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Do unreasonable terms drive innovation?


Suppliers understandably complain about the unreasonable terms and narrow evaluation methods used by some of their customers. They are often right to point at the failures that result from such behavior, when it results in incompetent and sometimes dishonest suppliers winning business that they have no chance of performing, or the burden of risk promotes an adversarial relationship.

Selections based on the lowest price are an obvious culprit here, but it goes further. The tendency for buyers to burden suppliers with unmanageable or unquantifiable risk is another major issue. For example, demands for the right to terminate ‘for convenience’ and without compensation are increasingly on the table, as is the expectation that suppliers should bear the geopolitical risks associated with major projects. 

Clearly, demands such as these cannot be countenanced by ethical providers who a) want to honor their commitments and b) have a duty of care to their employees and shareholders. Acquiescing to contract terms that could put them out of business is not compatible with good governance. In many cases, buyers back down because they recognize that their demands are not viable. Sometimes they – and their advisers – were simply pushing for an extreme, to see what they could get.

But I think there is a more interesting question here and that is ‘to what extent is unreasonableness the driver of innovation?’

Innovation depends on dissatisfaction with the status quo, a belief that things could be improved. If buyers never set aspirational targets, the incentive for suppliers to raise their game would reduce. So is ‘unreasonableness’ actually a critical element in our progress towards delivering continuous improvement?

To take a brief example, constant demand for reduced prices is on one level unreasonable. Yet it also forces a response from suppliers who wish to stay in business. That response is typically achieved by cutting their costs; sometimes it is via adding value; and on other occasions it could be through commercial innovations, such as ‘as-a-service’ contracting. There is always the risk that lower prices are achieved through unethical or undesirable practices, such as child labor or unsafe working conditions, but overall they have enabled many lives to improve and provided access to previously unaffordable goods and services.

Overall, there can be little doubt that ‘unreasonableness’ is the mother of invention. Many of the risks that suppliers typically accept today would have been unthinkable in the past. So perhaps we need to stop viewing risk as something that is negative and see it only in the context of an opportunity to do things better.

Collaboration is good – but it must be planned


In recent years, there has been a steady push for increased collaboration. Businesses encourage it both wthin and between functions and with customers and suppliers. A survey by the Financial Times discovered that employers value graduates who have ‘the ability to work in a team, to work with a wide variety of people and to expand their network’. These were, in fact, the three top characteristics.

IACCM has certainly been among those at the forefront of promoting the benefits of collaboration, albeit that this should be undertaken with surrounding structure and discipline. The Association’s research has indicated that collaboration generates better results, especially in the provison of services or delivery of outcome and performance-based contracts. The quality of interactions, the degree of open communications and the level of trust are all impacted by collaborative behaviors. But are there limits?

The dangers of ‘groupthink’

An article in The Economist suggests the need for careful thought over the extent and nature of collaboration. While teamwork and joint working would seem to be fundamental attributes for collaborative working, too much of either may prove counter-productive. For example, it is essential that everyone has a common goal, but too much teamwork can result in ‘groupthink’ – an inability or unwillingness to ask tough questions or take an opposing view. Similarly, benefiting from the ‘wisdom of crowds’ depends on a level of independent thought and anonymity of input, since otherwise ‘participants are reluctant to look foolish by deviating from the majority view’.

Constant communication is another feature of today’s workplace, with email, conference and video calls ensuring that everyone can remain connected. This also needs caution. According to a recent research paper, the best outcomes are achieved when team members are kept informed of each other’s views ‘only intermittently’. (‘How intermittent breaks in interaction improve collective intelligence’ – Proceedings of the National Academy of Sciences 2018).

So to the extent that a purpose of collaboration is to generate ideas or innovation, it is beneficial to encourage individual thinking, supported by mechanisms where those ideas are evaluated and refined. In this context, it is the environment and governance methods that must be collaborative and welcoming. Other research supports this critical role of the environment in which people work: it highlights the importance of sensitivity to others, the exent to which there is equal participation in conversations and the proportion of women in the group (more, apparently, is better).

Leadership and direction

Finally, there is the need to recognize that decisions must be made and that ‘leadership’ is in this sense critical. Researchers at Columbia and Wharton Business Schools found that ‘co-creation’ is less effective than individual leadership and this has been borne out by the research into corporations that introduced co-CEOs. Ultimately, the absence of a clear leader appears to create confusion – and ultimately will lead to collaboration being undermined by frustration.

In conclusion, what this tells us is that simple appeals for collaboration are unlikely to prove effective. Organizations must provide an appropriate management and measurement system that creates a framework and incentives for collaborative working. Shared service centers and relational contracting models are two leading examples of the changes that are needed from a management perspective. The question of the right measurements is more difficult to answer, but it is clear that current functional performance indicators need to change because they tend to driver adversarial behaviors that undermine cooperation. Contention is good, but it must be creative.

 

What do law grads do when they grow up?


