationships are equal and they require varying depth and frequency of interaction depending on issues such as levels of value, the extent of uncertainty or volatility, the likelihood of change, the nature of risk.
4) Define and agree governance levels and mechanisms that are appropriate to the extent of interdependency. This is where standard contract templates and rigid approaches to compliance frequently stand in the way of good relationships.
5) Appreciate that differences of culture, style or approach can be enriching. We say we want innovation and continuous improvement. Managed well, differences become a source of those ideas and inspirations. Managed poorly, they become a source of tension and anger.
Ultimately, we must exercise good judgment and test for fundamental issues of incompatibility – for example, dishonesty, incompetence, lack of capacity or capability. But once we have made our selection, we share responsibility to make it a success. “Compatibility,” states Mr. de Botton, “is an achievement of a good relationship; it must not be its precondition.”
“Supply chain management is a relationship business,” says Adrian Gonzalez on Talking Logistics. His interview with Brent Nagy, VP of Enterprise Customer Strategy at C.H.Robinson makes many good points – but with a few gaping holes.
The article identifies alignment, synchronization and communication as key to success, focusing on the need to engage stakeholders, both internal and external. Mr. Nagy rightly highlights the diversity of those who must be involved, to ensure seamless understanding: ““First is alignment and really understanding the customer and their needs and challenges, and then synchronizing how the work is done and prioritized. You can’t have one function tripping over the other, each with their own agenda, working in silos…It’s really understanding who owns the relationship, how the relationship from an alignment standpoint cascades down to operations, and having clearly defined roles and responsibilities for everyone involved.”
These comments align well with IACCM’s research, ‘The Ten Pitfalls of Contract Management’. Number one, clarity of scope and goals; number three, engaging stakeholders; number six, relationships lack flexibility and governance; number eight, poor handover to implementation. I also especially liked the observations regarding the need to embrace trading partners rather than hold them at arm’s length: “Treating your trading partners as an extension of your synchronization and alignment process is just as important. If you stop at your four walls and don’t extend it externally, you’re really opening yourself up to an environment where your partners don’t understand your strategy and needs, and if you compound that problem by myopically focusing on driving down prices, you will miss out on [opportunities to achieve greater value and benefits]. You can have the best and most aligned strategies on the planet internally, but if you don’t translate that externally…you’re opening yourself up to a big risk relative to how well these partner networks align with yours.”
While the article recognizes that operating across multi-tiered stakeholder networks is critical and that it often fails, it is rather less assured when it comes to offering a remedy. The answer, it seems, is communication – and ideally that should be face-to-face. But this ignores the realities of today’s business environment – the very environment that has made for such diversity and such complex networks. So relying on methods that worked 25 years ago is not the answer. In my experience, successful companies are tackling this issue in two ways:
- They recognise that the contracting process must address a disciplined approach to governance and performance management. This means working together to define approaches to balanced incentives, problem solving, joint working etc. These must be documented and distributed, wherever possible embedded into common software platforms. Without these actions, people will not be in step – the3 network and its interdependencies are simply too complicated.
- There is a fully documented communications protocol. Mr. Nagy is correct in calling out how tough conversations are often avoided by use of email or social networking tools. Such an approach typically worsens the situation – it is avoidance of the problem. Within that protocol, face to face meetings definitely have their place, even if they are sometimes undertaken via video conference – an almost inevitable consequence of our global trading relationships.
Once again, Talking Logistics has offered a thought-provoking insight to the challenges of undertaking successful business today.
When it comes to facing facts, do you bury your head or become obsessed?
Behavioural economists continue to unearth interesting observations about human attributes that have direct impact on performance. For example, they have discovered that people who suffer from the ‘ostrich effect’ regularly monitor activity or progress while things are going well, but prefer to bury their heads when things go badly. They consciously avoid valuable information and the potential need for action.
On the other hand, some (the meerkats) become obsessed and check the data with alarming freqency.
For those who observe the effectiveness of contract management, both behaviors are perhaps familiar. Certainly the ostrich effect helps us understaand why poor performance can often pass unchallenged until it suddenly turns into a crisis and dispute. Once again, it points to the fact that human behavior underlies so many problems; machines that are programmed to monitor performance show no such traits or emotions – they just react according to their programming.
But the problems do not stop there. When forced to confront an issue, you might hope that people would gather the facts and then take a balanced view to support subsequent action. However, they don’t. Researchers discovered that, far from appreciating and evaluating opposing viewpoints, many people mine the information for ways to support their existing beliefs. In other words, if you take the view that all suppliers or all customers lack integrity, you will select only the data that supports that belief.
So in summary, we avoid unpleasant information even when it is to our benefit to deal with it and, when forced to confront a situation, we seek the information that supports our preconceptions.
It’s actually a wonder that so many contracts succeed!
‘Let’s restore learning to the days when it taught practical skills and knowledge.’
That was the message I received last week from an acquaintance, who forwarded a rather amusing test paper, contrasting how the nature of math questions has changed over the last 60 years. It started with the following:
“A logger sells a truckload of lumber for $100. His cost of production is 4/5 of the price. What is his profit?”
Over the years, the problem becomes steadily simpler so that by 1996 it requires students to successfully underline the number 20. By 2016, the question has altered fundamentally:
“A logger cuts down a forest, caring nothing for the habitat of animals or the preservation of our woodlands. He does this so that he can make a profit of $20. What do you think of this way of making a living?”
