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Commercial themes for 2019


IACCM today announced key themes for contract and commercial management in 2019. These are based on global market observations and interaction with IACCM members from every industry. They represent the areas that are increasingly critical to the role and value delivered by commercial and contracting functions.

Creating Value Through Change: Contract economics, ethics & innovation

The efficiency with which trading relationships are formed and the value they deliver are critical to business success.  Commercial teams face unprecedented pressure to drive greater efficiency and value from their trading relationships – increase speed, reduce costs, raise effectiveness and contribution. At the same time, market and competitive pressures are driving the need for new commercial delivery models and forms of offering.

These demands can only be met through a structured change agenda, supported by the adoption of emerging technologies:

  • Contract economics:  leading businesses have started to address the overall cost of contracting and to understand its role in driving increased revenue and profit. Contract economics is about reducing the cost of contract creation; understanding the financial impacts of risk acceptance and allocation; and reducing the operational costs associated with managing contract performance, which includes tackling the sources of contract value erosion.
  • Ethics: businesses today face not only growing regulatory demands, but also increased social expectations regarding corporate behaviour and values. Contracts – and those responsible for them – play a major role in maintaining ethical standards. The quality and integrity of commitments to the market, ease and clarity of understanding, the honesty and transparency of commercial practices are key areas that enhance or undermine an organization’s reputation and ethical standing. Contract terms, processes and tools should be used to ensure business and supply chain integrity and to create a sustainable brand image.
  • Commercial innovation: new approaches, new ideas, new forms of relationship and commitment are increasingly key to business survival. The potential for change is often driven by technical invention, but its success in the market relies on commercial innovation. Business strategies and goals depend upon the ability to develop effective and efficient commercial models and delivery capabilities, with recent examples including the expansion of as-a-service, performance and outcome-based, shared benefit and relational agreements. The change agenda requires regular re-evaluation of market and competitive demands and trends, with consequent challenge and update of required policies, practices, processes and skills.

IACCM conferences

We are already working on our conference agendas, and have issued an invitation for interested speakers to send a synopsis if they would like to be considered as a speaker or panelist at one of the 2019 conferences. These will be held in Madrid (May), Sydney (July) and Phoenix (November).

Key topics (and potential case studies) related to the theme might include:

  • How changing demands affect the role of the function and individuals within it
  • How the function and individuals should be measured: practical examples of value delivery
  • The impact of market trends on what and how we negotiate and on governance
  • Implementation and use of new technologies
  • New skills and knowledge requirements and how they are best developed
  • Examples of innovative pricing, charging or performance management models
  • Experiences and case studies related to capital projects / infrastructure.

If you are are interested in speaking, you should contact lscottheatley@iaccm.com, or to register for one of the conferences visit the events calendar at www.iaccm.com.

‘Agile Fixed’ Contracts – An Oxymoron or an Opportunity for Collaboration?


(Contributed by Bruce Everett)

To be agile is to move quickly and easily. As a project management method, it is characterized by the division of tasks into short phases of work and frequent adjustments of plans. As a contract management method, it is characterized by collaborative relationships with outcome and performance-based contracts, designed to deal with high levels of uncertainty. The fundamental premise is that you can’t plan or contract for what is unknown, so decisions are made along the way as better information becomes available through experimentation and client feedback. This allows you to adapt as circumstances change and to counter predictive risk.

The challenge comes when we want the freedom of being agile, but want to counter contract risk by fixing responsibilities, price, and service levels as well as imposing a higher level of governance. We do have budgets, timetables, probity and stakeholders which act as constraints to unfettered freedom so, as good contract and commercial citizens, we seek to provide as much certainty as possible. However, agile contracting cannot be ‘set and forget’ because the requirements or product/service features change through the development and testing lifecycle as we learn more. The Principles behind the Agile Manifesto[1] even encourage such changes, with Principle 2 saying: “Welcome changing requirements, even late in development. Agile processes harness change for the customer’s competitive advantage.”

As a consequence, if scope changes, then the other ‘iron triangle’ components of time and cost have to vary. In a fixed contract, this can lead to time and cost overruns, delivery risks and strained relationships as the costs exceed the ability of the contractor to absorb them or pass them on (as opposed to new scope via change control and often to the contractor’s commercial advantage).

