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Cutting Legal Costs


Workload for the average law department has grown, but this has not made them immune to pressure for improved cost control and reduction. Achieving this can be challenging, especially since spend management discipline is not an innate competency within these departments.

To succeed, in-house legal must undertake greater analysis of current expenditure, as well as finding alternative delivery methods. A new study by IACCM indicates that most cost reduction efforts have focused on spend with outside-counsel – understandably since this is the largest area of expenditure, but with the risk that such a focus misses wider opportunities for innovation.

To date, alternative delivery methods such as increased automation or use of low cost providers have been limited – and surely must be set to increase. Indeed, recent research shows that more than 70% of large in-house legal groups anticipate the introduction of new technology[1] – but few seem clear on what that technology will be or what purpose it will serve.

Even though there is such a strong focus on cost reduction, the relationship between Legal and Procurement functions remains at best tenuous and those legal groups that do engage Procurement report mixed results. The main exceptions appear to be when the Procurement resources are embedded within Legal; this closer alignment generates increased trust and shared objectives.

Based on this and other research, IACCM offers two observations:

  • The major impact of new technology is likely to come from investments outside the Legal function. One will be through broader business initiatives such as RPA (robotic process automation) and blockchain, where lawyers will become more integrated participants in overall business processes and data flows. The other will be through external providers offering technology-enabled services (systems using artificial intelligence, natural language processing) such as litigation support, M&A analytics, contract standards and benchmarks and ‘big data’ analysis.
  • Legal departments are conflating increased value with lower costs. While cost reduction is important, it is not in itself a source of business value. To date, many in-house legal groups have not adequately examined their role and contribution in the context of the strategic goals of the business. As a result, they will struggle to demonstrate ‘value-add’ in a wider business context and to show a meaningful return-on-investment (ROI). Without such data, the pressure on cost reduction will continue.

[1] Source: HBR Consulting June 2018

This blog is extracted from an IACCM survey report, ‘Legal Department Spend & Resource Management’, to be published in July 2018.

From CPO to CEO: a realistic aspiration?


CEOs of major corporations come from diverse backgrounds – but not from the ranks of Chief Procurement Officers. In a recent blog on the State of Flux website, Alan Day suggests that this might change. He comments:

“Procurement is a great function to gain a breadth of business experience. We get to meet lots of supplier CEOs and talk with them about the strategic alignment of our businesses and how we might work together. We get to understand how the organizations works operationally, we network at a senior level, run large teams and look after big budgets.”

The big weakness, according to Alan, is a lack of Sales experience and consequently ‘closing skills’. To remedy this, he proposes that CPOs should develop expertise in sales by learning account management in the context of Supplier Relationship Management, a discipline that he suggest is akin to the account management role within Sales.

What the research tells us

Unsurprisingly, there is extensive research into the topic of CEO skills and background. Management consultant McKinsey is among those highlighting the critical importance of operational experience – for example running a large division, or a period as Chief Operating Officer. While studies show that a substantial majority of CEOs are appointed from within the organization, only some 15% come from a functional leadership role (most commonly Finance, occasionally Legal) – and in many cases that is because the functional experience has specific relevance to a critical business challenge. In their report, McKinsey observes that most of those functional executives only make the step up because they have had broader experience and exposure, since ‘lack of breadth’ is otherwise the biggest inhibitor.

To gain a view from the front line, I turned to Richard Sterling, a seasoned executive search consultant at AltoPartners with experience at placing CEOs, as well as appointments for heads of function including Procurement and Commercial Management. Richard acknowledged that the CPO role has the potential to carry greater status, but does that really translate to a potential path to the CEO position? Here is what he said:

“To assert that Sales is the singular missing ingredient as to why more CPOs are not becoming CEOs is at best extreme reductionist thinking.  To further assert that developing account management skills within the context of Supplier Relationship Management is equivalent to a sales-focused Account Management position is to not fully comprehend the difference between sales (identifying and creating opportunities, building the relationship, potentially forming alliances, closing the deal)  and the more general activities of account management (working with existing clients, nurturing relationships, growing the account, being the client’s every point of contact on all matters). Even where it exists, SRM rarely has an equivalent level of status or accountability to the account management and account executie roles.

CEOs rise to their position from varied backgrounds although finance, legal and operational streams are most common.  This does not mean that a CPO cannot rise to being a CEO; however,  it needs to be understood that there is a great deal more to being a CEO than the State of Flux blog puts forward – and there is little chance of anyone moving direct from CPO to CEO.

The aspiring CPO needs to develop a range of personal attributes and relationships which may run counter to being a high performing CPO. By way of example, let’s look at decision making: Today’s CEOs need to make quicker decisions using the best information available, buttressed by a broad range of internal and external relationships.  High performing CEOs are comfortable with this approach. They trust their intuition, which has been fine-tuned over the years.

