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Digitizing contracts


It’s 25 years since big corporations started to automate and streamline internal data flows and communications. Given the impact that these changes had, it doesn’t take a brilliant mind to recognize the scale of cost and inefficiency associated with today’s semi-automated external communications and the virtual absence of automatically shared data. Essentially, the success of an organization such as Amazon is in large part because it has automated commerce, stripping out cost and simplifying the  customer and supplier experience.

Streamlining performance between organizations 

At IACCM, we have designated these inter-organizational tie-ups ‘RRP’, or relationship resource planning. The concept is increasingly understood by technology developers and executive management, but progress is slow. The complexity of contracts is a major barrier; right now, they are defying efforts at digitization due to a lack of standards in content, structure and design.

It is more than 50 years since Thomas Watson, founder of IBM, observed:”Design must reflect the practical and aesthetic in business, but above all, good design must primarily serve people”. And that, of course, is where the vast majority of contracts fail. Not only are they unintelligible to large swathes of the population, they are also unprogrammable, which means we cannot readily extract and communicate the data within them.

But that too is changing fast. Not only is there growing pressure to ‘design for users’, but advanced systems are increasingly able to extract and disseminate the data from contracts. Such systems are starting to consolidate and distribute information about performance, providing dynamic reports about individual agreements, and also across multiple agreements.

A pre-requisite to survival

The momentum is increasing and the pace is sure to accelerate because automated commerce will soon be a prerequisite to survival. Managing contracts is, for many organizations, their primary driver of costs. Even in manufacturing, where a relatively high proportion of contracts are for commodities and components, it represents a significant overhead. IACCM conferences and meetings this year have been focused on offering our members these insights to the future and connecting them to the resources that can equip them for success. Our Americas conference will continue this process.

In my next few blogs, I plan to feature several successful commercial groups – buy and sell – grasping this digital age and the opportunities it represents.

 

Strategic or administrative: which would you rather be?


Contracts – and especially contract management – continue in many organizations to be seen as largely administrative. For those who perform tasks in this area, that is never good news. Not only does it mean they lack influence and status, it means they are also often seen as dispensable.

As anyone who reads this blog on a regular basis will know, I strongly disagree with the view that contracting is an administrative activity. Yes, of course ithere are elements of the role that are administrative in nature, but that completely ignores the broader impacts of this discipline on an organization’s financial performance and reputation.

I was excited yesterday to participate in a webinar that was led by Jessica John, from Kaiser Permanente Northwest. Jessica told the story of KPNW’s recent implementation of contract management software (the recording of the webinar is available in the IACCM library). Two things especially struck me.

1. To generate understanding and gain senior management support for automation, Jessica had executives come to structured sessions with her team. The purpose of these sessions was to show the many interdependencies between the contracting process and broader business operations. They helped the executives understand how this ‘administrative’ activity was impeding business speed, agility and competitiveness. In other words, rather than trying to hide or deny the function’s ‘dirty linen’, Jessica used it to press the case for improvement.

2. To make their software implementation effective, Jessica worked with Ecteon, her selected provider, to ensure integration with other systems. Not only did this result in streamlined operational performance, it also led to cross-functional appreciation for the many tentacles of a holistic contracting process and generated a wealth of new business data.

Through these two measures, the business gained a fresh perspective and has come to appreciate the critical role of a coherent and high performing contracting process. Today, it sits firmly within the core functions that determine and implement strategy. For Jessica and her team, the benefits of that to the function and to the business more generally are already significant – but as she outlined, they have really only just begun their journey.

The key point here is that automation can be used to open doors and advance business contribution. Far from being a threat, it is an opportunity – and congratulations, Jessica, for grasping it!

Can business ever act morally?


The Royal Commission on Financial Services in Australia continues to unearth unprincipled and sometimes illegal activity within many of the industries leading players. These include the enormous scale of commissions paid for the sale of useless products.

In Sweden – yes, the land of ethical leadership – a former General Counsel is on trial for using bribes to win business in Uzbekistan. In the US, a pillar of society is accused of fomenting drug dependencies and seeking to benefit from the invention of an expensive remedy.

No matter where you turn, the stories of malpractice abound. Has it always been this way? The answer is surely yes, but today there is much greater exposure and stories that once were local are now global.

So on one level, you might say that things today are better because at least we know more about what is going on and there is some degree of accountability. Yet is that enough? Will society in general simply shrug its shoulders, or is this undercurrent of unethical business behavior eroding public trust to such a point that it threatens social structure?

