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Collaborating across boundaries


Trading relationships often involve multiple parties whose support and alignment is critical to success. Achieving that support and alignment depends on empathy – an understanding and appreciation of their point of view (whether or not we agree with it).

Last week, IACCM held its 16th annual Americas conference, bringing together groups that represent four of the key stakeholders in every significant trading relationship – lawyers, project managers, contracts and commercial and procurement professionals. The spirit of collaboration was palpable. Newcomers especially were amazed at the openness and inclusive behaviors, commenting on the positive, ‘can-do’ atmosphere.

So what makes it different?

For an event to succeed, it requires a shared sense of purpose that goes beyond simple networking. The IACCM conference enables conversations between people who would not normally meet each other outside a negotiation. With its focus on ‘trading relationships’, they rapidly find a uniting topic, something that all of them care about and consider important.

I am going to highlight three of my observations from the event – three factors that helped build this spirit of togetherness.

  1. Each of the functional groups is facing similar pressure to increase delivery of measurable value. This means a need to expand their role and thinking – and to achieve this, building bridges between each other is an obvious way to generate more creative, more successful solutions and outcomes.
  2. At this event, even more strongly than in the past, there was a clear consensus that the approach to formation and management of trading relationships is changing. The integration of ‘the contract’ and ‘the relationship’ lay at the heart of many presentations and case studies, with focus shifting to the terms that support improved governance, greater adaptability and proactive performance management.
  3. There is a new enthusiasm and belief in the opportunities that lie ahead of us – in particular from new and emerging technologies. With ContractTech a major feature of the event, delegates were given multiple insights to an exciting future, where the quality of data will enable a shift of role and business influence.

For several years, IACCM research has pointed to the scale of value erosion that comes from weaknesses in the way we form and manage contracts. While a few organizations have picked up on this and driven significant improvements, most have not. Suddenly, the reticence is disappearing; there is a real belief that a focus on ‘relationship resource planning’ can yield the next big wave of savings – and that the IACCM community, with its ‘collaboration across boundaries’, will be at the heart of the movement that drives these benefits.

Has Procurement really changed?


The field of Procurement has been undergoing rapid and significant change.  All the experts predict that the era of change is not over – indeed, quite the opposite – it is speeding up.

How successful has Procurement been in making the adjustments expected of it? IACCM has been undertaking research – ‘Procurement Present & Future’ – to find the answer and to discover priorities for further improvement. While input from the function itself has been welcomed, our particular focus has been  on those who interact with Procurement – other internal functions and stakeholders, plus suppliers.

What’s the verdict?

There is widespread agreement that Procurement has become more influential. This has been especially noticeable in its focus on compliance and allocating greater risk to suppliers. Around 70% have also noted the relentless pursuit of lower prices, with around a third noting a shift towards the broader measurement of ‘cost of ownership’.

Given these observations, it is not surprising that few perceive Procurement becoming better at building collaborative relationships. In fact, internal colleagues actually think that Procurement has gone backwards in this regard; supplier personnel are a little more generous, but still only give a rating of 6 out of 10 for this capability.

SRM is a bright spot; technology gets mixed reviews

Supplier Relationship Management (SRM) receives positive reviews for the contribution it makes to improved results. Category management is also seen as helpful. In organizations where they have been introduced, both of these initiatives link to perceptions of increased professionalism.

Technology has been an area of major investment for many Procurement groups, so has this generated a positive return? Views are mixed. There is consensus that systems are generating better data, supporting improved conversations and performance management. However, outside Procurement, there is no great feeling that automation has streamlined procedures, nor has it resulted in fairer rewards. Indeed, suppliers identify procure to pay systems in particular as overall damaging to business results and the ‘fairness’ associated with contract award.

So does it add up to greater value?

Overall, the results support the view that change has been occurring. Certainly Procurement appears to have been increasing its control and making its presence felt – and it is not surprising that these characteristics are not popular with everyone. But of course the real question is whether those increased controls are starting to deliver real business benefit. That is where the jury appears still to be out. Scores in areas such as business judgment, delivering innovation and operating flexibly are on average negative – and this sums up to very mixed views on whether Procurement has actually increased its business value contribution in the last five years. By a small margin, suppliers feel that value has increased; by a slightly larger margin, internal colleagues feel that it has not. Clearly, there is still progress to be made – and the pressures for rapid change will only increase.

To participate in the IACCM survey and receive a full copy of the ‘Procurement Present & Future’ report, visit https://www.research.net/r/Procurementpresentandfuture

Failed outsourcing? Don’t blame the other side


New research will be presented at the IACCM Americas conference next week. It shows that levels of trust in outsourcing relationships are often weak or non-existent. Not surprisingly, where trust is low, disappointing or failed results are not far behind.

