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Why Contract Management and Digital are incompatible


Making sense of digital requires first an appreciation of its different forms – digitization, digitalization and digital transformation. Bertrand Maltaverne[1] recently wrote an excellent article on this topic and made the following definitions:

  • Digitization is the conversion from analog to digital (e.g. digitization of data).
  • Digitalization is the process of using digital technology and the impact it has (e.g. digitalization of a process).
  • Digital transformation is a digital-first response that encompasses all aspects of business …. It leads to the creation of entirely new markets, customers and businesses.

The challenge facing those who are responsible for contract management is that without digitizing their contracts and without digitalizing their process they will increasingly become barriers to the digital transformation of their business.

A core problem – identified in many IACCM studies and capability assessments – is that contract management is not typically viewed in the context of a life-cycle. Contracting policies and terms and conditions are frequently established by different departments; specific agreements or negotiations are undertaken by various groups or specialists who may or may not operate with consistency. Once signed, those who were responsible for creating the contract are generally not involved in its on-going management. With such diversity of participants and (often) limited clarity over roles and responsibilities, it is not surprising that coherent approaches to digitizing and digitalization are proving difficult to achieve. Unfortunately, as IACCM’s recent report on automation observed, contract management software is similarly fragmented and its adoption constrained.

Consumer businesses face a much easier time since they can largely dictate the way they form and manage contracts with both customers and many of their suppliers. It is much harder in the b2b environment, where relationship types are more varied, levels of relative power differ and underlying processes are inconsistent. However, market forces will drive the need for digitization since without it, organizations will be unable to compete. Those forces will result in a new ‘contract management revolution’, even more fundamental than the changes that globalization caused some 15 – 20 years ago. This time, it will drive three major changes:

  1. the development of a life-cycle view of the contracting process, from inception of requirement to completion or close-out of the agreement
  2. an appreciation that digital enablement of contracting is not only about internal process and data flows, but that it is fundamentally about enabling interactions outside the organization
  3. the identification of resources dedicated to oversight and maintenance of digital trading relationship terms and capabilities, covering all relationship types

The IACCM Automation Report is available to IACCM members at http://www.iaccm.com

Achieving collaborative relationships


Business leaders call for more collaboration; workers confirm that they prefer collaborative environments; researchers point to the benefits of collaboration. Yet consistently it proves hard to achieve and sustain – almost always (of course) due to failings by ‘the other side’!

The big challenge is that collaboration generally requires significant behavioral change at an organizational level. Indeed, this is recognised in the newly announced ISO standard,  ‘Collaborative Business Relationships’.

The problem is that any large, established organization struggles to implement behavioral change and in this instance the problem is of course much bigger, because the ability to collaborate is not just a matter of internal capabilities. You must also find organizations to collaborate with, others who share your values and methods.

So if there is indeed an overall will to collaborate, how can we bring practicality and meaning to collaborative relationships?

While we can certainly refer to the ISO standard as an aspirational model for organisational design, we also need to understand why the past is littered with anecdotal examples of success, but very few where those successes have been sustained or replicated.

Why is that? Embedded attitudes towards suppliers and customers are hard to change; they are often founded in a history of disappointments and tensions. Management and measurement systems frequently drive contention. Contracts are typically unbalanced and rarely act as a unifying force (‘we collaborate in spite of the contract’). Overall, factors such as these undermine trust and repetitive experiences confirm that collaboration is the exception.

The ISO standard is helpful in providing an approach for measuring eventual success. But in isolation, I dont believe that it offers a practical method for moving forward. As with all change initiatives, organizations need evidence of success; people want to understand more precisely how they should change working practices and they want to see the benefits.

That is where IACCM’s relational contracting model comes into play. It is realistic, practical, relatively easy to implement – and successful. The relational workshops help people see how they as individuals can make a difference and result in the sort of small steps that are fundamental to realising a big vision. The collaboration resulting from this approach generates a working environment that others then wish to replicate. From being an isolated example or pilot, the relational approach can rapidly gather steam and become THE way of working.

