Every day there are new examples of commercial innovation. Just yesterday, for example, I read about Electrolux and the ‘uberification’ of washing machines (and potentially other domestic appliances) and the link-up between ABB and Microsoft to transform interactions between suppliers and offer dynamic services to ABB customers.
Many of these initiatives may not succeed; all of them require commercial evaluation and careful structuring of the right contract relationships. Ideas like these also emerge from many places – innovation is not the preserve of executive management and increasingly they are seeking more diversity in commercial leadership.
What are the characteristics of an effective commercial leader? And are these innate, or are they learned? “The Extraordinary Leader”, a book by John Zenger and Joseph Folkman, takes the position that leadership skills can be acquired. Here are five critical areas for focus:
- Integrity. Leaders must be seen as honest (an interesting item to reflect on when it comes to the electoral process);
- Results. Leaders need to show focus and clarity on the right things.
- Change agents. Leaders embrace change, they do not fear or deny it. They visibly focus externally and connect their organization to the outside world.
- Inspire and motivate. While demanding, leaders also collaborate and are clear and effective in their communication.
- Passion for self-development. Leaders who are innovators want to connect with the best and employ the best.
In our connected world, structured around social media, Zenger and Folkman find that top-down leadership is being replaced and that globally matrixed organizations are pushing leaders out from the center and into the business. So if you want to be a leader, or further your current progress, here are some things you should be doing.
- Demonstrate honesty and integrity by speaking up when you think something is wrong – even if sometimes that may be a career-limiting decision
- Focus on results. Most people focus on process or perceptions, rather than on what needs to be achieved, what outcome will represent success
- Be a change agent. Keep up to date, ask leading questions, look for areas of disruption, technology or services that will change your business or what you do.
- Inspire and motivate. A visionary tells stories of how the future might be; they build relationships across the business and beyond, to ensure they understand how to get things done. They collaborate rather than compete and they do not seek to ‘protect their turf’
- Never stop learning. There is always something new to discover – and by focusing on the new, you are not afraid to share credit with others and you will always be someone they want to work with.
Of course, not everyone wants to be a leader and not everyone is ready to take the steps needed to become one. But for those who do, the steps are relatively clear. Indeed, they represent key elements of the IACCM professional certification program at Expert level – as we seek to support our members and executive management through the supply of commercial leaders.
Many organizations have introduced Supplier Relationship Management (SRM). Some are able to quantify the benefits, mostly in the form of ‘savings’, by which they generally mean price or cost reductions. A few point to incremental benefits, such as examples of innovation that may have led to increased revenue or profits.
Why is the picture so vague and so varied? A major reason is the lack of consensus about what constitutes SRM. For some, it means little more than a segmentation exercise. For others, it may be sustaining a focus on control and compliance. At the top end of the spectrum, it can involve extensive joint planning and high value strategic initiatives. No wonder, then, that results vary quite dramatically.
One problem with SRM is that it is often viewed as an extension of Procurement and therefore focuses on issues of power and control – concentrating on the biggest suppliers in an effort to reduce spend. Those suppliers are certainly important, but often they are not the source of major innovation. So the ‘strategic’ relationships, often with much smaller, agile suppliers which deliver market differentiation are managed by the business units.
But the bigger problem is that SRM programs mostly miss the point. They focus on the one-to-one relationship with the biggest suppliers and ignore the many-to-many relationships on which business performance depends. As I look at ‘best practice’, it is increasingly clear that the critical issue is not supplier relationship management, but managing supplier relationships. Those two are fundamentally different. “MSR” is about engendering collaborative behaviors across interdependent supply networks, to ensure benefits for all parties. Of course, it can be further improved by a solid SRM program, but SRM without MSR typically delivers very little value.
IACCM recently developed a presentation on this topic, with examples that illustrate the success that can be achieved. It will shortly be the subject of a webinar. If you are disappointed with the results of your SRM program, it will be worth tuning in.
Last week I suggested that at least 35% of today’s jobs in contract, commercial and supply management will have disappeared within 5 years.
The world of work is changing fast. A growing number of voices are warning about the impact of robotics, artificial intelligence and advanced analytics. Some predict mass unemployment; others suggest that the nature of work will radically change. All are agreed that the future will be very different from the past.
