Is it really 17 years?
This week I was taken by surprise when messages of congratulation started flooding in. They were a reminder that it is 17 years since IACCM was incorporated, with a mission to put contract and commercial management ‘on the map’.
So how have we done? In those early days, many were skeptical that anyone would care. Today, with 40,000 members representing some 14,000 different organizations, we can probably say that we proved them wrong. Others insisted that there was no point because the role was ‘fundamentally different’ in every industry, as well as every jurisdiction. Once again, with members in 164 countries and from every industry, I think we can assume they were mistaken.
Today, there is an established ‘body of knowledge’, globally available training programs, a respected professional certification standard and vibrant member networks, on-line and physical. A fast-growing research base has taken contract and commercial management from a mysterious craft to an acknowledged discipline. Organizations and individuals consciously strive for excellence, appreciating the value this discipline brings to their business. So can we now rest and say, after 17 years, ‘Mission accomplished’? Far from it – in my view, it is a journey just begun, with so much more it can deliver.
In both business and government, there is demand for commercial innovation and excellence – yet far too little supply of individuals with the necessary skills and thought-processes. Both contract and commercial management remain starved of the right technology. While internal enterprise activities have been automated and streamlined, the same cannot be said of inter-enterprise relationships. And IACCM benchmarks continue to show the challenge of establishing accountability for contract and commercial capabilities.
By their nature, contract and commercial management span multiple disciplines. They are activities that integrate – and therefore have no natural home in the typical corporate structure. That is why they report to so many different places and often lack an executive champion or sponsor. It is therefore ironic when top management complains about the lack of ‘commercial excellence’ or ‘contract management competence’. The answer to this is in many ways in their own hands, yet they fail to make the appointments or the investments needed. And as our research shows, that failure incurs real costs and results in the loss of real opportunities.
So there is still some way to go on this particular journey. I hope to report a real acceleration of progress when we hit our 20th birthday – and I am looking forward to many more joining the party!
In the Financial Times (September 7th), Martin Wolf commented that globalization ‘has stalled … and it might reverse’. He cited the unexpected consequences that have flowed from the globalization of markets, such as mass migration and growing inequality, which are reducing public and political support. This is reflected in ‘stagnation of world trade’, even when the world economy is growing, and a reduction in cross-border financial assets and foreign direct investment.
Some reductions are inevitable. For example, there are not infinite business processes or manufacturing activities to outsource and the great wave of this activity is therefore in the past. Geopolitical instability has been accompanied by increased protectionism and trade liberalization has stalled.
At IACCM, we observe some additional factors that may be influencing corporate behavior. Back in the 1990’s, networked technologies suddenly started to enable new – and more remote – trading relationships. This challenged long-established supply chains, eroding old loyalties. Lower prices became the mantra of every Procurement department and existing suppliers were either discarded or forced to move production to low-cost economies. But while purchasing savings might have soared, other business costs often increased. Dealing remotely, across cultures, brings many additional transaction costs, as well as a host of additional business risks – reputation, reliability, regulatory compliance to name but a few. While globalization certainly brought benefits, it also brought increased complexity.
Now, some 15 years after the great wave of ‘low-cost sourcing’, businesses are more hesitant about their off-shore relationships and, in many cases, more conscious of the true costs. They appreciate the challenges of good communication, of effective audit, of reliability of supply. In a recent IACCM survey, more than 70% of respondents believe that to be effective, negotiations must be face-to-face. So our virtual world continues to have limitations and as with all great waves of change, initial enthusiasm is followed by a period of reflection.
The quality movement has been around for decades and regulated trading standards go back centuries, yet still we struggle to generate the right results. Our process for establishing and managing contracts frequently does not help.
Recently, IACCM ran a webinar featuring Warren Smith, a UK Government employee. Warren talked about work he is leading on reducing ‘fraud and error’ in public sector contracts. While precise numbers are difficult to establish, he believes that the amount at stake averages some 4-6% of contract value. This number is consistent with the findings of companies such as SirionLabs, who provide automated checking and validation services for major private sector clients.