By its very nature, trade is a collaborative activity. It also lies at the heart of human progress and economic advancement. To quote from a recent article in Fast Company: “Collaboration is no longer just a strategy: it is the key to long-term business success and competitiveness. Businesses that realize this sooner rather than later will be the ones who win the game and succeed in the new global economy”. Relational contracting provides commercial and procurement teams with the chance to show leadership in this field, rather than being seen as a potential barrier.

Opportunism in contracts


A major reason for contracts – and why they are often so complicated to agree – is fear of the other side. In part, this is fear of what they won’t do. For example, will they deliver what they promise and will it be on time? Will they pay the bill? But these issues of core obligation and potential consequence are well established and in general are fairly easy to agree. Ironically, they are also the areas where most organizations (and many professional associations) continue to focus their training efforts.

The thing that is often more complicated is a fear of what the counter-party WILL do – particularly in the context of opportunistic behavior. This is especially the case in situations where there is an individual and to some extent customized scope – for example, in construction, engineering and in outsourcing or complex services.

Opportunism comes in two major forms. One is potentially the contract itself. If the proposed terms have been developed by one party (rather than using, say, an industry standard), there is a natural expectation by the counter-party that they will somehow be disadvantaged. Given the complexity and length of many agreements, these issues of ‘guile’ can be very hard to spot – until they are used against you.

The other big issue is around the scope and goals – the fear they are incomplete, ambiguous, flawed. Indeed, in the construction industry, research has shown that bidders welcome flawed design because this represents an opportunity for future price increases. Anecdotal evidence suggests that the same is true in many services engagements.

Dealing with the potential for opportunism is complicated. It depends on a mix of decision rights, potential remedies and consequences, incentives and relationship integrity. Unfortunately, procurement policies and sales practices frequently stand in the way of effectively discussing and balancing these factors. For example, a good procurement process might encourage and reward suppliers who point out design flaws, rather than allowing them to be used as a way to recover margin on a low-price bid. Intelligent acquisition methods would also explore information flows to ensure greater control and balance in effective decision rights. Good contracting practices would embed robust governance methods into the agreement and ensure they were effectively operationalized.

As we deal with ever-increasing levels of uncertainty and change, IACCM‘s work (and training materials) focus on the need to structure agreements and relationships in different ways. Far too many projects are still undermined by inappropriate approaches to supplier evaluation, negotiation and contract management – along with the wrong form of contract. If they really wish to reduce costs and improve margin, it is in these areas that organizations should focus their training and development.

 

 

Is the CIO the Chief Commercial Officer of the future?


Technology lies at the heart of every modern business. Yet increasingly organisations don’t own their technology – they buy in services from a range of providers. The job of the CIO has shifted to that of a business enabler and innovator, knowing less about the technology, but much more about its business impact and needing to understand the requirements of the market.

With this steady shift comes a substantial change in success factors and dependencies. One priority is selecting suppliers that do not create major reputational risks (British Airways is a good recent example of that problem), regulatory exposures or uncontrolled costs, including switching costs. Another is ensuring reliability, ease of use, adaptability and supporting innovation.

These are hard factors to balance – and they depend on sound commercial judgments and effective selection, negotiation, contracting and relationship management. But in addition to these issues affecting the overall technology platform, it is important to recognise that core business capabilities increasingly depend on the underlying technology platform. Digitization, for example, is understood to be a key market differentiator, enabling linkage and dynamic information flows across entire supply networks, facilitating relationships, executing smart contracts, overseeing compliance and performance.

So has contract and commercial management at last found a natural home – an executive whose success and future depends on the quality of these functions? It certainly seems possible. Indeed, we are seeing a growing number of CIOs who appreciate that poor contracting undermines not only their personal position, but is a broader constraint on business agility. Hence they are starting to promote or lead ‘hackathons’ to reengineer contracting practices and processes.

And even if that shift of role does not happen, it is surely time that commercial teams build strong connections to the CIO, helping him or her to understand the extent of their reliance on strong contract and commercial support. Perhaps with that understanding will come a new level of prioritization for investment in contract management technology.

 

 

 

Tackling hidden costs through improved contract management


One of the biggest problems with contract management is imprecision in its definition. What exactly is its purpose; where does it begin and end; who is responsible for its overall performance? It is an activity where the answer to these questions varies not only between companies, but between functions and individuals within a company. It is therefore inevitable that there can be confusion, overlaps – and in many cases, areas that simply aren’t tackled since they are either no-one’s (or everyone’s) job.

