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‘Contract Management is more important than Procurement’


This quote, taken from the latest edition of Supply Management magazine, will be welcomed by many as recognition that it’s actually the results of an acquisition that matter. For too long, they will say, Procurement has been happy to oversee inputs, ignoring the fact that it is contract management that oversees outputs and the actual delivery of value.

I have never forgotten the words of one very senior executive who recognized this issue when he observed that “organizations frequently undertake a perfect procurement and achieve completely the wrong outcome”. He understood that ‘procurement’ is actually just one element of a much bigger process.

Many contribute to disappointing results

There can be little question that traditional procurement practices are increasingly misaligned with business interests and have not adjusted to the realities of today’s markets. However, it would not be fair to heap the blame for that onto Procurement functions. They do what they are told and trained to do. Well-managed procurements are frequently let down by others – for example, Legal providing inappropriate templates, the CFO demanding draconian savings, the business unit failing to manage supplier performance. If Procurement has failed, it is a failure of its leadership to challenge and be adequately vocal in pushing for change. In this, they have often been let down by external experts – the consultants, advisory firms and training organizations that should be assisting in preparing their teams and processes for the future but instead have focused on issues like compliance, commoditization and category management. Procurement has been led down far too many blind alleys.

Where IACCM enters the picture

The International Association for Contract & Commercial Management was founded precisely because of these chronic issues. Procurement – like Sales – is just one of many specialist disciplines. ‘Contracting’ is an overarching competence and capability. It needs ownership. When it’s left to chance, things go wrong. Often badly wrong.

For 20 years, IACCM has worked to overcome entrenched attitudes and innate resistance to change. During this time, it has directly engaged with and trained over 200,000 people who understood there must be a better way. Its research, training and advisory services have enabled massive progress for the organizations which have grasped the fundamental truth that customers and suppliers depend on each other for success and are working to develop open, cooperative relationships, founded on honesty and integrity. IACCM espouses collaboration and believes in inclusive behaviors that generate mutual, shared benefits for customers and their suppliers.

In the end, does this mean that contract management is ‘more important’ than Procurement? No, it doesn’t. They are different disciplines and they must complement each other. What is true – and the real issue here – is that both are subservient to the overarching ‘contracting process’ and must align with commercial goals and strategies. Unless there is focus on holistic development of commercial capability, simply changing names or expanding the Procurement remit delivers at best marginal improvements and could even make things worse.

IACCM’s recent benchmarking report provides insight to the current state of contract and commercial management organization and performance, highlighting also the leading practises that generate improved results.

Are you really a negotiator?


Most business-to-business negotiations are destroying potential value. Rather than engendering trust, they sow the seeds for discord.

The problem

Ask any hostage negotiator about how to achieve success and they will tell you that it isn’t through intransigence, threats or deliberate tabling of unacceptable terms. Yet examine typical business negotiations and these are traits that frequently occur. The more powerful party tables one-sided terms and demands compliance. They typically claim ‘everyone else accepts these terms’ (I.e. if you don’t, we won’t do business); and in many cases, the counter-party responds by tabling their similarly one-sided terms.

This isn’t negotiation. In many ways, it is negotiation avoidance. It is based on a lack of trust and a fear of failure.

A different approach

If we want better results – and I hope we all do – there’s a need for a different approach. Here are three principles to consider:

  • Confront perceptions. It is clear that many negotiations are compromised by unspoken assumptions or beliefs. Unless these ‘elephants’ are addressed, there will not be trust and without trust, confrontation is inevitable.
  • Send negotiators, not roadblocks. Often, suggesting that negotiations are occurring is a bad joke. One or both parties frequently send people whose job is to enforce compliance. They lack authority and have no interest in showing empathy or acting as an advocate for the other side.
  • Build common ground. Ultimately, high performing relationships are built on shared principles and goals. Yet because the elephants aren’t addressed and because the negotiators have limited authority, it is very unlikely that common ground will be explored or established.

Ultimately, while organizations are responsible for performance, it is people who set the scene. Until these three principles are addressed, we can’t expect results to improve.

 

Contracts as sources of innovation


“Trade is the spark that lit the fire of human imagination, as it made possible not only the exchange of goods, but also the exchange of ideas. Trade also encouraged specialisation since it rewarded individuals and communities who focus on areas of comparative advantage. Such specialists had the time and the incentive to develop better methods and technologies to do their tasks.”

That quote comes from an edition of The Economist, almost 10 years ago, reviewing a book by Matt Ridley that addressed the importance of human optimism (a major theme for IACCM this year, with further research to be unveiled at the IACCM Americas conference in November).

Contracts and trade

Contracts sit at the heart of trade. They are the ‘boundary objects’ that define roles and responsibilities, reward and consequence. In addition, as other recent research by IACCM confirms, they influence whether or not innovation and continuous improvement occur (report available on the IACCM website).