Professor Andrew Brown from the Institute of Education is one of those promoting the message of change. He suggests that the top-end of employment opportunities will be filled by those performing ‘knowledge production jobs’. These are in contrast to the ‘squeezed middle’ – the sort of repetitive, knowledge-based tasks that can readily be performed through automation.
This represents both good news and bad news for the role of contract and commercial management. The discipline of contracting has gathered new momentum in recent years. Contracts bind economies; they impose increasingly complex rights and obligations; they provide a framework for managing change. As globalization, outsourcing and contract labor have gathered pace, the world has needed formal structures for their management. And this is why contracts have become more important – and their inadequacies revealed. It has also led to a growing volume of contract management jobs and training, often performed as an element of another role – for example lawyers or project managers.
All the signs point to a surge in automation in this field. For routine transactions involving drafting, negotiation and performance management – the vast majority of business activity – automation is not just possible, it is desirable. It operates with greater accuracy, efficiency and reliability than human resources. But automation has its limits. It does not innovate, it does not design continuous improvement, it does not undertake research.
Trading relationships lie at the heart of human wealth and prosperity. They are fundamental to survival – and hence a critical field for ‘knowledge production’. According to Professor Brown, key skills for the future will be the ability to propose problems, interpret data and communicate results. Such skills lie at the heart of commercial innovation – indeed, they reflect precisely the areas that are tested in candidates for IACCM Expert certification (and if you aren’t already in the program, it’s time to start).
Hence there is a definite role awaiting those who wish to focus on ‘knowledge production’ and who develop the skills to lead and influence innovation and change. Creativity will be key; control and compliance will be the role of the machine.
“No debate, not a word of warning – just 6 months’ notice that the role is being eliminated.”
That was part of a conversation I had last week with the leader of one contract management group, reeling from the shock of an unexpected announcement.
But contrast that with this conversation which I had on Monday.
“We see accredited contract managers as a critical and growing role for our future. In fact, we see it as perhaps the most important area of our business because almost all other functions can be outsourced – and then we are left with nothing but contracts. Our performance will be totally dependent on our capability to manage those contracts”.
Two very different perceptions of the future? In fact, no. When I dig beneath the surface, I discover that both organizations see contract management as a core competency, but are approaching its creation in different ways. In the first example, management has concluded that capability must be built across the organization and will be led by a Center of Excellence within the Legal function. They have decided that existing contract management staff do not have the necessary skills or attitudes to transition to a future that is far more about contracting strategies and technology deployment. Indeed, when I spoke with their COO, she explained quite simply: “If the existing team had been part of the future, they would have been the ones promoting this change – and they never did. They just sat and waited for the future to hit them”.
In the second example, there is no history of centralized contract management; it is a distributed activity and business units have been responsible for delivering results. Contracting strategies have had no clear point of ownership and were generally based on standard templates managed through Legal and Procurement. This arrangement led to consistent poor performance and the realization that contracting must be elevated to a prominent position and role across the organization.
It is examples such as these that led to my blog last week, How Many Contract Managers Do You Need? There, I highlighted the importance for every contracts and commercial group to step back and develop its strategic plan. Every business function is challenged by the wave of new technologies that are no longer on the horizon – they are at the gate and, in some cases, already inside the building. If you fail to plan, if you fail to visibly lead your own self-surgery, you will most likely suffer the fate of our first example – others will decide your destiny.
The future will look different. To prepare, you can gain extensive insights from IACCM research, from webinars or at member meetings and conferences (see for example the theme of our next member meeting in Washington DC or our next conference in Dublin at the IACCM events page). As an example of that future, we worked recently with a corporate member to undertake a current benchmark (their resources compared with industry norms) and then evaluated the changes needed to convert from a largely operational to an increasingly strategic role. In our findings, the overall budget for contract and commercial management reduces by around 10% over the 5 year period, yet headcount falls by 35%. A combination of automation and more highly skilled staff accounts for that variation.
So the future is by no means bleak – unless you fail to plan.
“The world is held together by innumerable contracts”.
That was an observation of the Nobel committee for economics when making its 2016 award. Add to this the fact that commercial innovation lies at the heart of business and enterprise success and you start to see a rather compelling case for the importance of contracts and commercial management. Indeed, in today’s volatile and unpredictable market conditions, they have arguably become a critical competency – not just for the business, but also for its employees.