You would think that most organizations might consider savings at this level to be a worthwhile target. With this in mind, IACCM approached members of its public sector Community of Interest, suggesting they might want to connect with Warren and share ideas and approaches. To date, there have been few positive responses – in most cases, it seems to be a matter of ‘Not my job.’ And it isn’t that they then identify someone else – because the answer seems to be that it is no-one’s job and no-one wants to pick it up.
Before those in the private sector dismiss this as a purely public sector problem of attitude, we should all reflect on the many ways in which contract value is eroded. Look no further than IACCM’s ‘ten pitfalls’ to identify a series of areas where more robust contract management could be driving better results. Claims and disputes is a good example: how many of us know the frequency of claims and disputes, how many of us know the underlying causes, how many of us are actively promoting improvements that would reduce the cost? Or what about some of the terms and conditions we insist on imposing during negotiations: do they truly benefit the organization? The thing is that it is easy to retreat into our areas of expertise or what we see as our defined job role, leaving ‘someone else’ to worry about the bigger problems of overall results.
Maybe we should all be learning from the work being done by people like Warren Smith – and the scale of commitment that the UK Government (and some other public sector entities) is showing towards achieving value through commercial excellence.
Yesterday I received an invitation from HR.com to attend a webinar entitled ‘Disagree agreeably to boost productivity’. The theme of the session is that disagreement is sometimes inevitable, but it does not have to create disharmony or argument. When we operate with openness and respect, disagreement can be a learning experience that boosts value. On the other hand, handled the wrong way, disagreement creates chasms, it undermines cooperation and respect.
Certainly these points are important for all of us to remember, in both business and personal life. However, it strikes me there is a different twist to this principle, which is ‘Agreeing disagreeably undermines value’. And for those of us involved in contract negotiation, this is an equally important principle.
How often have you emerged from a negotiation feeling somewhat annoyed or disgruntled, perhaps not even feeling committed to the result? Far too often, we reach agreement through a process of contention and grudging compromise. Just because we have agreed does not make the process itself agreeable – and that surely is a point also worthy of reflection as we consider our objectives and decide on our negotiating style.
Sustainability and ‘corporate social responsibility’ are the new, fourth dimension of supplier selection criteria (the other three being price, quality and time).
That’s according to Sylvain Guyoton, Vice President of Research at EcoVadis, who spoke today on an IACCM webinar. Sylvain described the evolution of sustainability and the extent to which it is now becoming integrated into procurement practices and, increasingly, a fundamental issue for suppliers. One element of this is the ability to demonstrate CSR standards; another is acceptance of additional contract terms and obligations.
EcoVadis has seen strong growth as corporations deal with the challenges created by high risk global supply chains, geopolitical instability and increased regulatory pressures and reporting requirements. Cost pressures force business to operate in this complex environment; CSR is the tool through which they manage the resulting supply and reputational risks.
In reality, sustainability has proven to be about much more than compliance. As the discipline has grown, it has resulted in major areas of cost reduction (for example, in more creative approaches to packaging or to logistics) and value creation (for example, through competitive differentiation). But this, to me, is where it becomes interesting that sustainability is still perceived as an area driven by Procurement / Supply Management, whereas in my mind it is much more about Marketing. To succeed, businesses need increasingly to be able to show their CSR credentials and to demonstrate their capabilities proactively. Therefore, I see a growing interest by those responsible for sales contracting, as they look to anticipate market needs and embed CSR principles as a source of competitive difference.
Going beyond this, we are also observing a growing realization that good CSR practices demand different thinking about contracts. Sustainability depends on embedded behaviors and practices within a business, not just words on a contract. This need is adding to the momentum for contracts as effective tools for communication – in other words, they need to be designed and written in ways that ordinary people can understand. It is this which is driving momentum for user-based contracts and the evidence suggests that compliance rates soar as a result.
Therefore I believe the issues that are driving sustainability are indicative of a much wider change in society and business, towards greater openness and transparency – and this means not only new terms and conditions, but also quite fundamental rethinking of the way we develop and communicate our contracts.