Conventional wisdom, well Wikipedia, will tell you that fixed price contracts don’t suit innovative new projects with untested or underdeveloped technologies. Yet I’ve worked recently on so-called ‘hybrid agile’ projects in the government military sectors and in the commercial financial services sector where fixed price contracts are used. Indeed, sometimes because of an extended governance process and a management culture that demands order, the costs are fixed before the scope is even agreed. According to the results from the IACCM Most Negotiated Terms Survey 2018, the ‘Scope and Goals/ Specifications’ was the #1 Most Important Term in the contract. But in agile projects still we try to fix price for a moving scope and specifications.

Why do we do that? Yes, for change control reasons (but aren’t we trying to encourage change not limit it?). Yes, for risk and governance reasons (but isn’t a governor used to limit the top speed of a vehicle and aren’t we seeking speed through an agile approach?). Yes, to provide certainty (but don’t we know that we can’t predict the future only adapt to it?). Yes, because as good contract and commercial practitioners we seek to avoid time and cost overruns (but the body of evidence is showing that fixing the contract is actually contributing to these negative consequences). I am saying Yes because we do need to consider these reasons as we establish and manage contracts. However, I propose the other reason is that we don’t trust the contractor not to exploit either the lack of firm specifications or the ready access to the end-customer to up-sell scope and increase their revenue. Frankly, I also propose that we don’t trust the project team or end-customers to manage scope creep. Therefore, we seek to limit their freedom through the contract and seek to fix as much as we can negotiate with the customer and the contractor.

Rather than fix price for the whole contract or even various releases of features, contemporary project and contract thinking recommends the use of cost-plus time and materials contracts; or incremental delivery and checkpoints (e.g. after the initial test phase) where scope, budget and due-dates are agreed; or target cost contracts with gain/pain share. Each of these approaches balance freedom and control, so start to suggest that the term ‘Agile Fixed Contracts’ does not need to be an oxymoron. Each of these approaches also presents an opportunity for collaboration. For example, if a root cause of the desire for greater control is lack of trust, then a cost-plus T&M contract will require a substantial level of trust. The #2 Most Negotiated Term for 2018 of ‘Responsibilities of the Parties’ will need to be clear, but moreover, the relationship will need to be strong and open to share cost and profit data to support a “trust but verify”[2] contract management approach. Similarly, for a gain/pain share target cost contract, trust will be important to encourage open dialogue around scope, perhaps using the agile MoSCoW prioritisation rules (i.e. there are Must haves, Should haves, Could haves and Won’t have this time).

We often focus on the type of contract that is best-fit for agile projects and my encouragement is to focus equally on the best-fit relationship. A key first step in the IACCM Relational Contract process is “To build the trust necessary to focus on the relationship, ensure alignment within your own organization and thereafter use a process for choosing a partner that considers relational competencies in addition to service offerings, quality levels, etc.” [3]  Trust but verify sure but, if we want to be truly agile in our projects and our contracts, collaborate for trust first.

[1] http://agilemanifesto.org/

[2] Attributed to US President, Ronald Reagan, based on a Russian proverb

[3] David Frydlinger, Tim Cummins, Kate Vitasek, Jim Bergman, “Unpacking Relational Contracts – The Practitioner’s Go-To Guide for Understanding Relational Contracts”, A White Paper by THASLAM College of Business, IACCM, LINDHALL, Open Source, Oct 2016 p.7

What is the role of a contract manager?


I am amazed at how many people want an answer to this question. More than 350,000 have read my blog on this particular subject. Is it because they don’t know the answer, or perhaps want reassurance that they are doing the right things?

The continued volume of interest (on average over 300 new viewers each day) has led me to write a more extensive and updated report on this topic, which IACCM will publish to its worldwide members in December. Because of recent benchmarks, there is authoritative insight to what contract managers typically do and how they spend their time. However, as with so many subjects, there are no absolutes ….

The focus of contract management varies. In some organizations, it is largely focused on pre-award activities. In others, it is exclusively post-award. And then there are those where it does a bit of both. Added to this, an organization may have contract management resources applied to sales contracting. Or perhaps they are focused on procurement. And maybe they are doing both.

What’s behind a title?

As if this is not enough, we have the confusion of variable job titles. Some are fairly simple derivatives, such as contracts officer, contracts executive, contract administrator or contract engineer. Others are more complicated – for example commercial manager or commercial executive, or even commercial contracts manager. The list of variants is actually extensive – and do they actually mean anything? Again, the answer is … it depends! The benchmark study has identified some patterns, especially when comparing the average ‘contract manager’ with the average ‘commercial manager’ and these are reflected in the report.