It is this culture of striving for continuous improvement that drives and provides incentive for innovation, enabling human aspiration to become a reality. However, such aspiration is rapidly undermined in an environment that is seen as punishing or risk averse – the characteristics of many of today’s contracts. Assumptions of failure or disaster are frequently self-fulfilling. The IACCM research confirmed that those who place their primary focus on protecting against risk thereby discourage cooperation and limit the exchange of ideas.

A heavy responsibility

If indeed it is trade that sits at the center of our future success and, more broadly, our ability to prevent disaster (including, for example, from climate change), then the contracts community has a large and heavy responsibility to ensure it is not only removing barriers to innovation, but that it is also itself innovating in the methods through which trade occurs. We have a duty to ourselves and others to ensure that we contribute to the cultural and economic forces behind human progress.

“Thanks to the liberalising forces of globalisation, innovation is no longer the preserve of technocratic elites in ivory towers. It is increasingly an open, networked and democratic endeavour”, says Ridley. Contracts can – and must – create environments where openness, transparency and networked communication are encouraged and rewarded and where cultures of blame, risk allocation and punishment are avoided.

Agility, contracts and value: time for new thinking


Agility is defined as “the ability to move quickly and easily”. It is an attribute that today’s business considers highly desirable, yet typically struggles to achieve. Research shows this is particularly true for the contracting process and the management of external relationships.

Agility in the context of contracts

it is important to distinguish here between contracts for agility and having a contracting process that is itself agile.

‘Agile contracts’ are simply a form of agreement that supports the parties when undertaking agile performance. But the act of preparing an agreement is just one small component of the overall transaction or relationship and enabling agility through a set of contract terms is very different from actually having an agile commercial process.

There is little question that most people would like to make their trading relationships more agile. Quick and easy to identify the right supplier or customer; quick and easy to reach agreement on the terms; quick and easy to undertake delivery; quick and easy to make changes or secure improvements. But as IACCM’s 2019 Benchmarking Study shows, ‘quick and easy’ is not a description that can typically be applied to the overall contracting process. While the simplest transactions  (such as buying off Amazon) may be ‘agile’, as soon as something enters the more formal sales and procurement process it becomes subject to delay and complications. And even when one aspect of that process has been made ‘agile’ (for example a catalog buy), it doesn’t guarantee that other aspects of the downstream process have the same characteristics. Indeed, fragmented action may even make the downstream process even more complicated and inefficient.

Tackling a mismatch

One major finding by IACCM – and now the subject of further in-depth research – is the fact that the contract terms and the governance models used to support each trading relationship are frequently not ‘fit for purpose’. There is, quite simply, a mismatch between what the parties want to achieve and the contract and contract management model that they deploy to achieve it.

Ironically, one major reason for this turns out to be that efforts to be ‘agile’ in  entering into the contract result in overall rigidity and loss of flexibility in its performance. Specifically, both buyers and providers tend to be wedded to the use of standardized contract templates that are frequently designed to limit agility and which are themselves not readily adjusted to reflect specific aspects of the required relationship.

Becoming agile

Agility is itself often seen as complex. IACCM’s work with a group of major corporations (its Ressarch Forum members) is proving this not to be the case. What is perhaps the most challenging aspect is finding people with the mental agility to recognise that they really can make things better!

In a series of mini-conferences, which started this week in India, IACCM will inspire its members with the insights they need to drive new conversations and discover new levels of agility and value in their trading relationships. Key to this is starting to think and act holistically in managing the contracting process

Agility, contracts and value: time for new thinking


Agility is defined as “the ability to move quickly and easily”. It is an attribute that today’s business considers highly desirable, yet typically struggles to achieve. Research shows this is particularly true for the contracting process and the management of external relationships.

Agility in the context of contracts

‘Agile contracts’ are typically thought of simply as a form of agreement that supports the parties in undertaking agile performance. But of course, preparing an agreement is just one small component of the overall transaction or relationship and enabling agility through a set of contract terms is very different from actually being agile.

There is little question that most people would like their trading relationships to be agile. Quick and easy to identify the right supplier or customer; quick and easy to reach agreement on the terms; quick and easy to undertake delivery; quick and easy to make changes or secure improvements. But as IACCM’s 2019 Benchmarking Study shows, ‘quick and easy’ is not a description that can often be applied to the overall contracting process. While the simplest transactions  (such as buying off Amazon) may be ‘agile’, as soon as something enters the more formal sales and procurement process it becomes subject to delay and complications. And even when one aspect of that process has been made ‘agile’ (for example a catalog buy), it doesn’t guarantee that other aspects of the downstream process have the same characteristics.

Tackling a mismatch

One major finding by IACCM – and now the subject of further in-depth research – is the fact that the contract terms and the governance models used to support each trading relationship are frequently not ‘fit for purpose’. There is, quite simply, a mismatch between what the parties want to achieve and the contract and contract management model that they deploy to achieve it.