The need to manage change is becoming more probable and more frequent. Markets, customers, regulators – it is a challenge for business today to remain competitive and to remain compliant. And that situation is often made worse by the extent to which we depend on our external trading partners to facilitate (or even originate) that change.
Why is it that reliance on external providers would make change more complicated? Surely a key argument for outsourcing is that it offers greater flexibility, that it removes the pain associated with internal change programs – so is outsourcing not working?
A recent blog by The MPower Group focuses on the factors that are needed for effective change management. They highlight the essential elements of leadership, employee engagement and honest, open communication. Immediately we start to see the problem. Far from facilitating change, many of the contracts we put in place today operate as barriers to it. There is frequently an attitude that change is risky and represents a potential win-lose game, associated with concepts such as ‘scope creep’.
Since most changes rightly need to be negotiated, it is appropriate that contracts place controls on the way this will happen. But in today’s business environment, it is essential that the mechanisms are fast and adaptive, ensuring the right data and conversations, the right stakeholder engagement and appropriate levels of sponsorship. Many times I find contracts do not define these mechanisms and are either vague or bureaucratic, reflecting poorly defined internal procedures.
Underlying this is the problem of attitude and the view of too many contract negotiators and managers that change is something that will bite them, that facilitating change will mean either a hit on margin or an exposure on price or budget. What we must understand is that without change, we will not be able to compete. This is just one example of the areas where contracting practices and attitudes can operate against the interests of the business – and the people who work there.
When it comes to contract and commercial management, what does good look like? With some 83% of business people in a recent poll dissatisfied with their organization’s contracting process, you might think that this would be an important question and that businesses worldwide would be seeking answers.
By and large, they are not.
In past blogs, I have made efforts to describe ‘excellence’ in both areas. Yet to be helpful, organizations often need ways to measure current capability and performance. That is where tools such as capability maturity models and assessments can be useful. At their best, they offer not only an insight to current state, but also a benchmark against other organizations and a route-map for improvement.
Certainly that is the way the IACCM capability assessment works. It measures process, rather than organization, since ultimately it is process effectiveness that matters – and the quality of organizational performance will become evident as part of the results. It offers a variety of benchmarks, ranging from global, geographic or industry averages, through to comparisons by quartile. It also challenges organizations to ensure that contract and commercial practices are aligned with the strategic goals and objectives of the business (which often they are not).
The most common weaknesses are in leadership and technology. In many ways, the two are intertwined. Without technology, processes remain manual, time-intensive, resistant to change – and most important, they remain largely transactional and lack good management information or data. Because of this, the process (and people related to it) generally have limited status or influence, except at a transactional or deal-based level. As a result, it is a role that rarely attracts natural leaders and where top management fails to see the purpose that good leadership would serve. Lack of investment (in both people and technology) is an inevitable result.
IACCM data has shown very clearly the costs that are associated with poor contracting and the absence of good commercial data. Capability assessments reveal the nature of current weaknesses and the steps required for improvement. With these insights available, it should not be difficult to achieve solid progress. In a world where management claims to seek continuous improvement, you might expect rapid and immediate attention being paid to this area of business operations. Yet in general, it is not. There is an embedded reluctance to grasp the opportunities that come from change.
In part, the reasons for this go back to the already mentioned issue of leadership. But organizational politics and fear of disruptive change also play a major role. Many different groups claim an interest in contracting and commercial management. While none may be willing to take ownership or accept accountability, they are stubbornly determined to prevent anyone else from doing so. As a result, there is generally inertia, broken only when there is a major error or disaster. This is followed by a flurry of activity, perhaps some new form of control mechanism or addition of contract terms that protect against an event that is unlikely to recur.
Improvement will come. In most cases, this will be in spite of incumbent contract and commercial practitioners. It will be driven by technology – not the contract management software of the past, but tools and systems that inject powerful data analysis and enable new ways of contracting and new insights from contracts. ‘Good’ is already starting to look very different from the past.