These are big questions and I pose them on this blog because it might be argued that it is the duty of the modern commercial function (and each professional within it) to challenge the practices that lead to these unethical activities. In some instances, we have become part of the game. There are certainly lawyers who take the view that it is not so much about doing the right thing, but rather doing the things you can get away with. Procurement functions, when measured on savings, are too often complicit in manipulating the system to meet their measurements rather than the business interest. Contract managers may observe underlying dishonesty in the claims or commitments being made, even sometimes questionable payments, but do they question, or do they turn a blind eye?

Of course, one answer is ever greater levels of regulation, but is that really where we want to go? What sort of world will that create? Another view might be that since most of the unethical practices in business occur in the setting up and management of trading relationships, commercial staff are in a unique position to observe them. The big question, therefore, is what role might we play to raise the integrity of business dealings?

 

 

 

Are you running blind?


At the start of this week, I had two very different conversations. In each case, the conversation was with the global head of the Commercial & Contract Management function and in each case they were handling major outsourcing and services agreements. But at this point the story starts to diverge. They are summarized below:

Organization #1

  • Has been instructed to cut CM resources by a third
  • Is struggling to demonstrate specific value or explain what impact the headcount cut will have
  • Has been ‘too busy providing operational support’ to develop a forward-looking strategy
  • What technology?

Organization #2

  • Is experiencing sustained growth in functional status and budget
  • Has documented contribution of $60m cost reduction / revenue growth in first half 2018
  • Has an approved strategic plan and executive sign-off for forward investment
  • Has implemented technology to drive data, efficiency and value delivery

So what did they do differently?

Organization #1 is typical of so many – hard working, industrious, committed, but ultimately invisible in terms of value. When reviewing opportunities for cut-backs, executive management simply asked the question “Will it have any effect if we reduce headcount?” Even though there certainly will be an impact, there is no data to quantify this or to support the continued level of budget.

Organization #2 also kept busy – but with a somewhat different focus. Following a capability assessment undertaken by IACCM in 2017, it embarked on a program to ensure functional alignment with corporate goals and strategies and to gather data to demonstrate its business contribution. This led to a rapid review of the tasks being performed and ensuring that these were connected to quantifiable benefits.  A business case for small technology improvements that would streamline workload and support delivery of those benefits was approved in the summer of 2017.

As a result, the function has been able to show tremendous progress in the value it is adding.

• An average 25% reduction in contract cycle time due to easy search capabilities
• Regular management reporting on key business and commercial indicators
• A single, harmonized global process for document management
• A range of validated savings and revenue improvements through:

o Avoidance of de-scoping through contract interpretation and close client obligation management
o Obligation management – spotted and collected on missed rights that were not being exercised by Capgemini
o Avoidance of service credit payments
o Capturing service level earn-backs
o Cost avoidance via a decrease in maverick spend
o Improved oversight of renewals and consolidation opportunities

The Lesson

The lesson from this is rather self-evident. Don’t just assume that being busy translates to value. Far too often, groups fail to challenge what they are doing or how they are doing it. As a result, their work may fail to keep pace with changes in business strategy or priorities and almost certainly they lose visibility at senior levels.

It can be hard to self-challenge, which is why most successful groups gain some sort of extenral input. This could be through techniques such as a capability assessment, or it might be through gathering external benchmark data – simply finding out what others are doing. That could be through formal research, or more simply by attending roundtables, industry conferences or member meetings. IACCM offers all these things to its members – yet in common with other professional associations, we find only around 20% take advantage of what is on offer.

Finally, there is a method that doesn’t even require you to leave your seat. The IACCM Benchmark Study runs every three years and provides participants with comprehensive data (at no charge) which they can use to self-assess and have meaningful conversations with senior management.

So ultimately the lesson is, if you find yourself in the situation faced by Organization #1, there really is no excuse.

Will new technology mean the end of term agreements?


At a recent IACCM roundtable, participants discussed the seemingly insoluble issue of maximising value from supply relationships. It was widely agreed that loyalty and collaboration are important characteristics, since they support more open communication and opportunity evaluation. Yet loyalty and collaboration depend on levels of long-term trust and integrity that are rarely achieved. The key issues – especially for buyers – are ‘How do I stop suppliers taking advantage of me and how do I ensure I’m not overpaying or missing out on innovation?’

These questions are typically answered today by the use of regular competitive bids and, to a growing degree, through maintaining a market overview by Category Management teams. The problem is that competitive bidding – rather than keeping suppliers committed to value – actually tends to undermine performance. As with any relationship, behavior is impacted by the sense of durability.

Setting the term

This brings us to the point about a fixed contract term, something that is common in many agreements. In theory, the term sets a balance between the interests of buyer and supplier – long enough to make the supplier investment worthwhile, but not so long that the buyer feels trapped.