Ironically, one major reason for this turns out to be that efforts to be ‘agile’ in  entering into the contract result in overall rigidity and loss of flexibility in its performance. Specifically, both buyers and providers tend to be wedded to the use of standardized contract templates that are frequently designed to limit agility and which are themselves not readily adjusted to reflect specific aspects of the required relationship.

Becoming agile

Agility is itself often seen as complex. IACCM’s work with a group of major corporations (its Ressarch Forum members) is proving this not to be the case. What is perhaps the most challenging aspect is finding people with the mental agility to recognise that they really can make things better!

At a forthcoming series of mini-conferences, starting this week in India, IACCM will be inspiring its members with the insights they need to drive new conversations and discover new levels of agility and value in their trading relationships. Key to this is starting to think and act holistically in managing the contracting process.

Value destruction or value for money: sometimes a hard call


The ideas behind value engineering are not new. In fact, they go back to the 1940s, when the construction industry in particular was seeking new and more scientific ways to guide its purchasing decisions. It would not be unreasonable to assume that the methodology and its use would have matured by now. But you would be wrong; it has actually gone backwards.

In its latest edition, Architectural Products (a US industry publication) states the following:

“Today, value engineering in construction has fallen far from its origins, with products being chosen and changed out simply because
they are cheaper, many times sacrificing performance and longevity. This new process is no longer about creating actual value. Acknowledging that budget is always a concern, there must still be a better way.”

Is modern procurement practise ‘dumbing down’ decisions?

One conclusion clearly could be that the procurement practises of recent years (driven by an obsession with short-term financial results) are at fault. ‘Value’ has often been overtaken by ‘price’. Measurements are based on input costs, not outputs or outcomes over time.

It is clear that there is some validity to this view. In spite of (or arguably in some cases because of) the massive investments in technology, corporations seem to lack the ability and incentives to operate on objective judgments of value. And, as incidents such as the Grenfell fire and the Morandi bridge collapse illustrate, that can prove extremely costly in terms of lives, reputation and money.

But is it that simple?

The article specifically calls out decisions made on the basis that an item or resource is cheaper. Certainly there are many occasions where such decisions are wrong. But we must also remember that, since the 1940s, the social ethos has changed. We live in a world where everyone wants perfect, everyone wants new, everything is disposable. So why buy things that last 20 years when the building may undergo fundamental alterations or change of purpose every 5 or 10 years? Seen in that light, it could be argued that ‘value’ and a short lifespan are synonymous.
A great comeback?

Today, at least in principle, we are seeing a massive shift in those social values. The concepts behind sustainability demand a rethink of the measurements and behaviors that underlie the disposable culture. So will value engineering experience a rebirth? I like to think the answer is yes – and indeed it lies at the heart of work IACCM has been undertaking to redefine principles for contract governance and performance management. Those principles draw on another concept from the world of engineering – that is, uncertainty analysis.

As part of its research, IACCM has recognized the need to build strong connections between the methods deployed in engineering and those in contracting. Together, they can provide users (whether in Procurement, Project or Contract Management) with powerful tools to better segment their commercial decisions and supply relationships. The result, we believe, will be delivery of true value, both to business and to society.

 

As-a-Service:Commercial Model of the Future


Almost 90% of Procurement and Contract professionals expect major growth in ‘as-a-service’ offerings, with a quarter believing they will rapidly come to dominate the market.*

Is that a far-fetched prediction? In many ways not. As-a-service offers the buyer many benefits – eliminating capital outlay, providing greater flexibility, avoiding redundant or outdated systems and equipment. It is therefore very much in tune with our age, providing rapid gratification through on-demand, affordable access to products and services.

Suppliers in some cases face high set-up costs, due to the need for asset investment. But often they don’t – for example, in the case of platform providers who draw on the assets of others (Uber and Airbnb being the frequently cited examples). As the range of as-a-service offerings increases, it will become more and more difficult for traditional businesses to compete.

As IACCM’s recent study on as-a-service indicated, there is variability in offerings. They range from a one-size-fits-all standard, to mass customized, to fully custom design. This has a major impact on cost and commitment, hence there are significant variations in contract terms and negotiability. At the lower end, the contract is potentially fixed and non-negotiable. At the upper end, the customer may be looking for a guaranteed outcome and dictating many of the terms.

One key lesson from IACCM’s research is that many sectors of the market are not yet fully conversant or aware of the implications and practices associated with as-a-service offerings. This is in part due to the inexperience of buyers, but also suppliers have in many cases failed to think through key aspects of the capabilities needed to support such a fundamental shift – in particular the implications for Sales skills and the ability to ‘educate’ their customers.

As-a-service in many cases creates longer term relationships and an increased level of interdependency. Having appropriate contracts and contract management competency is therefore a critical component of these offerings.

Based on polling over 180 participants in a recent IACCM webinar (webinar recording available at www.iaccm.com)