A leading example of this is communication. Time and again, when IACCM is asked to assist members with improving their contract management, we find poor communications lying at the heart of problems. This can – and usually does – take a variety of forms. It may be the inadequate data flows generated from technology. It could be a failure to engage with stakeholders or to keep them informed. It might be poor handover from the pre-award team to those responsible for performance. It is frequently the complicated wording and structure of the contract itself, leaving 88% of business people complaining in a recent survey that ‘contracts are difficult or impossible to understand’.

Each of these issues reflects the observation in the opening paragraph – roles and responsibilities are frequently unclear, therefore the problems are not addressed.

But the issue with communication goes much deeper because it is also about the ways we communicate. Ensuring contract performance is critical to any organization, yet in many there is little thought given to the methods by which this can best be achieved. Our cost-cutting world has typically assumed that the best model for business operations is in many cases remote. Indeed, with many project teams and supply networks now scattered across time zones, physical meeting and co-location are often impossible. Pressure on travel budgets has ruled out even occasional physical meetings. Technology for contract management is frequently limited because no one is clear about the investment case. As a result, people often rely on email – which is increasingly recognised as a major source of confusion, misunderstanding and inefficiency.

Contract management desperately needs a complete overhaul of its associated communications strategy. As IACCM dives deeper into its analysis of the causes of value erosion, it is clear that inappropriate forms of communication lie at the heart of many problems. There are numerous examples – here are just two:

  • Suppliers were regularly failing to meet regulatory standards on health, safety and hygiene. This was leading to high levels of staff turnover at those suppliers and resulting in poor quality and productivity. Contract terms were amended, introducing more detailed clauses and more onerous penalties. There was no measurable improvement in performance – until someone realised that the contracts were the problem. No one could understand them. Through redesign, the contract became a means of effective communication, rather than a weapon to punish non-compliance.
  • In a recent workshop assessing performance on a $16bn project, it became evident that working relationships between the many parties were strained. Goals were often unclear and there was a tendency to allocate blame for problems, rather than to fix them. It became obvious that communications across this interdependent ‘virtual’ enterprise were poor. There was heavy reliance on email because no one had alternative contact information – there wasn’t even a shared database of phone numbers. Physical meetings were rare; use of alternative communication techniques had not been explored. A team was established to define communication protocols and to ensure clarity over the behaviours expected from program participants, regardless of which organization they represented. Performance and morale are showing steady improvement.

Communication lies at the heart of human behavior. That means it also lies at the heart of contract performance. So why isn’t establishing and defining communication practices and protocol a fundamental element of a contract manager’s role?

Calling all Commercial professionals: Prepare yourself for Industry 4.0


The elements in what we are calling Industry 4.0 are converging – and already proving disruptive in a growing number of sectors. The impact on commercial practices, supply relationships and contracting will be enormous and those changes are coming fast.

Right now, the biggest constraint on business is probably the combination of legacy systems and legacy behaviors. But the elements of Industry 4.0 are now far more pervasive than most of us realise. Consider for example the shift away from sale of goods to the provision of services – with some 25% of external spend now believed to be buying ‘goods as a service’. Look at the pervasive influence of software as a service and the speed with which it has replaced the old licensing model. In manufacturing, the ability to remotely track products throughout their lifecycle is becoming common. Robotics, artificial intelligence, cloud computing, the Internet of Things, data analytics, 3D printing, mobile devices – all are manifestations of the digital revolution and what makes this so different is that they are increasingly being interconnected. Unlike past technologies, we are entering a world where interoperability is the norm.

So why is that significant to those who are involved in commercial policies and contracts? Quite simply because many aspects of our work will be turned upside down. Take issues such as customization. The digital world enables highly customized products to be assembled in units of one, at an affordable price. Take risk, where intelligent products start to anticipate their own faults and problems, where interconnected products themselves suggest ways that efficiency can be improved, based on their experience of use and utlilization. Take pricing models, where more and more products will be sold as services and where charges will be based on monitored use or demonstrated benefits.

Many of the things that we have historically viewed as unaffordable, impossible to monitor or too risky to commit will steadily become norms of business practice. And of course, the winners will be those who spot those opportunities first, who recognize the opportunities generated by interconnected systems, rich data flows and new relationships.