But what I find most interesting as I review IACCM’s work on this topic is to explore how things have changed. Certainly, for many, the core role has not altered dramatically. Automation has had some effect, but less than in many job roles. New forms of offering have emerged, driving greater demand for contracts expertise. The pressure for greater speed has run directly counter to the concerns about risk and compliance. These various forces have created an underlying sense of uncertainty and chaos in defining the role – which perhaps explains the volume of interest in the topic.

Where are we headed?

Will this role survive the onslaught oemerging technologies and if so, in what form? Indeed, will contracts (as we know them today) disappear, to be replaced by computable contracts? Will future negotiations be conducted by humans or by machines? And can blockchain replace the need for manual intervention in post-award management through smart or self-executing contract terms?

Again, IACCM believes it has answers to each of these questions and has spent many hours studying the various technologies and broader business trends. The report will set out where there are opportunities and where there are threats. There is little doubt that the role will change substantially over the next few years and that there are exciting opportunities ahead. The question therefore is increasingly ‘How should I prepare for the future role of a contract manager?’

To which the simple answer is, ‘Read the report’!

The new IACCM report ‘The Role of a Contract Manager’ will be published on December 10th 2018 and can be downloaded from the IACCM website at http://www.iaccm.com.

 

Should contracts induce fear?


“It’s not scary enough.”

That was the comment by the legal team at one major corporation following a contract simplification exercise. They were concerned that the absence of intimidating language and the abandonment of traditional legal design made the document ‘too friendly’. In their view, it is important to induce a sense of fear in the counter-party as an added incentive to performance.

It seems they share this view with President Trump, who recently observed: “Real power is through respect. Real power is, I don’t even want to use the word, fear.”

So given the extent to which power is used to impose contract terms and conditions, is it legitimate to see ‘fear’ as a useful tool in achieving the best results?

It depends what you want

Professor James Heskett of Harvard University has written a useful article on this topic. Citing work by Amy Edmondson, he highlights the damage that fear does to interpersonal relationships – in particular, it “destroys teamwork, creativity, and innovation”. Hence within an organization, it is critical to create an environment of ‘psychological safety’, where people feel included, respected and valued. But to what extent does this follow through into external relationships and the way we go about negotiating or managing contracts?

In her book ‘The Fearless Organization’, Ms. Edmondson explains that psychological safety must be accompanied by an environment that encourages high performance standards. This issue of performance standards is obviously key to the world of contracting. Perhaps here we must distinguish between the type and duration of relationships, recognizing that in a simple transaction which is rarely or never repeated, fear is unlikely to do harm and may even be a positive influence in ensuring that obligations are honored or met. However, once we move to longer-term, more interdependent relationships, a contractor in many ways becomes an extension of the organization and will be far more impacted by feelings of psychological safety.

There is an analogy here to the ‘master-slave’ relationship that is often noted in the field of contracting and identified as a recurrent source of poor performance. Hence we once again have an indication of the importance of integrity between ‘the contract’ and ‘the relationship’. If teamwork, creativity and innovation don’t matter, then scary contracts can be the order of the day. Otherwise, ‘fear’ shoud be self-induced, reflecting a personal or organizational concern of not wanting to lose or damage a valued relationship, not something imposed through the terms of a contract.

 

Asset protection and economic decline: are they linked?


Compared with the United States, China has taken a commanding lead in the levels of optimism among its young people – and that translates directly to upward mobility and wealth creation.

An article in the New York Times highlights the gap that has emerged in terms of personal opportunity, declaring that ‘the American Dream’ is alive and well – but it has moved to China.

Protect or grow

Optimism has always been key to growth and it is inevitably hard to sustain. A tipping point seems to occur when politicians, businesses and society start to worry more about protecting what they have than about a belief in the opportunity for more. Asset protection, while understandable, is in fact constraining.

There are many examples of this through history, ranging from the decline of Ancient Rome to the mercantilist causes of the American Revolution. In recent years, the United States has shifted from unbridled optimism and belief in the future to an increased sense of unfairness and exploitation by others. This has led to a focus on issues such as asset protection and trade barriers, at the expense of innovation and growth.

The role of contracts

Within businesses, these protective attitudes often become evident in their contracting practices. They are frequently based on innate distrust of trading partners and a determination to ‘protect the crown jewels’. Negotiation in such circumstances is not about maximizing opportunities, it is more about containing potential for loss and using power to impose or avoid risks. Battles over existing Intellectual Property are common and the primary focus of commercial staff shifts from ‘enabling opportunities’ to ‘protecting against failures’.

It is of course true that optimism must be tempered by a degree of caution – but when optimism declines, caution tends to take over. We see this in the comparative attitudes to contracting when comparing China to the Western world – the former seeing risk as an exciting challenge, the latter seeing it as a potential barrier.