Without giving away the details (further in-depth reports will be published later this year), a couple of points jump out at me from the findings. First, in spite of all the talk about strategic advantage and innovation, the overwhelming majority of buyers continue to focus on cost reduction as their primary goal and measurement of success when outsourcing. This aligns with previous research which shows that, at least in early years, reduced costs are the main determinant of a ‘good’ project. Only over time do other characteristics, such as innovation or continuous improvement, start to have extensive influence on the relationship.

What I found especially interesting in the results was that the number one reason that buyers give for their unhappiness is that they perceive suppliers ‘under-scope’. This, presumably, leads to regular battles over fee versus free and, in many cases, to additional costs or under-performing services.

These issues of cost reduction and under-scoping appear to me inextricably linked (and were discussed in my recent blog on opportunism). If buyers focus on cost reduction – and therefore base supplier selection on low prices – they can hardly complain if the provider minimizes scope in order to win. This syndrome is evident in industry after industry and, sadly, suppliers who try to warn buyers about the consequences of this approach simply do not win business. All the evidence we have is that honesty and integrity do not pay.

So if your outsourcing agreement – or indeed any other signficant project – is failing, you should look at the success criteria you established and see whether these drove subsequent behavior. If you want to achieve lower costs, a low-trust and adversarial relationship is the last way you will achieve it. Successful results typically accompany open and honest relationships where the parties are not punished for speaking the truth.

Uber’s biggest failure: contract management


One of my colleagues recently met a marketing executive from Uber at an airport. While talking, my colleague observed:’Uber is really a giant contract management company’. His comment was met with a puzzled look, followed by the reply: ‘I’ve never really thought about contracts’.

Ten years ago, there was the financial collapse. Before that, Enron; and since then, a multitude of highly publicized cases of major public sector waste and, in some cases, corruption. The common factor in each of these? All of them were running operations that relied on integrity in their contracts and contracting practices, yet with senior management that either didn’t know or didn’t care about the underlying lack of visibility and operational discipline.

So what about Uber?

Contracts – and the way they are formed and managed – is the core of Uber’s business. They establish contracts with their drivers; users of the Uber app accept its terms and conditions; regulators require contracts as part of the license to operate. It is the commercial design and interconnections between these contracts that should provide the source of the company’s overall integrity.

So what should Uber be doing differently? I’m certainly not suggesting that there has been any form of corruption. The issue is more to do with alignment. Good contracts and effective contract management are based on thorough stakeholder analysis and reconciliation of different (sometimes conflicting) stakeholder interests. In its race for growth, Uber appears too often to ignore or disregard key stakeholders, or to ensure compatibility between the various relationships it establishes. It has operated with an arrogance or ignorance – I don’t know which – that is now bringing inevitable repercussions, in particular massive damage to its brand.

Uber is not alone in failing to use a disciplined contracting process to drive operational performance and standards. In a recent IACCM survey, the role of contracts in supporting corporate values and brand image came in bottom place. Yet in my view, it should always be top. Contracts should test, validate and reflect the brand. You cannot, in an age of growing transparency and heightened consumer expectations, get away with marketing one thing and contracting for another.

The fact that a senior marketing executive could be so dismissive perhaps offers a further clue to the problems Uber faces – but also suggests a path through which it might find redemption. Analyse your contracts, understand their interdependencies, test their integrity and alignment with corporate goals and values. Through this approach, businesses can rapidly identify and address many of their commercial weaknesses and failings. It is something IACCM member companies are fast recognizing and is one of the core values the Association provides through its annual process reviews and benchmarks.

It’s time for Uber to take a corporate membership!

 

 

Step to the side – it’s where you’ll find the opportunities


Many of the jobs in procurement and sales contracting are squeezed into the middle of the process – that is, the part that starts with preparing or responding to bids and tenders, ensuring compliance, preparing and perhaps negotiating the contract. While these are important activities, they are also highly replicable and therefore threatened by automation, standardization and outsourcing. IACCM estimates that job roles focused on these activities will reduce by some 80% over the next five years.

This means that many of today’s practitioners need to focus their efforts somewhere else, providing support or leadership in areas that either are not so impacted by automation, or alternatively are new roles being created as a result of automation. The good news is that such roles not only exist, but also they are increasingly a focus for management attention.

To prepare for these changes, IACCM recommends that its members think about the performance and integrity of trading relationships. The inefficiencies in managing across organizational boundaries offer remarkable opportunities to generate improvements and measurable business value, in both pre-award and post-award management. To achieve this, we need far more focus on the market, an understanding of new suppliers, new forms and sources of competiton, trends in delivering customer value. Building commercial capability requires not just understanding, but also coordination of internal resources to ensure that these sources of value and differentiation have been developed. Such changes will drive new contract models, alternative approaches to pricing or charging and closer integration across organizations.

A holistic view of commercial performance is something that almost all organizations currently lack. Fragmented investments in technology have not helped the situation. But the new wave of analytical software tools is starting to offer very different insights and the ability to prioritize and tackle key sources of value loss and opportunity erosion.

