Skip to content

The pernicious effect of compliance


These days, organizations invest heavily in compliance. It’s important, but done the wrong way can have disastrous results.

Compliance is a big deal, especially for many of those who work in commercial roles. Ensuring and monitoring adherence to rules and standards is a major part of their job and they perceive it to be of tremendous value.

Can others be trusted?

It is easy for this focus on protecting business interests to turn into a belief that others, even within our own organization, are less concerned or diligent. We have all heard the stories about those mavericks in Sales or the program managers who agree changes without proper approvals. Over time, it is common for skepticism to turn to mistrust – an assumption that our colleagues will behave irresponsibly unless they are carefully controlled and monitored.

An example of this mentality is frequently evident in the handling of contracts, where changes of any sort are subject to onerous review and approval. Ultimately, this may send the message ‘Not only don’t we trust you, but we don’t even think you are competent’.

Enable or control?

A recent article in Strategy+Business highlights the negative effect of such a message. It undermines collaboration; it is demotivating; it stifles new ideas and transparency. The best organizations are those that care about compliance, but assume their employees can be trusted and make every effort to equip them with the knowledge or tools that they need to be compliant. They also ensure strong feedback loops so that the rules and standards can be challenged, reviewed and updated.

So how do you approach compliance: are you a controller who assumes the worst in others, or an enabler who facilitates the right business decisions?

Where next globalization?


The coronavirus crisis is illustrating the stark interdependencies of the modern world. Businesses everywhere are having to confront delays, missing components and claims under force majeure.

Consumers will soon start to confront shortages, often in areas they might not expect. For example, shipping containers are now in short supply because they are stuck in China, and I am told this particularly impacts the containers used for refrigerated goods. Are food shortages on the horizon?

It’s about more than consumer goods

The spread of the virus shows that this is about much more than the availability of goods. It is also about the extent of interconnection between people. A single small sales conference in Singapore with delegates who then dispersed to dozens of countries; the multi-national passengers on cruise ships; the millions of students with places at overseas universities. All this goes to prove that when problems and catastrophes occur, they are increasingly global in their impact.

How will the world react?

It is of course possible that business and politicians will seek to repatriate areas of production, or at least reduce dependence on what they may see as ‘risky’ countries. This has a certain logic and many might argue that these problems are in part a consequence of the low-cost economy, in which both business and consumers have for too long turned a blind eye to labor conditions, health standards, environmental impact and political repression.

Shaping our future

But an alternative to localization is for us to awaken to the fact we are one world, that we are all in this together. We could, as a global society, reject those politicians who seek to divide us and who resist truly global standards.

The implications of either route are enormous. Those who suggest there is a simple solution are either ignorant or charlatans. I certainly don’t pretend that I have the answer because ultimately, this is about building consensus. If there is one good thing about the coronavirus, it is that it may be the catalyst that generates true and honest debate about our values. Whether or not we like it, the reality is that we occupy one planet and have developed to a point where we are no longer independent and self-contained nations. Modern technology gives us all a voice. It is time to use it, to insist on politicians who are truly accountable and to engage in shaping our future.

Commercial Management is an anti-profession


Let’s face it, professions are both good and bad. They create standards and promote integrity. But they also introduce restrictions and delays.

Professions have a long history and they exist in part to protect the public interest. However, professions were also formed to protect their own interests – to limit competition, to hoard know-how or expertise.

In the business world, professions have been supplemented by functions and specialisms. Each of them in turn brings the benefit of deep knowledge, and the challenge of protectionism. Research suggests that many of these specialisms will be replaced by automation and artificial intelligence systems. That research also points to the emergence of ‘the integrator’ – a role long espoused by IACCM and at the heart of its training programs.

Why does it matter?

A consequence of specialism is complexity. Business decisions mostly require multi-dimensional input. It becomes challenging to gather that input when it is scattered across multiple expert groups, each of which often has its own systems and data which only they can access or understand. And even when the input has been gathered, it must be reconciled – for example, how do the views of sales, legal, finance, engineering, supply chain etc. stack up against the business requirement or market need?

Recinciliation of stakeholder views and needs lies at the core of commercial management. It is the disciplined process through which a need or opportunity is evaluated. As such, it is an integrationist role, supporting decision-making on matters of policy and practice and in the context of individual projects or contracts.

But it doesn’t exist

It is true to say that this integrationist role is largely absent in many organizations. And that is why so many executives feel challenged by uncertainty and disruption. Modern business desperately needs the emergence of individuals who have the competence to orchestrate across specialisms and develop commercially viable solutions. They must be adaptive, risk aware, opportunity focused, committed to continuous personal development and focused on enabling others, rather than competing with them.