According to a recent report, almost 14% of the UK’s law graduates who move straight into employment are working as waiters or bar staff. That probably doesn’t reflect the aspirations they had when they started in law school, nor of course where their career will ultimately take them.

A study in the United States suggests that (contrary to common opinion) the overwhelming motivation for entering law school is not financial. The factors most frequently mentioned are oriented to aspects of public or government service, giving back to others and influencing social change. Access to high-paying jobs came in fifth place in the survey. Among other interesting findings, those in law school tend to come from higher socio-economic groups – perhaps necessary, given the high cost of becoming qualified – and family influence is the biggest single factor leading to enrolment.

So what do law graduates do?

Back in the UK, over 40% of law school graduates go on to further study (a requirement for those who want to continue into legal practice), but over 20% move into business roles where they don’t make direct use of their training. Interestingly, of those who are undertaking further study, 45% have enrolled on a Masters program, suggesting that they too may be heading for a business, rather than legal, career. Analysis of the IACCM membership supports the view that many law graduates do not necessarily choose to focus on a legal career; for example, nearly 50% of our members in the US are legally qualified, with over half of these not working as counsel.

As new technologies increasingly disrupt the way that roles are performed, many expect the legal profession to be affected more than most. Artificial intelligence, data analytics and the emergence of contract standards will change the nature of legal work. Law schools are in many cases struggling to adjust their programs to equip graduates with the skillls and knowledge needed for the future, yet this is not having the dramatic effect on employment prospects that many were expecting. Indeed, if the content of legal programs starts to adjust to business needs, possessors of a law degree have every chance of being seen as among the most attractive recruits.

 

 

 

 

 

Contract management: the case for digitization


In a recent blog, I highlighted the importance of a proactive approach to contract and commercial digitization. Many still hesitate – they want to know what benefits it will bring, they say they can’t obtain funding, they even ask ‘what is digitization?’. So I promised a series of case studies and this is the second of them. The core message: if you hesitate, you will have been left behind.

Case study #2: Contract Digitization 

This project, undertaken by the legal and contracts team in a $25bn services corporation, gathered over 10,000 contracts from North America and Europe. It undertook a process of digitization covering agreements in multiple languages. This initiation activity took several months to complete, but once consolidated into a central repository, immediate benefits started to flow. These were not only in the management of each existing agreement, but also in the creation of new contracts.

A combination of digitization, automation and enhanced reporting capabilities generated a wide range of business improvements. The global contracting process was truly harmonized for the first time and many previously manual activities were eliminated, leading to cycle time reductions that are on average greater than 25% (for example, typically representing a 4.5 week improvement in time to signature). The freeing up of commercial resource, together with the alerts generated from within a single repository, has created a much closer and more strategic relationship with other functions – for example, working with Sales and account management on improved planning and management of renewals and opportunities for consolidation and – most important – regular reporting to executives on key business and commercial indicators and trends. These reports are starting to impact much wider business decisions and are being seen as critical sources of management information.

The benefits of analysis

Until organizations actually have an ability to undertake large scale analysis, they typically do not appreciate all the valuable insights they can gain. For example, at a customer level it is now possible to start observing the variations across contracts and to propose ways that they might be harmonized or optimized. Within industries, sectors or jurisdictions, patterns can be sought, enabling better anticipation of issues and term and condition requirements, resulting in far less need for negotiations. Similarly, comparisons across market sectors or geographies, or across service types, offer insight to levels of risk or comparative margins. Business information at this level rapidly shifts the role of contracting from being an artisan skill, based on experience and opinion, to the status of a fact-based science.

Nice to have or must have?

The benefits above will appeal to many, but the skeptics may suggest the benefits are too nebulous, that other projects should take priority. So for those who don’t think it’s important to invest in the quality of customer and market relationships, there is also hard data.

Through contract intelligence, this organization generated more than $18m of financial gains in the first 6 months of operation of the new system. Not counting the benefits of shorter cycle time or workload reduction (which largely impacted the use of contract labor), the digital initiative has been especially effective in areas such as obligation management, avoidance of scoping issues, reduction in liquidated damages, service credits and ‘goodwill’ write-offs. It has also supported identification of contract growth opportunities and capture of earn-backs or gain share. Finally, the flow-through is also being seen in procurement and sub-contracting, through greater control of business unit spend decisions.

It is early days and still the long term implications are being discovered. A recent example is the extent to which there is now greater standardization of contract drafting, plus a new initiative to simplify contract design, to support greater ease of use and understanding.

The decision remains optional

In IACCM’s current benchmark survey, more than 60% of participants highlight that automation initiatives are now a priority. For some, this is a new direction; for others, it is enhancing or replacing what they have. But many, while recognizing a need, will still struggle to gain buy-in, or find themselves on a long and tortuous journey to identifying a solution. These case studies should act as an inspiration – and if that’s not enough, contact IACCM for help! Keeping pace with the digital age truly isn’t optional; it’s a matter of survival.

 

Can there be trust without transparency?


