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Commercial Excellence: The World Awakens


Is your organization on the path to commercial excellence? McKinsey, the global strategic consultants, are just the latest to grasp the critical role that commercial competence plays in delivering performance and growth. In a recent article, they observe that leading organizations ‘are now using superior execution rather than better offerings to outperform incumbents and drive growth’.

Commercial innovation is scarcely a new concept (and it has lain at the heart of IACCM’s work for the last 20 years), but it has been relatively unfashionable as an area of business focus. The era of globalization drove different priorities – cost cutting, standardization, efficiency and compliance. But these focus areas resulted in operational improvements and often ignored market and competitive effectiveness.

The need for challenge

A range of new forces – not least emerging technologies – are creating new possibilities and demands. Business models are shifting – for example, towards the delivery of outcomes, as-a-service offerings – and these require different internal capabilities as well as altered relationships with customers and suppliers. Having reduced (or in some cases eliminated) commercial resources, many organizations are now struggling to respond. They have become good at folllowing rules, less good at challenging or changing them.

McKinsey suggests that top performers – ‘those with superior commercial capabilities’ – consistently deliver revenue growth about 1.9 points higher and earnings growth about 4.7 points higher than peers in the same sector. They also extoll the virtue of benchmarking and its importance in driving continuous improvement.

Support for the new direcction

It is gratifying to have this endorsement of the work that IACCM undertakes with its members worldwide, providing not only regular comparative reesearch, but also undertaking capability assessments for many of the world’s biggest organizations. Our soon-to-be published 2018 benchmark report contains data from 742 companies. In addition, we have recently completed a detailed study of ten major public sector jurisdictions, comparing them also with private sector leaders.

It is exciting to find the world re-awakening to the role and importance of commercial capability. For those who have developed expertise in this area, the future indeed looks bright.

To learn more about IACCM’s research and the IACCM commercial capability assessment, visit www.iaccm.com

Procurement and the battle for recognition


Marketing versus Procurement, Sales versus Procurement, the business versus Procurement … If you pay attention to the headlines coming from many Procurement trade bodies and associations, you would think that every day for the average Procurement Department is a battle.

Adding to this atmosphere of trench warfare, another favoured theme is the sense of ‘not being recognized’, which leads to the regular discussion of Procurement achieving power through ‘reaching the top table’.

Might these issues of power and warfare be because too many Procurement groups are confused and struggling to deliver true measurable  value? And is that problem in part due to the training and direction they are being provided? For example,  in many cases Procurement teams are still being told that the epitome of success is ‘savings’ and that negotiation is about compliance. Now, one leading Association that regularly applauds its members for achieving savings suggests that those who think this way are ‘dinosaurs’. Then there is training. Works like ‘The Art of War’ have been recommended reading for years- so what are the new sources of wisdom that support a more integrated and collaborative approach?

I find it disconcerting when any functional group sees itself being ‘in conflict’ with its external contacts, whether those contacts are in other business functions or in other organizations. How can this possibly prove productive? How can it ever lead to the value and innovation that business and government agencies seek from their supply relationships?

Procurement groups will always operate with measurements that differ from those in other groups. For example, Marketing is focused on brand image and generating new business, while Procurement is tasked with ensuring value for money. Differences such as these are designed to cause contention, but contention does not mean that there should be conflict. Indeed, in mature organizations it leads to constructive and creative dialogue which results in a balanced decision.

A growing number of Procurement groups are successfully expanding their role, vision and influence. They see suppliers as partners and the foundation for their success. Many of these have recognized the value they gain from being members of IACCM and part of an inclusive community that encourages collaboration, new thinking and objective analysis. They embrace the opportunities for constructive dialogue across business boundaries and functions, welcoming the opportunity to take increased responsibility for supply outcomes.

Does this mean you can always trust suppliers or other functional groups to do the right thing? Certainly not – and that’s why it’s important to maintain oversight. But there is a big difference between oversight and warfare. And there is also a big difference between achieving positive business outcomes and winning short-term victories through the use of power.

Does your business need ‘pre-mortems’?


A recent item on LinkedIn introduced the concept of a “pre-mortem” in decision-making. It suggested the need to explore the impact of an idea in advance – “one set of thinking is to explore if the project is a complete success, the other to explore the impact if the change made is a total failure. Imagine if Volkswagen had done a “pre-mortem” on their “cheat device” engineering? If Facebook had explored failure scenarios with sharing data with third party apps? If Wells Fargo had examined the operational impact of bonuses for new accounts? What if the moon mission in the 1960s had explored failure? Oh wait…they did. In fact, NASA is probably one of the more principled decision making bodies to examine countless “failure scenarios” and adjusting processes to reduce probability of negative events.”

As the examples cited above illustrate, organizations certainly should undertake thorough risk analysis. So what is stopping them?

Among the interesting points to consider are:

1) why is it that NASA has been so successful?

2) why is it that commercial staff are often not invited to contribute to key business decisions?

In the case of NASA, it’s important to note that the risks being assessed and managed are predominantly technical in nature. In fact, most organizations seem relatively good at technical risk assessment. IACCM research – and examples such as Wells Fargo, Carillion, Volkswagen and Facebook – indicate that failure to adequately evaluate commercial risks is more frequently the cause of major failures.

So does this suggest that commercial experts are incompetent, or is it that they simply aren’t included in the decision-making process? The answer is probably a mix of both. First, it is certainly the case that many executives consider themselves ‘commercial experts’ and therefore don’t always grasp the need for ‘commercial challenge’, whereas they would rarely undertake major programs without expert technical advice. But there are also issues of competence among commercial staff. Far too many commercial teams are much better at problem identification than they are at problem solving. This indicates a frequent failure to grasp the executive psyche, which by nature is optimistic and welcomes creative solutions, not obstacles. (And in this spirit, I suggest the term ‘pre-mortem’ may not be the most compelling!)

So if you are a commercial executive whose advice is not being sought on a timely basis, look first not at the fault of others, but rather at what you need to be doing differently.

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.