So if training is required, isn’t Commercial Management just another profession in the making? Perhaps; but I think of it more as a discipline because it is a field that welcomes entrants from many backgrounds and perspectives. It is a broad and inclusive community that embraces change and encourages new ideas. And this is what makes it a disruptive force, challenging the long-held beliefs and practices of established professions.

CEOs and CFOs don’t want more professions and specialists; they want people and systems who cut across and make sense of them.

 

 

Coronavirus and Force Majeure


At the time of the Global Financial Crisis, the Force Majeure clause briefly rose to second place in the annual study of the most negotiated terms. Those buyers and suppliers who had sufficient power to drive changes sought to reshape the clause in ways that would work to their advantage.

Now, the outbreak of the Coronavirus and its fast-emerging impact on world trade has once again elevated the importance of Force Majeure clauses and many are asking how it will impact obligations of contract performance.

Finding the contract

It is at times like this that many organizations wish that they had better control and insight into their contracts. In order to establish the likely impact of this health emergency, they firstly need to be able to find their contracts and secondly they need to analyze what they say. A fortunate few will have robust and searchable repositories and have also deployed the sort of AI or NLP tools that support rapid analysis and review of the relevant terms.

But beyond this, is the nature of the emergency now declared by the World Health Organization likely to qualify as a Force Majeure event? In order to qualify as a public health emergency, it must (i) be extraordinary; (ii) constitute a public health risk to other States through the international spread of disease; and (iii) potentially require a coordinated international response. These factors clearly indicate the seriousness of the event, but in themselves do not of course generate the basis for a claim of Force Majeure.

Determination of applicability will always depend on the specifics of the clause and how it is written. But there are other factors to be taken into account in any adjudication relating to the applicability of Force Majeure. Among the critical factors are likely to be industry custom, whether or not the event in question was unforeseeable, and whether adequate efforts have been made to mitigate the consequences.

Further considerations  

Thoughts on this topic do not simply end with the question of whether Force Majeure applies (and in many cases I suspect it will). There are also factors such as termination rights to be considered, This will most likely depend on the duration of the event – so right now, not something we can forecast.

There are also likely to be related terms to consider. For example, if Force Majeure applies, what consequence does it have on things such as an extension of time, or future obligations on supply, or possible recovery of additional costs. Also, are losses in any way recoverable under insurance?

Finally, what about a situation where there is no Force Majeure clause – does this mean an obligation to perform? the answer is not necessarily, because the concept of ‘frustration’ may apply.

 

Do Procurement practices cause dishonesty?


To survive, suppliers must win bids and make money. Customers appreciate this point – most of them are supply organizations themselves. But how much money should suppliers make and how should they make it? That’s where disagreements start to arise and where the potential for contention begins.

While modern procurement acknowledges the need for profit, it is the primary function charged with achieving cost reduction. It isn’t easy to find the right balance so, in competitive markets, it is tempting to base supplier selection on the lowest price. In order to make things even simpler, the methods behind strategic sourcing sought to limit the impact of long term relationships (where loyalty or friendships might influence decisions) and to deconstruct acquisitions into component parts so that they could be ‘commoditized’.

In principle, all of these steps made sense, especially in an era when global markets and constant innovation were creating a fast-changing competitive landscape. They allowed massive simplification and large-scale automation of procurement decisions. Many supply relationships became arm’s length and ‘success’ was measured on a combination of negotiated savings and compliance with bid and contract terms.

In other words, concepts of value, reliability and broader business judgment were largely eliminated by these new scientific and objective methods. And it is certainly the case that input prices in general fell.

But it’s all different now …

At this point, there are many who will say that the environment I describe is a thing of the past, that today Procurement has a renewed focus on performance and outcomes, a spirit of collaboration and relationship management. And I have no doubt that this is sometimes true, but I also know that many of those who believe in such change frequently find themselves swimming against the tide of traditional thinking and embedded systems.

i say this based on numerous factors, and will cite two of them;

  1. the experience of suppliers. I talk with suppliers every working day. In general, their experiences have not changed. Procurement decisions continue to be driven by the same measurements and procurement professionals are not open to exploring broader sources of value, or to examine the potentially negative impacts of rigid compliance.
  2. recent IACCM research (December 2019) shows that approximately 70% of negotiations today are virtual – the parties never meet. Even worse, a high proportion of those negotiations are undertaken through email – hardly conducive to deep and meaningful conversation, or examination of ideas or success criteria.

What is the impact?

In a previous blog, I highlighted the issue of supplier honesty – in particular the frequent disconnect between the claims made by Sales and Marketing and the limitations expressed in the contract. This is clearly contrary to society’s growing demand for openness and transparency and many of those commenting on my blog decried the continuing dishonesty of suppliers.