There is a growing movement for transparency in contracting. Organizations such as the Center for Global Development and the Open Government Partnership are at the forefront. IACCM is a contributor and strong supporter of this work since it is fundamental to our mission of ‘improving the quality and integrity of trading relationships’.

The focus at this point is on public sector contracting with the initial intent to reduce potential for corruption and dishonest dealing. More ambitiously, there is talk of creating greater visibility into value, though this would surely demand having insight to much more than just the contract.

Backroom deals and exclusionary practices

However, the real point is whether there can be public trust and confidence without an ability for scrutiny. An article in The Wall Street Journal (9/24/18) exposes precisely this issue. It highlights “dozens of contracts” where “Dominant hospital systems use an array of secret contract terms to protect their turf and block efforts to curb health-care costs.” This is wrong and, according to the article and my informal conversations within the industry, it goes a long way to confirming why health care costs in the United States are so much higher than elsewhere (President Trump, please take note).

A universal problem

This problem isn’t unique to the US, because at heart it comes down to the underlying morality of the health sector and attitudes towards justifiable levels of profit in an area of human need and suffering. In the UK just last week, Novartis was loud in its protests because it lost a challenge when the government approved use of a much cheaper alternative to one of its flagship products, representing health care savings of £500 million a year. This money will now be diverted to other health provisioning.

The need for debate

These examples highlight a pressing need for transparency and informed debate in all areas of major public interest. Healthcare is surely high among them,  as an area of universal social need, where the scale of expenditure means that opportunities and incentives for corruption and abuse are rife. These concerns apply whether the public health system is largely provided by Government or by the private sector. Opaque pricing and back room deals surely have no place in a field of such fundamental human interest.

i appreciate the need for the health sector to generate profits that fund research. I also recognize the pressing need to revamp the costly regulatory and distribution process through the use of new technology. Vested interests abound, yet health more than anything should surely be an area where there is no debate about the need for integrity. Even those who run the system are not immune to sickness and disease. Society as a whole should be united in tackling unprincipled motivations for commercial gain, ensuring that transparency provides a basis for honest dealings and trust.

The use (and abuse) of commercial structures


Read more…

Contract Management: Is it worth investment?


Although senior managers understand that contracts are important, most do not grasp the challenges – or potential contribution – that are associated with contract management. On the surface, it seems such an obvious and straight-forward activity – and therefore struggles to gain investment.

This is the first in a series of case studies on the value of contract management. It focuses on a relatively simple example of contract lifecycle automation and features a software and services company with global operations and annual sales of approximately $2bn.

A successful deployment

The contracts team in this case reports into the legal function and the automation project was sponsored by the General Counsel. “Our deployment of contract management technology means that for the first time we have a shared, centralized and real-time version of truth regarding our commercial relationships. Contract data that once took hours or days to find and assess, or even proved impossible to locate, is immediately available. Through this investment, we have far greater insight and information about our relationships with customers and it is available on-demand not only to my team, but also across finance, operations and sales teams. Because they value this benefit – and now understand what they have been missing in the past – they also recognize the importance of accurate, timely data inputs on new or amended agreements, so we have motivated system users and contributors. For our customers, this means we are able to operate with more accurate information, faster response times and much more intelligent support.”

Was there a business case?

In common with many similar initiatives, producing a fully evaluated business case was not feasible. “We had a largely manual process. There wasn’t an underlying system from which we could extract data. Even something as basic as lead times wasn’t easy to establish. We just knew that the process was slower and less efficient than it could be. We also knew that the worktime of experienced, highly paid staff was often absorbed in finding documents or gathering information that should have been available with the click of a button. Also, extensive efforts were going into fixing issues and problems that really were avoidable – better information, automated alerts would save time, avoid issues and generate better revenues.”

“But in the end, the business case was in large part common sense. We really couldn’t make an accurate prediction of the return on investment because of the absence of data.”

So what are the benefits?

“Perhaps the biggest benefit has been the scale of understanding across the organization that contracts and their management really matters! Suddenly we have data that is making its way into management reports. We have people coming to us seeking data to inform their decisions. The legal and contracts group has taken on a new level of value.”

“Equipped with consolidated data, we are much better at understanding and analyzing customer relationships – for example, multiple agreemens with one customer, or ven searching across customer groups, or industries or geographies. We can recognize differences, compare performance, see areas of risk. Then, when it comes to performance, our work has become far more accurate and proactive; we no longer risk missing renewals, or ‘accidentally’ continuing to operate under an expired agreement. Our renegotiations are planned and they are appropriate the customer’s situation, performance, industry norms. And of course, the increase in efficiency has meant that our professionals are able to focus time elsewhere – all those things they wanted to do, but never had time. That includes things like earlier engagement with the account teams, more involvement in shaping customer relationships, more time undertaking market research and benchmarks (we are in a sector where terms and conditions are in a real state of flux). As a result, we are far more visible and far more included in key discussions. Our technology has not only added value in its own right, it has enabled my function to become a new and vibrant source of added value to the business.”