Globally, governments and business leaders are awakening to the need for more agile, adaptive organizations, where commercial awareness is not restricted to a body of specialists or hoarded by a few functional experts. In the UK, commercial reform is at the top of the government agenda. In China, contract and commercial management training has become a priority in driving disciplined economic growth. Across industry, top executives are calling for increased commercial skills and identifying the critical need for innovation and speed in trading relationships.
In this environment, while there is certainly a need for contract and commercial specialists, broader awareness and understanding of these disciplines is increasingly demanded of any ambitious professional, regardless of their job role. According to one leading executive search firm, without the ‘outsights’ that are implicit to contract and commercial management, employees tend to be too inward-looking; they tend to become barriers to change; they lack the stimulus needed to promote new ideas or methods.
Many people are getting the message. More and more universities and business schools are incorporating contract and commercial management modules within their programs. Leading corporations are investing in widespread ‘commercial awareness’ training. Over the last 18 months, the IACCM ‘MOOC’ (massive open online course) has attracted almost 100,000 participants – almost all wanting to raise their personal knowledge and development, rather than any plan to pursue contract or commercial management as a job or career.
Increasingly, just understanding the inner workings of your particular business, or having the expertise of your specific work or profession, are not enough. For a career to flourish, awareness of the commercial trends in markets and an appreciation of the agreements that hold them together have become critical attributes.
The IACCM free on-line MOOC starts another run on November 14th. For details or to register visit https://www2.iaccm.com/events/register/?id=2622
It is planning season so I am increasingly being asked for data to support headcount and resource estimates. The questions apply to both contract management and commercial management and for organizations large and small.
As IACCM benchmarks have consistently shown, the answers on headcount and budget are highly variable, but driven by a range of broadly consistent factors. These include obvious considerations such as the scope of the role being performed, the extent of use of offshore / outsourced resources and the relative complexity of the underlying workload.
There is extensive variation in how contract management is performed and this is reflected in the visible level of cost. Even where there are dedicated resources, the average cost ranges from approximately 0.1% of revenue to 0.7% of revenue. Often, the identifiable resources are just the tip of the iceberg – and in some cases, the iceberg is completely concealed. For example, in a study recently conducted by IACCM, we discovered one company where contract management was costing $30 million in legal resources alone, representing almost 30% of the average lawyer’s workload. In another, the role was performed entirely within business units at an estimated cost of more than $200 million.
As identified in the IACCM 2015 Benchmark Report, dedicated contract management resources generate significant efficiencies and cost reduction. But the picture is no longer simple because the nature of those resources is changing fast. In the past, contract management would be performed by a dedicated business function or professional group and the activity depended on people. Today, as we work with organizations on their forward plan, the nature of the skills required is shifting and the extent of automation is growing. The contract management function is poised for major changes which will also transform the value it can provide to the business.
In Part II of this blog, I will describe how that future is likely to look
This year’s IACCM Americas conference confirmed the speed with which contract and commercial management are transforming as business disciplines and in the value they are providing. Conference sessions were full of ideas, examples and case studies. Here are just a few of the take-aways that we captured during the closing presentation.
The critical importance of contracts
IACCM’s COO, Sally Hughes: My first takeaway is the absolute acknowledgement of the critical importance of contracts – the reinforcement of that throughout the last three days has been very evident.
Let’s remember the statement from this year’s Nobel Prize award for economics: “Modern economies are held together by innumerable contracts”.
Another quote at the conference was “Contract Management is a leading indicator of financial performance”. Of course we would fully endorse that statement and our research certainly shows that poor Contract Management and contracting process can lead to value leakage of, on average, 9.5% of annual revenue – an amount that few other improvement projects could come close to matching. We have seen some wonderful examples of how you can significantly contribute to the bottom line by addressing your approach – for example, in the Innovation Award we made this week to Shell.
We said in our opening presentation that “contracts lie at the heart of social, political and economic activity”. It’s important to reflect on this – those are not ethereal words – Susan’s Wittenberg’s moving story demonstrated the role that effective contracting is playing in the eradication of Polio – an example of the critical importance of contracts and the skills of those who manage them – in this case impacting the health of thousands of people globally.