Contracting as a bellwether

One way that I have seen organizations successfully shift to a more optimistic, growth-oriented outlook is through a change in internal motivators and measurements of commercial staff. Their behaviors can be enabling or constraining. By changing measures from a focus on compliance to a focus on creativity, management encourages an atmosphere for innovation and fresh ideas. This isn’t a matter of ‘win at all costs’, but rather like the attitude in China, to see risk or complexity as an exciting challenge to be overcome, rather than a source of fear and a reason to say ‘no’.

Commercial Excellence: The World Awakens


Is your organization on the path to commercial excellence? McKinsey, the global strategic consultants, are just the latest to grasp the critical role that commercial competence plays in delivering performance and growth. In a recent article, they observe that leading organizations ‘are now using superior execution rather than better offerings to outperform incumbents and drive growth’.

Commercial innovation is scarcely a new concept (and it has lain at the heart of IACCM’s work for the last 20 years), but it has been relatively unfashionable as an area of business focus. The era of globalization drove different priorities – cost cutting, standardization, efficiency and compliance. But these focus areas resulted in operational improvements and often ignored market and competitive effectiveness.

The need for challenge

A range of new forces – not least emerging technologies – are creating new possibilities and demands. Business models are shifting – for example, towards the delivery of outcomes, as-a-service offerings – and these require different internal capabilities as well as altered relationships with customers and suppliers. Having reduced (or in some cases eliminated) commercial resources, many organizations are now struggling to respond. They have become good at folllowing rules, less good at challenging or changing them.

McKinsey suggests that top performers – ‘those with superior commercial capabilities’ – consistently deliver revenue growth about 1.9 points higher and earnings growth about 4.7 points higher than peers in the same sector. They also extoll the virtue of benchmarking and its importance in driving continuous improvement.

Support for the new direcction

It is gratifying to have this endorsement of the work that IACCM undertakes with its members worldwide, providing not only regular comparative reesearch, but also undertaking capability assessments for many of the world’s biggest organizations. Our soon-to-be published 2018 benchmark report contains data from 742 companies. In addition, we have recently completed a detailed study of ten major public sector jurisdictions, comparing them also with private sector leaders.

It is exciting to find the world re-awakening to the role and importance of commercial capability. For those who have developed expertise in this area, the future indeed looks bright.

To learn more about IACCM’s research and the IACCM commercial capability assessment, visit www.iaccm.com

Procurement and the battle for recognition


Marketing versus Procurement, Sales versus Procurement, the business versus Procurement … If you pay attention to the headlines coming from many Procurement trade bodies and associations, you would think that every day for the average Procurement Department is a battle.

Adding to this atmosphere of trench warfare, another favoured theme is the sense of ‘not being recognized’, which leads to the regular discussion of Procurement achieving power through ‘reaching the top table’.

Might these issues of power and warfare be because too many Procurement groups are confused and struggling to deliver true measurable  value? And is that problem in part due to the training and direction they are being provided? For example,  in many cases Procurement teams are still being told that the epitome of success is ‘savings’ and that negotiation is about compliance. Now, one leading Association that regularly applauds its members for achieving savings suggests that those who think this way are ‘dinosaurs’. Then there is training. Works like ‘The Art of War’ have been recommended reading for years- so what are the new sources of wisdom that support a more integrated and collaborative approach?

I find it disconcerting when any functional group sees itself being ‘in conflict’ with its external contacts, whether those contacts are in other business functions or in other organizations. How can this possibly prove productive? How can it ever lead to the value and innovation that business and government agencies seek from their supply relationships?

Procurement groups will always operate with measurements that differ from those in other groups. For example, Marketing is focused on brand image and generating new business, while Procurement is tasked with ensuring value for money. Differences such as these are designed to cause contention, but contention does not mean that there should be conflict. Indeed, in mature organizations it leads to constructive and creative dialogue which results in a balanced decision.

A growing number of Procurement groups are successfully expanding their role, vision and influence. They see suppliers as partners and the foundation for their success. Many of these have recognized the value they gain from being members of IACCM and part of an inclusive community that encourages collaboration, new thinking and objective analysis. They embrace the opportunities for constructive dialogue across business boundaries and functions, welcoming the opportunity to take increased responsibility for supply outcomes.

Does this mean you can always trust suppliers or other functional groups to do the right thing? Certainly not – and that’s why it’s important to maintain oversight. But there is a big difference between oversight and warfare. And there is also a big difference between achieving positive business outcomes and winning short-term victories through the use of power.