CPOs, however, tend to be – by profession, education and experience – analytical and risk averse, wanting as much information as possible and spending time getting that information, then more time validating the information before making a decision. They are generally driven by a relatively narrow set of performance measurements which, unlike their colleagues in Sales, are open to challenge (for example, are ‘savings’ actually achieved?) In the face of today’s rapid and highly competitive environment that approach is not sustainable.

Finally, the aspiring CPO needs to become very calculated about their career. This means that the aspirant will need much more than just having exposure to other business functions or their peers in other companies.  There is no substitute for having real experience and board-level accountability. This is what the aspirant will need to acquire either through a series of significant projects in which ability and performance outside procurement can be demonstrated, or perhaps by progressing to a role such as chief operating officer. Chief Operating Officers are one of the more commonly considered routes to the role of CEO. ”

In conclusion

So is the transition from CPO to CEO impossible? Clearly not, but as a direct route it is highly unlikely. While in some cases a career path might include a period as CPO (and there are some good arguments in favour of this), it is clearly not normal. Right now, many of those in Procurement who truly want to progress to CEO positions recognize the best route is to leave the Corporate world – and start a business of their own!

 

Contract automation: what system to choose?


The momentum for automation is unstoppable and the contracting lifecycle will inevitably be caught up in this wave. Many are aware of the need to push forward with a contract lifecycle management (CLM) system – but they face a variety of challenges.

What is the contract lifecycle?

Very few organizations handle contracting as an integrated process. Virtually none have a ‘process owner’, responsible for overseeing the integrity of the lifecycle. This lack of definition and lack of ownership continue to make technology selection and implementation problematic. They have contributed to multiple failed implementations which have led many to question the value or applicability of automation – a view that contracting is just too complicated for technology.

Many organizations have also struggled to define required functionality or to appreciate user needs. This is reflected in low adoption rates and poor levels of integration with other systems.

Are the vendors at fault?

It is easy to blame the vendor community – and with more than 200 suppliers of CLM systems, the market is extremely volatile and confusing (especially if you aren’t sure what you want from the application). Because virtually all the suppliers are relatively small businesses, there has been a tendency for the customer to drive requirements, rather than the market guiding the buyer. This has resulted in systems trying to adapt to poorly defined processes. It has also led to systems with a plethora of functionality, which often increases complexity for users.

So where next?

With this background of past failure, poorly defined process, confusion over functionality and a plethora of choice, it is not surprising that buyers are hesitant to commit. The fact that most analysts and consultants do not understand contracting means that it is difficult to gain objective advice. This led IACCM to decide that it needed to step into the gap and support organizations in their automation efforts. In partnership with Capgemini, IACCM spent 8 months reviewing the market, surveying and interviewing suppliers, and conducting demonstrations to validate capabilities. This has resulted in three major steps:

  1. an authoritative definition of the contrqact management liifecycle
  2. an automation guide explaining overall background and categorizing functionality
  3. an on-line tool to support supplier analysis and selection

IACCM remains entirely objective in the advice it provides; there is no funding by the vendor community. The report and tool are also open access and will continue to be updated to reflect shifts in the market or in specific supplier offerings.

Later this week, IACCM will run a webinar setting out these developments and how to use the various materials we have developed. You may wish to join us – register at https://www.iaccm.com/events/register/?id=3149

 

Commercial Update: 3 major questions for commercial teams


In this edition:

  • Keeping pace with change – 3 major questions for commercial teams.
  • AI is struggling to make inroads within corporate legal departments.
  • Is outsourcing in trouble?
  • California introduces its own GDPR.

Keeping pace with change – 3 major questions for commercial teams. McKinsey, the management consultants, highlight three core challenges:

  • Digital globalization: data and information now generate greater economic value than the global trade in goods. This creates two big questions for commercial teams – are we generating and using this new global currency of data and information; and do we have the commercial models and contractual vehicles to develop and sustain the right external relationships?
  • Automation: machines will steadily replace some jobs, augment others and make new ones possible. The impact on commercial roles – contract management, legal, procurement – will be massive. Are we planning for that future or will we let it overwhelm us?
  • Skill shift: McKinsey – and others – highlight the growing importance of technological, social and emotional skills. Examples are in areas such as relationship management, influencing, empathy and behavioral analysis. These are not currently critical attributes for the commercial community – so what steps are we taking to acquire them?

AI is struggling to make inroads within corporate legal departments. According to an HBR Consulting survey, just 6% have or are piloting AI tools – and many of those are in fact business tools to which Legal contributes. IACCM research suggests that the impact of AI on Legal is in fact more likely to come from outside the function, either through new enterprise applications or through external service providers.

