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Value destruction or value for money: sometimes a hard call


The ideas behind value engineering are not new. In fact, they go back to the 1940s, when the construction industry in particular was seeking new and more scientific ways to guide its purchasing decisions. It would not be unreasonable to assume that the methodology and its use would have matured by now. But you would be wrong; it has actually gone backwards.

In its latest edition, Architectural Products (a US industry publication) states the following:

“Today, value engineering in construction has fallen far from its origins, with products being chosen and changed out simply because
they are cheaper, many times sacrificing performance and longevity. This new process is no longer about creating actual value. Acknowledging that budget is always a concern, there must still be a better way.”

Is modern procurement practise ‘dumbing down’ decisions?

One conclusion clearly could be that the procurement practises of recent years (driven by an obsession with short-term financial results) are at fault. ‘Value’ has often been overtaken by ‘price’. Measurements are based on input costs, not outputs or outcomes over time.

It is clear that there is some validity to this view. In spite of (or arguably in some cases because of) the massive investments in technology, corporations seem to lack the ability and incentives to operate on objective judgments of value. And, as incidents such as the Grenfell fire and the Morandi bridge collapse illustrate, that can prove extremely costly in terms of lives, reputation and money.

But is it that simple?

The article specifically calls out decisions made on the basis that an item or resource is cheaper. Certainly there are many occasions where such decisions are wrong. But we must also remember that, since the 1940s, the social ethos has changed. We live in a world where everyone wants perfect, everyone wants new, everything is disposable. So why buy things that last 20 years when the building may undergo fundamental alterations or change of purpose every 5 or 10 years? Seen in that light, it could be argued that ‘value’ and a short lifespan are synonymous.
A great comeback?

Today, at least in principle, we are seeing a massive shift in those social values. The concepts behind sustainability demand a rethink of the measurements and behaviors that underlie the disposable culture. So will value engineering experience a rebirth? I like to think the answer is yes – and indeed it lies at the heart of work IACCM has been undertaking to redefine principles for contract governance and performance management. Those principles draw on another concept from the world of engineering – that is, uncertainty analysis.

As part of its research, IACCM has recognized the need to build strong connections between the methods deployed in engineering and those in contracting. Together, they can provide users (whether in Procurement, Project or Contract Management) with powerful tools to better segment their commercial decisions and supply relationships. The result, we believe, will be delivery of true value, both to business and to society.

 

As-a-Service:Commercial Model of the Future


Almost 90% of Procurement and Contract professionals expect major growth in ‘as-a-service’ offerings, with a quarter believing they will rapidly come to dominate the market.*

Is that a far-fetched prediction? In many ways not. As-a-service offers the buyer many benefits – eliminating capital outlay, providing greater flexibility, avoiding redundant or outdated systems and equipment. It is therefore very much in tune with our age, providing rapid gratification through on-demand, affordable access to products and services.

Suppliers in some cases face high set-up costs, due to the need for asset investment. But often they don’t – for example, in the case of platform providers who draw on the assets of others (Uber and Airbnb being the frequently cited examples). As the range of as-a-service offerings increases, it will become more and more difficult for traditional businesses to compete.

As IACCM’s recent study on as-a-service indicated, there is variability in offerings. They range from a one-size-fits-all standard, to mass customized, to fully custom design. This has a major impact on cost and commitment, hence there are significant variations in contract terms and negotiability. At the lower end, the contract is potentially fixed and non-negotiable. At the upper end, the customer may be looking for a guaranteed outcome and dictating many of the terms.

One key lesson from IACCM’s research is that many sectors of the market are not yet fully conversant or aware of the implications and practices associated with as-a-service offerings. This is in part due to the inexperience of buyers, but also suppliers have in many cases failed to think through key aspects of the capabilities needed to support such a fundamental shift – in particular the implications for Sales skills and the ability to ‘educate’ their customers.

As-a-service in many cases creates longer term relationships and an increased level of interdependency. Having appropriate contracts and contract management competency is therefore a critical component of these offerings.

Based on polling over 180 participants in a recent IACCM webinar (webinar recording available at www.iaccm.com)

Contract Governance: a missing link for improved business performance


Formal, institutionalized corporate governance is a relatively recent concept and still maturing, yet few today would suggest it is unnecessary.

Given this fairly recent focus, it is perhaps no surprise that contract governance is some way behind in gaining executive (and regulatory) attention. Yet arguably, the institutional management of an organization’s trading practices and relationships is just as important as the management of its internal relationships and controls. That is why it must become an area for serious focus and improvement.