But several made the valid point that ‘As a supplier, if we are honest, we lose the bid’. And I have many examples where that is true. So those in sales contracting and commercial management who espouse honest dealings are quickly shut down by their experience in the market. Of course this does not excuse deliberate misrepresentation or lying. I am talking here about having open conversation about risks and uncertainties, factors that could derail the desired result or outcome. and which can be effectively addressed or avoided only if they are discussed up-front.

Cooperation, collaboration, honesty – none of these is a unilateral activity. It requires change by both (or all) parties. Since they are the ones who control the purse strings, it is Procurement who have the power to drive this change. Without it, we have to accept a lack of transparency and with it, a continuation of sub-optimal results and the loss of both economic and social value.

Contract redesign is great – but it needs conventions


Contract redesign is an exciting and massively beneficial movement. Digitization has enabled new thinking in both the form and the purpose of contracts. We have entered an era where trading relationships are not just proliferating, but also need to be adaptive to shifting values, volatile markets and constant innovation. To support these demanding conditions, contracts are assuming a new and dynamic role, facilitating understanding and performance – which means design for users and clarity of communication.

These are not the attributes associated with traditional contracts and their related documents which, with few exceptions, are designed by lawyers, for lawyers. In the background, obscure structures and terminology are justified by the overhanging threat of litigation and legal precedent. In reality, a tiny fraction of contracts are litigated and there is no evidence to support the contention that judges cannot cope with documents designed to provide clarity. Indeed, it is the very lack of clarity that contributes to disagreement and dispute.

Momentum for change is rapidly increasing as businesses and governments start to recognize the massive savings and performance improvements to be achieved through redesign of contracts as a driver for digital services.

User-design AND usability

However, in shifting to a new and different form, it is essential that we do not overlook the core purpose of contracts and their need to interface with not only people, but also systems. A contract is not a work of art and we run the risk that we replace the artisanal approach of legal drafting with an equally artisanal approach of innovative design. Contracts have a practical purpose in defining and driving performance and to do this in a practical, affordable way depends on data interoperability.

To give an example, emojis and pictorial representations certainly make contracts more user-friendly. But in the business world, if my use of emojis or pictures is not the same as yours, I have simply created confusion and probable misunderstanding. In this example, I have replaced standardized legal convention (which is at least understandable among those with legal training, even if obscure to others) with a non-conventional approach that is subject to misinterpretation by everyone. At an extreme, it is rather like everyone inventing their own language and then becoming frustrated because no one else can understand them!

The process of exchange

Contracts do not operate in isolation. They are one component in an exchange process and must assist in making exchanges more reliable. This means that there is a need for conventions and avoiding a situation where the exciting prospects of redesign become an artistic free-for-all. That is why IACCM has invested heavily in building a contract design library that is in large part free to access and which welcomes continued contribution of new ideas and proposed conventions. And it is also why technology firms are steadily adopting a set of standardized conventions within their software that will support the expression and performance of contracts.

I would like to acknowledge the contribution of Professor Oliver Goodenough, who identified the importance of developing ‘conventions’, rather than potentially more rigid ‘standards’.

Are you doing what your CEO needs?


Disruption. Apparently that is the number one issue facing CEOs. But what does it mean – both for them and for you?

The challenge for a business leader today goes far deeper than just the nature of competition, the speed of change or the need for agility. Those are symptoms of a much greater challenge of control – of having the time and the data to make good decisions.

So what has changed?

The Economist (Feb 8th, 2020) makes reference to this issue of disruption and provides an excellent outline of what it means in an article ‘Meet the new boss’. Encouragingly, the message it offers is essentially the same as that which IACCM has delivered to its members for several years – the need to adjust to intangibles (for example, services rather than products), to tackle fragmented data flows, to develop stronger and more collaborative inter-organizational relationships and to pay greater attention to social impact and alternative measures of value.

These are demanding changes, but they are precisely what high-performing commercial and contract management is about. Grasping the commercial impact of a shift from products to services; designing technology platforms that capture and disseminate commercial data without a need to replace existing application architecture; changing measurement systems and performance management to drive the right commercial behaviors; rethinking market relationships and selection criteria to demonstrate ethical standards and values.

Preventism has had its day

Last year, IACCM research showed that most contract and commercial practitioners see their role as ‘preventist’ – that is, preventing bad things from happening. While that’s important, it isn’t enough. And indeed, if we are not focused on the key issues highlighted above, we will rapidly become of marginal importance. Already, many in the commercial community complain that they aren’t sufficiently valued. It’s time to wake up and start focusing on the things that business leaders really care about. ‘Preventism’ is inevitably focused on the past, about not repeating mistakes or omissions. CEOs need people who equip them for today and the future, who focus on delivering success.

Recent IACCM research and tools supporting these changes include work on servitization, relational contracting and economics, uncertainty management, impacts of new technology and relationship resource planning (RRP). They are all focus topics at the 2020 IACCM conference series – see dates and details at www.iaccm.com/events