IACCM will shortly release a series of podcasts with advice on how today’s practitioners can make the shift in their role. Alternatively, discover the answers at IACCM’s forthcoming conferences – see http://www.iaccm.com for details.

Contract & Commercial Management: 18 years and counting


This week I have been overwhelmed by messages of congratulation for IACCM’s 18th birthday. It is a stark contrast to 1999, when I recall one of the more encouraging comments was: “It’s been tried before. It’ll never work.” Today, with over 40,000 members, from more than 16,000 organizations in 165 countries, I think we can confidently conclude that the pessimists were wrong. Indeed, it seems safe to say that commercial and contract management are flourishing.

Eighteen years ago, the formation of IACCM was indeed a leap of faith, but that faith was based on an evident shift in business need. The forces of globalization – and in particular the spread of networked technology – had created conditions that demanded greater standardization and simplification of commercial policies, practices and procedures. The contracting process – and contracts themselves – stood out as a major barrier for global business, with traditional multi-national companies operating through relatively independent country subsidiaries and unable to enter into multi-country commitments.

Those conditions also revealed the fragmented and inconsistent nature of contract and commercial skills. There was no consistent training, no underlying body of knowledge. The jobs and skill sets – if they existed at all – were largely undefined, except within a single company.

It took 3 years to gather more than 1,000 members. It was 5 years before IACCM had any paid staff. Still the overwhelming view was that the organization could not survive. Yet steadily, with the strong support and enthusiasm of a dedicated band of believers, the pace of growth accelerated.

Today, the conviction that got us started continues to shine through. Indeed, I believe that we are entering a second and even more fundamental phase of relevance, not only to business, but to society as a whole. This time it is the digital world that is the transforming force. User-based systems, social media, advanced analytics – these are forces that demand a new wave of fundamental simplification in commercial practices and in contract formation. Trust in business, trust in institutions is at a premium. To respond to social and political demands, both public and private sector must operate with increased commercial transparency and using methods – such as contracts – that engender confidence and understanding, rather than distrust and confusion.

Who will lead this new wave of change? For me, the answer is clear. Just as in 1999 a small band of believers led fundamental change in contract and commercial practices, so the next few years will see an expanded band leading the way in creating a framework for successful trading relationships. While many traditional roles may be challenged by the emerging global forces, those in contract and commercial management will adapt and prosper as those agents of change.

My thanks and gratitude go to all those who have been on the journey with us over the last 18 years. Today, the Association is strong, with a dedicated and talented staff, a focused and enthusiastic Board and a myriad of ambassadors among its members. I look forward to welcoming many more over the years ahead, because the journey has only just begun. At 18, IACCM has just come of age – the best is yet to be!

Join us today – become part of the IACCM family at http://www.iaccm.com

Why would company execs want the GC to report to the CFO?


An article in Inside Counsel poses the question “Why would company executives want the General Counsel to report to the CFO”? It highlights the following as potential reasons:

• The CEO travels extensively or has too many reports. Hence, the CEO wouldn’t be a good manager and there would be a lack of connection—which would be a detriment to the GC and the legal function.

• The CEO has an extremely difficult personality so the GC needs a buffer, which is best served by the CFO.

• The CFO is a more active manager and would be more effective in maintaining a stronger relationship with the GC. There is a dotted line to the CEO.

• The CFO wants the added report for his own professional development.

• The structure of the company has many other core functions reporting to the CFO.

• Because the CFO and GC work so closely together, that reporting structure is a more logical one.

• The CEO doesn’t like lawyers and wants to engage with the legal function “only as necessary.”

• The nature of the company’s legal matters does not merit a CEO report at this time.

As with any organizational debate, these points are all interesting. But it seems to me they miss a fundamental issue – and that is, the scale to which a business’s financial performance links to the General Counsel and the legal staff.

Should the Legal function grasp financial opportunity?

In IACCM’s recent ‘Purpose of a Contract’ survey, respondents were asked whether a contract should be ‘an instrument for generating financial benefit’. They ranked this purpose in tenth place – out of eleven. Arguably, this should be first on the list. Businesses enter into contracts to secure economic gains or to protect economic assets. Similarly, they care about things like regulatory compliance not for their own sake, but to avoid the financial consequences of non-compliance. Hence there is potentially a powerful argument for the GC to report to the CFO, if only to increase legal department appreciation of the key impact their role has on corporate financial performance.

My counter-argument to this position is that the GC – and legal department – is needed as a moral compass. In my experience, companies with an over-powerful finance function are the most likely to lack balanced commercial judgment.  Their focus on profitability and growth can lead to decisions that damage business reputation. A strong legal function, properly integrated into the business and with significant authority, should operate as a counter-balance. But to do that, they certainly must appreciate the extent to which their work has an economic and financial impact – so we need lawyers who are truly commercially aware.