Not entirely new

Just 10 years ago, Oliver Williamson was awarded the Nobel Prize for Economics, recognizing his work on transactional costs within contracting. Thirty years before, he had written a seminal paper on contract governance, in which he focused on commercial contracting and concluded: “The efficient organization of economic activity entails matching governance structures with  transactional attributes in a discriminatory way”. In current terminology, that means transactions must be segmented based on specific characteristics (such as risk, value and uncertainty)and then a variety of contract management methods must be available to support them.

A serious gap

IACCM research has identified the continued absence of sophisticated segmentation techniques  as lying at the heart of contract value erosion. Essentially, contract governance is at best partial in its coverage, with the greatest maturity applying to relatively low value and / or high frequency transactions. While these are important for efficient and reliable operations, they are rarely critical. When it comes to longer term or strategically important relationships, contract governance is rarely well defined or managed.

This matters for many reasons. It results in cost overruns, delayed or missed revenues, massive increases in transactional cost, contentious relationships and potential reputational risk. Yet while so many of these damaging issues could be avoided, traditional approaches remain intact, often resulting in inadequate supplier selection techniques, inappropriate forms of contract, value-eroding negotiations and poorly defined and equipped post-award operational teams.

Addressing the problem

Not all is doom and gloom. As with any problem, the initial challenge is to gain recognition that it really is a problem. Then comes the need to demonstrate it can be fixed. In the case of contracts – just like corporate governance – the big issue is the enormity of action required. Contracts and their performance permeate just about every corner of the business – as well as the counter-party’s business and potentially beyond. There is no ‘owner’ of contract governance in today’s corporations – it’s just too complicated.

But change is in the air. Executive awareness is growing and emerging technologies are starting to offer the critical components needed to drive integrated data flows, to provide on-demand information and knowledge – in short, to deliver a backbone that supports the mapping and implementation of differentiated contract governance structures.

As the world’s only non-profit association for contract and commercial management, IACCM has spent years researching and designing improved methods. Unique in its worldwide coverage and integration of both buyer and supplier perspectives, it has been able to develop ideas and methods that truly enable rapid and major advances in contract governance. These are exciting times!

 

Brexit: a classic in how not to negotiate


Negotiating something as fundamental (and emotive) as Brexit was never going to be easy. In the end, it has turned into a fascinating case study that will doubtless be used and cited for decades to come.

What happened to BATNA?

Establishing a ‘best alternative to a negotiated agreement’, or BATNA, is a well established principle in every negotiation handbook. It is fundamental to each party’s power. So what happened with Brexit? In their wisdom – or perhaps determined to undermine the process – the UK Parliament promptly removed any possibility of a BATNA by insisting that there must be a negotiated agreement.

Any incentive that the EU may have had for meaningful negotiation was thereby removed.

And what about stakeholder management?

A second key to successful negotiation and a positive outcome is to understand and manage stakeholders. In the case of Brexit, this was perhaps an insurmountable task, given the multiplicity of agendas that needed to be considered. This was again evidenced by the UK Parliament where three years of debate yielded plenty of insight to what they didn’t want and very little on what they did want. Again, scarcely a backdrop for effective negotiation and not a credit to the democratic process.

In the EU, stakeholder management is a process of building internal consensus through compromise – a process that results in little flexibility and a culture of last minute decisions.

A lack of vision

Ultimately, the big problem with Brexit is the absence of vision. Without a meaningful goal, it is impossible to unite people in its achievement or to undertake a mutually acceptable negotiation. On this score, both the EU and the UK are at fault. It was in both party’s interests to establish a vision for the future relationship and the positive aspects this might bring, but neither could bring themselves to this level of maturity. Ironically, it was this very issue of ‘lack of vision’ that in my opinion led to the Brexit vote in the first place.

But that is another story!

 

 

Price isn’t everything


In many cases, organizations continue to make purchasing decisions based on price. It has been baked into their DNA, with the mantra of ‘commoditization’ backed up by software that drives price-based competitive auctions and measurement systems that continue to monitor ‘negotiated savings’. In the public sector, this is further reinforced by public procurement rules that blithely ignore concepts of value and have failed to adapt to the nature of today’s supply requirements.

Many claim otherwise

Suggestions that procurement decisions remain focused on price are often met with howls of protest and claims that such an approach is a thing of the past. In some cases, this is true – there are Supply Management groups which have moved on and many who advocate the need for change. Yet supplier experience continues to attest that those who have actually changed are very much the exception.

Why is this a problem? 

Simply put, purchasing decisions need context and it is rarely true that price is everything. The commoditization craze that came with reverse auctions and spend management discouraged the use of economic judgment – essentially, it resulted in economic illiteracy. A great example of this was cited in a recent edition of Talking Logistics, which examined the influence of networked technologies on the logistics industry. It made the point that, during the dot com era, many believed that they could convert a traditional relationship-based industry into a spot market commodity. They were wrong. The article highlights how similar efforts are now appearing as a result of digitization. In both cases, these are driven by the hunger for lower prices, but illustrate two fundamental misjudgments:

1) creating a spot market does not necessarily alter the availability of supply and is more likely to reduce competition over time than to increase it;

2) low prices frequently do not translate to low cost. For example, reliability and quality of collection, shipping and delivery frequently has far greater importance than saving a few dollars in processing costs. A failed delivery may well catch the CEO’s attention; a nominal ‘saving’ certainly will not.