New technologies – and in particular new analytical tools – should have the potential to make fixed contract terms redundant. By aggregating all the elements of comparative operational cost (not just price), it ought to be possible to maintain dynamic benchmarks of supplier performance. As we all know, this is actually the critical data that represents a true measure of value. From a contract perspective, it would mean that there was objective assessment of the incumbent supplier and that they could be given clear improvement targets to retain the business.

Maintaining pressure on suppliers to perform is fair and reasonable. Using an arbitrary time period as the incentive is not only questionable in its effectiveness, but also imposes heavy cost burdens that ultimately translate into higher prices.

 

 

Destroying competition


Competitiive bidding lies at the heart of most procurement strategies. In the case of the public sector, it is foundational to  public procurement regulations.

But there is a problem: in many industries, levels of competition are declining and IACCM’s recent cross-jurisdictional study of government procurement found this to be a common theme across the public sector. Without sufficient competiton, does the entire philosophy that underpins current bid and award processes need to be revisited?

What has gone wrong?

There are many factors at play, but fundamentally it is clear that aggressive procurement strategies may yield short-term gain, but ultimately they undermine competition. Globalization created the illusion of endless choice and continuous price reduction. Buyers dispensed with supplier loyalty. They imposed lower prices and increased the levels of supplier risk. Even when agreements were signed, the contract often imposed onerous price reviews and suppliers faced the constant threat of a new bidding round.

In order to survive, suppliers were caught in a curious syndrome. In order to cut operational costs, they had to outsource more and more of their core activities, so while at one level they were trying to resist customer demands, at another they were imposing similar demands on their suppliers. Over time, this has led in many cases to extensive industry consolidation.

Risk transfer is another major issue, especially for the public sector. Once again, governments operate on the principle that they cannot accept ‘sovereign risk’ and therefore seek to impose heavy performance burdens onto their suppliers. In the days when most transactions were for relatively standard products, such risks were manageable. Today, many contracts are for complicated – often highly customized – products and services, where levels of uncertainty are far greater. An inflexible approach to procurement and subsequent contract management means that an increasing number of suppliers simply choose not to bid. Those who do engage face heightened possibilities that they will lose money and emerge with a damaged reputation. Ironically, the fault for failure is rarely clear-cut, so the risk terms that the contract sought to impose are rarely enforceable.

The way ahead

There is still a school of thought within some procurement groups (and politicians) that all the problems are due to greedy or dishonest suppliers. Fortunately, that attitude is declining and there is a growing recognition that supplier selection and management processes require significant reform. As always, revised contract terms seem to be low on the list, but at least conversations have started.

Ultimately, we need a fresh approach from both buyers and sellers. Organizations must work together to reduce the many costs sssociated with today’s highly inefficient trading relationships. Procurement practices and Sales incentives require significant reform. Performance – and related data architectures – must shift focus to monitor and measure outputs and outcomes.

These steps and more lie at the heart of a new IACCM study and report on the commercial practices that must replace the flawed theories of endless competition that have driven us to the challenges we now face.

Eliminate your contracts


Elon Musk is on a mission. Writing on Twitter, he said: “We’re trying to get rid of contracts completely. Should just be ‘tap here & you get your car’. Then, if you don’t like it for any reason, just return it like any other product.”

Unfortunately there doesn’t appear to be any specific plan or timeline for eliminating contracts for Tesla customers – but might it be that Mr Musk is actually shooting for the wrong target?

Eliminate or energize?

The issue which provoked this statement appears to be linked to ’ease of doing business’. Mr Musk was frustrated by the difficulties and delays that some customers apparently faced in getting contracts in place. Many other executives share this view and see contracts as a source of complexity. Frequently they are right, but that’s a matter of choice and, with greater focus, much of that complexity could be eradicated – a much better solution than ‘elimination’ of contracts.

Contracts SHOULD provide a mutual and mutually understandable framework of rights and responsibilities. They should offer an acceptable level of balance that protects interests. Tesla has legitimate interests, as does its customers. For example, it expects to get paid. It expects to be able to enforce rights if it is not paid. A customer wants undertakings regarding quality and clear rights in the event that there are defects.

But none of this means that the resulting terms and agreement need to be complicated to understand or to access. They could be available via a video, in multiple languages. They could even be entertaining. I am sure that Mr Musk’s creative4 mind could come up with some amazing ideas on how to make Tesla’s contracts a reputational asset. And that would far better serve the interests of his company and its customers than simply eliminating contracts entirely.

So have you any creative ideas for designing contracts that would best fit the Tesla brand and image? Perhaps we can turn this into a competition for IACCM members!