Is outsourcing in trouble? The Economist (June 28th) quotes Serco CEO Rupert Soames who recently depicted the world of outsourcing as being a mix of ‘the good, the dumb and the desperate’. While there is no question that outsourcing drove major cost reductions and efficiency improvements in the past, those benefits may be drying up. In the public sector especially, questions are growing over future outsourcing. Public procurement policies that constrain supplier selection criteria and limit post-award innovation and change are driving a culture of low cost, with inevitable impact on quality and supplier integrity. The big question: is private sector experience actually very different; will we see an erosion of outsourcing, or does its future simply depend on developing improved commercial models and terms?

California introduces its own GDPR. Effective January 1st, 2020 the state of California will introduce its own version of GDPR, drawing on many of the same principles as the legislation introduced by the European Union in May this year. The new law aims to protect the privacy of consumers and has met with mixed reactions from industry. Already some – for example Microsoft – have indicated that they plan global compliance with GDPR. Others are more resistant – for example, just last week, Facebook moved 1.5 billion records from its European headquarters in Dublin.

The perverse effect of contracts


The choice of contracts – and particular terms and conditions – is often driven by habit, rather than any form of scientific thinking. That’s in part due to a lack of data, but ultimately responsibility for fixing the problem lies with those who create the contracts. Their failure to examine the impact of the agreements they develop means that the world of contracting is often rather like mediaeval medicine – either ineffective or, at worst case, far more likely to kill than to cure.

Growing sophistication in data collection and analysis is steadily revealing the nature and scale of damage done by poor contracting practices. One current example is the debate over the use of non-compete agreements. These have become pervasive and in many cases grossly unfair, seeking to prevent even low paid workers from moving to a competitive business.

The price of non-competes

There are of course circumstances where an employer genuinely needs to protect valuable know-how or intellectual property. But non-competes are a great example of applying contracts without thought for their social and economic impact – or even perhaps the interests of the employer. Inevitably, they limit worker mobility, which (research suggests) holds down wages. On the positive side for workers, studies undertaken in the US show that employers in states that allow non-compete agreements tend to spend more on staff training. However, by constraining mobility, those states lose out on innovation and the rate of new business start-ups – surely a big price to pay in today’s competitive markets and certainly not good for longer-term employment or profitability.

Non-compete agreements provide just one example of the way that contracts affect behavior, often with significant economic impact. From other research, we know that approaches to risk transfer, the management of intellectual property, the rigidity of terms and the use of inappropriate templates are among the many instances where there is a disconnect between the contract and a desirable outcome.

A better way

In many fields of human activity, there is extensive research and testing before new ideas or methods are let loose onto the public. Not so with contracts. Even though contracts are fundamental to human welfare, anyone can introduce new terms almost regardless of their social impact. While the law provides a framework that prevents major abuse, it does not examine broader questions of ethical or economic desirability – those areas rest with policy makers and, when it comes to contracts, their involvement is largely reactive.

Contracts and commercial terms are themselves a source of innovation and competitive edge. The idea that they could be subject to a regulatory regime is both unrealistic and undesirable. However, those who design and introduce them should certainly be responsible and accountable for the results that they generate and top management should be far more engaged in their review. This demands a much broader appreciation of the impact of contracts and greater professional discipline for those who produce them.

 

The BIG question for Procurement


More and more is written about the future of Procurement and the shift that is required in its approach. Collaborative, value-focused,  approachable – there is extensive commentary on the changes in behavior and attitude that are needed to engender trust and thereby raise functional status.

These observations are not new (I can recall similar discussions regarding value and status going back more than 20 years). Emerging technologies certainly make them more urgent, since a high proportion of procurement jobs are under threat. So the big question: why isn’t Procurement changing?

It’s easy – and tempting – to use excuses. Among the most common are the impact of the internal measurements (negotiated savings and compliance) imposed from above, or the untrustworthy behavior of suppliers which prevents collaboration. But the truth is that these issues won’t go away unless procurement personnel make them go away. They have power over their own destiny.

We will squeeze them until the pips squeak

Behaviors are embedded. It takes leadership and determination to make them change. I’m told that much Procurement training still perpetuates the adversarial, them-and-us attitudes that undermine a shift in status. Often, those who should be setting an example fail to do so. For example, at a recent meeting, a leading advocate of collaborative working felt the need to explain that ‘Collaboration doesn’t mean weakness – we’ll squeeze suppliers until the pips squeak’.

And suppliers confirm that, in general, Procurement attitudes aren’t changing. There’s lots of talk about value, about delivering outcomes and working together, but for many the reality is a process-driven approach with little evidence of shared responsibility for performance.