At first, I had some sympathy with his comment. It seemed quite reasonable to expect children to learn basic mathematical skills, rather than abstract and, in this example, politicised thinking. But as I reflected, I realised how wrong I was to think that way – and how right the test is to move education in the direction it has.
Back in 1956, when the first test question on the sample paper was posed, there was no automation. Mental arithmetic was a fundamental requirement. It was essential to navigate through everyday life. Knowledge workers were largely a thing of the future because most work was manual.
Today’s children live with knowledge at their fingertips. If they want to discover a percentage, or the meaning of profit, they look it up on their phone or laptop. What they increasingly need in order to flourish in a networked world is empathy and judgment – two things that machines cannot yet provide.
So while I may disagree with the way the 2016 question is written, the fact that an answer demands empathy, analysis and judgment is fully reflective of the skills and competencies that young people now need.
This is a salutary lesson for all of us as we think about the elements of our knowledge and work activities that remain relevant in a machine-driven age. While commercial judgment is key and empathy and analysis are critical, traditional management of repetitive or memory-based tasks and processes will soon be consigned to being something we did in the past.
This week saw the launch in Germany of a new Masters program in International Contract & Commercial Management. IACCM led the first two days, providing operational context and strategic direction.
As a concluding exercise, students were asked to develop presentations on the role that contract and commercial management functions will fulfil five years from now. One student summed it up brilliantly when he simply stated: ‘We will have shifted from building walls to building bridges’.
His point, of course, is that the contracting process today is too often focused on protecting narrow, siloed interests, rather than encouraging collaboration, transparency and agile movement. Protectionism is the opposite of free and open trade and always damages economic wealth. That is certainly the case with many contracts today. They are structured and worded in a way that undermines intent and threatens performance.
These students came from diverse industries and educational backgrounds, yet they were united in the challenge of managing uncertainty, dealing with change, defining outcomes and goals. They rapidly appreciated the need for contracts to assist in addressing these key issues, which means it must operate as a communication tool across stakeholders and provide mechanisms to deal with altered circumstances. Through that approach, a contract links parties and supports free movement of data and information, thereby ‘bridging gaps’ rather than creating walls to climb.
As we all know, a contract only has real purpose when things go wrong. That’s why organizations engage in a battle over whose form will prevail and it is why people become so frustrated when reaching agreement causes delay.
Attitudes haven’t changed all that much since research was undertaken by legal scholar Stewart Macaulay in 1963 and subsequently updated in 2013 by Professor Gillian Hadfield. In fact, those studies even question the relevance of a contract when things go wrong: “Written contracts (are) often highly standardized documents that (are) largely confined to the drawer once drafted by the legal department and then rarely consulted to resolve disputes”.
Macaulay and Hadfield were examining the attitiudes of business executives. But behind these superficial findings, they discovered that this attitude only applied to transactions that were relatively predictable and in themselves considered ‘low risk’ – in other words, the sale and acquisition of what today we might term ‘commodities’. As soon as performance becomes less predictable – for example, because of potential changes over time, uncertainty over requirements or capabilities, potential confusion over ownership or an expectation of innovation – ‘contracting’ becomes much more significant. Those executives not only started to care more about legal implications, they especially appreciated a need to “coordinate beliefs about what constitutes a breach of a highly ambiguous set of obligations” and to identify shared approaches and strategies that induce compliance and performance.
These concepts are of major importance because they can help us realize far more value from our trading relationships and they indicate the nature of the changes we need to make, especially in the approach to procurement.
On one level, it might be argued that procurement strategies which seek to break transactions into separate ‘commodity’ elements are really smart. They simplify acquisition and reduce the relevance of the contract, making it consistent with the use of ‘standardized documents’ that require little understanding of contract terms or behavioral economics. This turns the act of procurement into a process which often operates to avoid negotiation, not to support it.
In an era when most acquisitions were for standardized goods, there was a logic to this approach. Where it falls down is in the acquisition of more complicated items, such as IT systems or software, where requirements and performance are harder to define. It becomes especially problematic when purchasing long-term services, which by their nature are intangible and require far greater definition and management.
Today, while commodity purchasing remains a high volume of activity, the majority of business spend has moved from goods to services. We are buying performance, outcomes and sustainable relationships. In many organizations, Procurement skills and processes simply have not kept pace. They remain focused on driving down the price of commodities when they should instead be focused on working with suppliers and supply networks “to identify shared approaches and strategies that induce compliance and performance”. The discipline provided by contracts and the contracting process is fundamental to achieving this shift.
But the need for change goes beyond the Procurement function. It requires a new business attitude and a recognition that better performance depends upon integration across entire relationship networks. In other words, businesses need to start with an appreciation of the commitments they make to the market and they must flow those commitments (and updates to them) through the organization and into their supply agreements. Right now, there are multiple disconnects. Many functions operate as silos with limited appreciation of customers or markets. There is rarely adequate connection between those who form contracts with customers and those who are contracting with suppliers. Relatively few organizations see a need for sell-side and buy-side resources to co-locate, to use the same systems or to undergo similar training and to have complementary goals and objectives.
IACCM research consistently shows that these divisions in organizational structure cause substantial value and performance loss. There are compelling arguments to create an integrated function that supports ‘trading relationship capability’. But failing that, it would at the very least be smart to create an internal environment where those who develop and negotiate contracts – buy-side and sell-side – can speak to each other in the same language and have a common understanding of their role and methods.