Simplification through Technology
IACCM’s CEO, Tim Cummins: Picking up again from conversations this week, it was Dierk Schindler who said that we need to move from “Masters of Complexity” to “Masters of Simplification”. We have presided over an era of massive growth in the length and complexity of contracts, to a point where 88% of business users can’t understand them and 83% find the process by which they are formed unhelpful. Much of that complexity is a direct result of the new technologies that have transformed business operations and markets. But the reason that contracts and the contracting process are complicated is because we ourselves have done so little to adopt the technologies that would simplify the experience of our clients, users and stakeholders. As we have seen over the last few days, those technologies are available and it is imperative that we accelerate their adoption.
Sally Hughes: My next highlight is “Commercial Innovation”. We have talked extensively about technology and digital transformation, but what about Commercial Innovation? Bryan Barker said in our opening keynote panel that “…we’ve traditionally been here to provide certainty and a backdrop for when things go wrong….”. That is absolutely not our future and anyone who continues with that mind-set is doubtless heading for failure. Mind-set is something that I consider to be a critical component in our quest for change. Both Brett and Liam’s presentations this morning talked to that “mind-set shift” and “unlearning assumptions”. VUCA (volatility, uncertainty, complexity and ambiguity) is our reality and, like it or not, Robots are Rising! We have to accept our reality and decide how we are going to innovate around all of this transformation.
Operate as a Team of Teams
Tim Cummins: My second take away builds on the presentation from Liam Brown this morning and the concept of a “Team of Teams”. As we saw with the success of the FFG Enterprise and their winning of one of our Innovation Awards – we need to rethink the way we use the term “enterprise”. Increasingly we work in extended supply networks or ecosystems. Their interdependence means that we must break down the borders and boundaries of traditional enterprise thinking and enable operation as a team of teams. But this concept goes further. For example, when we undertake research, our members often tell us that the biggest barriers to change, to innovation and to increased business value are created by the silo-based thinking that goes on within their organisations. Going further, we should think about our professional community itself and how “outsights” represent our source of status and business contribution. These can only be attained by again considering ourselves, this community, as a team of teams, eliminating the narrow thinking that views other companies, other industries, other countries as having little or no relevance to our work. We must stop claiming that we are all ‘special’ – because it is that belief and the ‘specialism’ that it implies that creates barriers to teaming. At the heart of enabling “team of teams” thinking, lies greater transparency, data exchange, shared tools and systems – in fact many of the characteristics that we have identified as being at the heart of relational contracting.
Sally Hughes: That brings me nicely to my last takeaway which is “Outsights”. How many of you knew what that word meant before you came to this conference? I hope that having spoken to this term, we have now clarified what we mean. So how many of you feel that you haven’t gained any outsights over the last few days?! And how many of you will not be going back to your organisations with new ideas?! I’m so pleased to see no hands being raised! We make the point each year, but it is always important to reiterate – the primary purpose of IACCM is to be your source of outsights and it doesn’t stop here, with the end of the conference . We will be running this week’s ATE on Thursday afternoon as always, our library continues to fill with a plethora of material and resource for you to refer to you at your leisure. We have communities of interest where you can test your ideas and gather new ideas at the same time, member meetings, message boards – the list goes on. Equally you can reach out to any one of the IACCM Team at any time.
We still have a way to go with some of the concepts that we have been talking about but we certainly sense from our many conversations that these last three days have provided you with new examples and ideas and demonstrated how you might be able to do things differently.
Measuring our success
My last takeaway builds on a conversation inspired by John Proverbs on how we should measure and demonstrate success. Our current measurements inhibit the value that we bring to our business and stand in the way of commercial excellence. Indeed, a focus on short-term savings or compliance can often detract or even undermine that value. While transactional performance is clearly important, it rarely offers the insights that we need if we are to raise our status and our contribution. Our thinking and our measurements must start to focus on driving benefits at a portfolio level and relate directly to achieving the strategic goals of our business. Most typically today these goals demand improved speed, quality, integrity and financial performance.
Value will be delivered through a process based view, through monitoring the outcomes of what we do, through generating measured innovation and continuous improvement. This depends upon capturing and analysing performance data, through challenging established rules and procedures, through inspiring the new models and approaches we have discussed this week. And it also depends on courage – developing leadership and influencing skills.
The agenda is clear and is contained in two infographics in our Future of Contracting and Commercial Management Report. These explain the market forces and influences that have transformed the required role of Contract and Commercial Management and the characteristics of the new model we must adopt.
Next Monday morning start the change by making sure that a copy of the report is on your CEO’s desk.