Beacons of hope

There are beacons of hope. Tesco, a large UK retailer, has recently been cited for its progress in shifting from a highly adversarial approach to one of increased fairness and respect for its suppliers. General Motors is another example where supplier ratings have improved dramatically in recent times, reflecting a move away from its power-based approach towards the supply base. In Australia, CASG (the procurement arm of the Department of Defence) is a true leader in developing its contracting and relationship management expertise and Jemena, a power utility, is also at the forefront of change.

We see an increasing number of individuals and groups that are opening their minds to different training and certification providers, recognizing the need to break from ‘old school’ thinking. At IACCM, we continue to experience growth in the number who realise not only that suppliers are not the enemy (there is actually interdependence), but also that shared learning, shared methods, shared terminology offer the best route to mutual understanding and respect. These groups also appreciate the critical importance of gaining broader commercial skills, rather than an exclusive focus on procurement and logistics.

It is perhaps the issue of respect that is key to change. By working together, customers and suppliers can achieve great things. To flourish, Procurement personnel must become the instigators of change. It’s a choice –  and truly does represent the BIG question.

IACCM will be running a series of programs on the BIG question, Procurement and change. Watch out for webinars where we will feature those who are successfully transforming and this will culminate in  workshops and discussions at the IACCM Americas conference, ‘Collaborating Across Boundaries’, in October. (visit http://www.iaccm.com/Americas)

 

 

 

Most negotiated terms 2018


If the reason for negotiation is to reach an agreement that delivers mutual benefit, it is quite clear that many of today’s business-to-business negotiations fail to achieve their purpose.

IACCM has released this year’s report of the most negotiated terms, providing insight from more than 2,100 organizations. Participants confirm the steady shift of business towards services, reflected in substantial growth of outcome, performance and solutions contracts.

This movement is evident in the terms that negotiators consider most important:

  1. Scope and Goals / Specification
  2. Responsibilities of the parties
  3. Price / Charge / Price Changes
  4. Delivery / Acceptance
  5. Service Levels
  6. Performance / Guarantees / Undertakings
  7. Limitation of Liability
  8. Payment
  9. Data Protection / Security / Cybersecurity
  10. Change Management

However, this understanding of importance does not translate to a shift in the terms that are most negotiated, which remain dominated by issues around risk allocation and the consequence of failure. Limits of liability, Indemnities, Termination and Warranties occupy four of the top six positions.

There is some diversity in the most negotiated topics based on legal system and industry – for example, battles over risk transfer are noticeably greater in Common Law jurisdictions, whereas countries operating under Islamic Law tend to be far more focused on financial issues and Civil Law regimes appear more concerned about clarity of responsibilities and intent. The research therefore illustrates the importance of negotiators understanding the issues that drive particular industries or cultures and taking these into account as they draft and negotiate agreements.

Is there room for optimism?

The results do not point to any dramatic shift in the traditional priorities for negotiators and indicate that many interactions remain power-based, rather than seekiing mutual benefit. Participants continue to see ‘the other side’ as the main obstacle to change and show limited signs of seeking to alter the conversation.

However, IACCM knows from its work with members that change is happening. New technologies are a major (though not the only) factor in enabling a different approach, streamlining dataflows, supporting analytics and simplifying communication. Automation has the benefit of lacking emotion and takes issues of trust and tradition out of the equation. There is a growing divide between those organizations which are making technology investments and those that are not. Quite simply, without automation, a supplier becomes difficult to do business with.

In this year’s report, IACCM highlights four steps that organizations should take to shift the negotiation agenda and enable focus on value and benefits. These are:

  1. Focus negotiations on the terms that are costing money. Supporting this direction, the report publishes a list of the terms most commonly associated with a claim or dispute and suggests this data can be used to support a change of focus.
  2. Ensure use of the right agreement by implementing ‘decision trees’. Remarkably, work with IACCM members has shown that far too many agreements are based on an inappropriate contract template, which not only delays the process, but also represents a source of risk.
  3. Reduce repetitive negotiation by adopting the IACCM Principles. These Principles, which are freely available, have been developed by lawyers representing a group of leading international corporations with the specific purpose of enabling less time on the terms linked to failure and more on those which would support success.
  4. Improve implementation and understanding by automating extraction and dissemination of terms. More and more organizations are grasping the importance of structuring and drafting agreements as communication tools, whether or not this is accompanied by automation.

Perhaps the most important message is that change is starting to happen; the agenda is shifting and the pace shows clear signs of acceleratiing. So the key message is: Stop listenting to people who say that change isn’t possible – don’t get left behind.

This year’s report on the Most Negotiated Terms can be accessed on the IACCM website