The elimination and replacement of legacy systems is certainly a challenge, but industries such as electronics are making rapid progress with embedded software transforming the role of machines and putting them at the heart of intelligent networks. The demands on aerospace and defense suppliers for more agility, for greater safety, are leading to rapid development of new commercial models (for example, this sector leads in the use of collaborative contracting models and procedures). The logistics industry is transforming as technologies such as blockchain capture up-to-the-minute data that can be accessed instantly by the entire network of related parties. Emerging economies, unconstrained by legacy systems and technologies, often stand the best chance of short-term transitions – for example in the delivery of health services. And business start—ups no longer face the challenge of developing vast infrastructure – they can instead buy scalable services, whether in technology or systems or physical assets and infrastructure.

Legacy behaviors are therefore in many ways a greater threat. Businesses and individuals are struggling with the question of when do they ‘throw the switch’, dispensing with old attitudes  towards functional specialism, controls, compliance and risk. There are few places that this will be felt more than in areas such as legal and contract management. Yet change they must, because traditional approaches will operate as an impediment to competition in the Industry 4.0 world. Market understanding, creativity, empowerment and opportunity enablement will become the hallmark of 21st century commercial competence – and that is why these are such major themes of IACCM training, research and conferences.

Therefore it is imperative that those who wish to prosper in this new world invest in better understanding it. Understanding the skills, knowledge and methods of the digital economy is the best way to become an adaptive, agile professional, capable of moving between the old world and the new, exercising judgment on which commercial models and values should be applied.

 

Where is the growth?


The Financial Times recently published an analysis of Europe’s fastest growing companies during the period 2012 – 2015. Perhaps the most interesting point is the industry segmentation of the list and the extent to which it reflects issues of market competition, disruption and opportunity.

In reviewing the list, it is notable that many of the fastest growing companies are new entrants – clearly pointing to disruption. In those circumstances, suppliers are likely to face a situation where demands for innovation are accompanied by significant pressures on margin, leading to a demanding market environment. Other sectors may see a higher ratio of growth for established leaders, reducing the challenges in negotiating agreements.

The growth sectors are themselves interesting. The dominance of IT services, consulting and software indicates the extent to which the digital revolution is impacting business. By contrast, the technology itself (including provision of cloud services) does not appear to offer such strong growth opportunities, presumably because it is a relatively commoditized sector, suffering pressure on margins.

It is data of this type that can increasingly be used to inform and develop contracting and commercial strategies – where are the major areas of growth, what sort of companies are driving that growth, what is the impact on profitability, what types of relationship will be of greatest value and which terms and conditions will be most important to win business.

Sector analysis of fastest growing European companies (Source: Financial Times 26th April, 2017)

Rank
Sector
Number of companies
1
IT Consulting, Services & Software
108
2
Retail (including Mail Order & E-Commerce)
91
3
Wholesale
76
4
Construction, Engineering & Landscaping
69
5
Advertising, Marketing & Event Management
60
6
Consulting, Legal & Tax Counselling, Auditing
48
7
Transport & Logistics
45
8
Banking, Financial Services & Insurance
41
9
Mechanical Engineering & Plant Construction
38
10
Electronics, Electrical & Medical Engineering
36
11
Other manufacturing sectors (e.g. Metal or Furniture)
36
12
Gastronomy, Lodging, & Tourism
33
13
Energy & Utilities
31
14
Human Resources
29
15
Health & Social Affairs
23
16
Telecommunications
21
17
Automotive (Dealers, Manufacturers & Suppliers)
19
18
Food Production
19
19
E-Commerce Technology & Marketing
16
20
IT Hardware
16
21
FinTech
15
22
Packaging, Waste Management & Recycling
15
23
Real Estate
14
24
Education
12
25
Facility Installation, Services & Management
12
26
Media (Print, Digital, Broadcasting)
12
27
Security Technology & Services
12
28
Chemicals & Pharmaceuticals
11
29
Cloud Service Provider
11
30
Gaming, Betting & Entertainment
11
31
Big Data & Data Analytics
10
32
Manufacturer of Textiles, Shoes & Accessories
10
Grand total of companies in the list
1000