So what’s the answer?

Procurement decisions need context. They must examine impacts that stretch beyond the acquisition and explore downstream effects. I recall a great story from the public sector, where a buyer thought it would be a marvellous idea to save money in the criminal justice system by supplying gaols with fruit that had failed the supermarket tests of homogeneity. It seemed entirely logical – saving money and the environment – until it caused a prison riot due to the inequitable size of portions!

With the growth in the scale and types of acquisition, in particular the shift towards services, procurement decisions need a new and economically-based approach to sourcing decisions and supplier management. ‘Price’ must be put in its proper place – and my next blog will expand on how that should be achieved.

Commercial Management: a career with a future?


Over 60% of those working in Commercial Management are excited by the impact and potential of new technology. They believe they can harness its power to better understand and mitigate risks and to increase their influence with senior management.

This welcoming and confident attitude is encouraging and at odds with some other professional groups, who tend to see technology more as a threat. Similar optimism is reflected in the fact that 85% see the current and future job market for their skills as ‘fair to good’ and a high proportion are also confident that they know what future skills they need.

Not all is roses ….

The work of a commercial professional is challenging; they are motivated by the contribution they make to business goals; they love negotiating. But most are somewhat frustrated by the limited career path and opportunities, meaning a significant proportion either plan to change company or change jobs in the next 5 years. Over 40% feel that their current organization fails to invest in its people; over 30% are unhappy with company culture and a similar percentage are dissatisfied with their current pay.

In the context of training, a fascinating statistic is that more than 50% feel the ready availability of knowledge and information, driven by networked technology, means there is now a GREATER need for structured training programs. Clearly a case of too much information becoming overwhelming.

This data is extracted from IACCM’s current Talent Survey and reflects just a small portion of the insights being generated. To participate in this study (and receive a copy of the resulting report) visit https://iaccm.fra1.qualtrics.com/jfe/form/SV_73XH9Gj76yAEk3b

Commercial Managers in the digital age: keys to success


At its heart, commercial management is about grasping the big picture, seeing connections, developing practical solutions. On one level – the availability of information – the digital age is streamlining and simplifying the commercial manager’s role. On many others, it is potentially making it more complicated, or at least very different from the past.

What are the issues?

A recent book put it like this: “Complex trends in globalization, demographic shifts, and new technologies are raising urgent challenges for managers on an everyday level. Because of the number of companies undergoing digital transformation, managers need to navigate an intense speed-to-market landscape while juggling virtual teams within and sometimes outside their organization“.

And this means ….

Commercial managers must not only identify the risks and challenges from this fast-moving environment, but also – and this is critical – innovate, offer creative solutions. Fundamental questions in a digital world are how to innovate, develop new ideas; how to influence and gain insight from both physical and virtual teams; how to communicate and drive change across extended ecosystems. In themselves, the questions are not new. It is the scale and speed that makes things different.

Keys to success

A growing volume of research points to the critical role of communication style and ‘managing your network’. High performing commercial managers unite teams around a clear and shared sense of purpose – not just what they are trying to achieve, but why. They generate an environment where ideas and positive challenge are welcomed and where collaboration is understood, expected and achieved. They are comfortable operating across extended networks, internal and external, both to gather information and achieve results.

At the same time as the digital world imposes these demands, its effective use also makes it possible. Today, there is no excuse for being information deprived; there is no excuse for failing to establish connected networks; there is no excuse for failing to master diverse communication techniques; there is no excuse for lacking self-awareness and influencing skills. These are simply critical attributes for a Commercial Manager.

Communication – the final barrier

Finally, what about communication style and content? As recent conference delegates know, this is an area where IACCM has been doing a lot of research. Working with academics at UC Irvine, we have examined a large number of ‘commercial’ personnel – lawyers, contract and procurement managers. Many are not today exhibiting the critical communication style required to be a commercial leader or influencer. Rather than projecting themselves as enablers, they are seen as ‘preventers’ – safeguarding what we already have, rather than enabling opportunities for the future.

Not everyone wants to be a Commercial Manager, but for those who do it is critical that they understand and grasp the implications and needs of working in the digital age. A good place to start is in shifting personal and team image by challenging and, where necessary, changing what and how we communicate.

IACCM offers its members tools to analyze current communication style and provides methods to establish the new approaches needed for individual and functional growth.