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Commercial Round-Up: Highlights of the Week (#3)


A weekly round-up of stories and events from the world of commercial management.

Why do IT contracts fail? According to an article in Information Age, the number one reason is the way that buyers squeeze supplier margins. Starting with negotiations that focus on price rather than value, then inserting terms that seek recompense for any shortfalls, but no rewards for success. Ultimately low margins threaten outcomes. Of course, the situation isn’t helped by poorly prepared technical specifications, changing requirements and the buyer’s often one-sided view of flexibility. (While recognising these issues, IACCM’s experience is that providers are not blameless. Failures can also result from overstatement of capabilities and opportunistic pricing during development and implementation.)

Consultant contracts lack transparency, accountability: that’s the conclusion from a study by the Melbourne School of Government. They feel that far too many consultancy agreements are awarded by Government without real clarity of purpose and often that details are shrouded by confidentiality provisions. As a result, no one can evaluate value for money. This recurrent issue – especially as it relates to the scale of spend with the major consultancies – never seems to be any closer to resolution. Decisions on contract award often appear driven less by value and competence and more by the sense that ‘I can’t be blamed if I select one of the big four’.

Smart ledgers offer boost to world trade: IACCM was delighted to partner with Z/Yen, the Centre for Economics & Business Research and the Cardano Foundation on a research project exploring the impacts of blockchain technology on world trade. At a launch event in the UK parliament, the CEBR estimated a contribution to growth of up to $140bn and that is just the impact that smart ledgers could have on limited areas of the trading process for goods. Once their full benefit to goods and services is realised, the impact will clearly be much greater. As Samsung’s recent announcement illustrated, the momentum for blockchain’s use in contract performance is accelerating.

Which way Procurement?: Phil Ideson produced an excellent summary of some recent reports on the future of Procurement. It does not provide an optimistic outlook, with consultants and analysts apparently sensing a function without a rudder, moving nowhere. But the reports themselves seem to offer little direction, simply repeating calls to ‘become a trusted adviser’ and ‘be more strategic’. I find it interesting that IACCM offers its members a very clear vision for their future and sets out the path to get there, but perhaps that is because we focus less on the function and more on today’s business needs. As we discussed at the Supply Chain Research Council meeting this week, the gaping hole in most organizations is the field of contracting – a field that focuses on lifecycles and outcomes and of which Procurement is just a component. This is clearly where big opportunities lie, made more so by emerging technologies. But the reports are right when they identify absence of leadership as a key problem.

Is specialism killing your business?


Over the millennia, specialism has served us well. Human progress and economic wealth have been built on increasing division of labor and the development of professional competencies.

But specialism also has downsides. Those ‘professions’ become protective of themselves and operate as barriers to change. ‘Specialists’ like to think they are ‘special’ – they lose context, they become self-important. And these traits soon become sources of cost, delay and barriers to change.

Pro’s and Con’s

Specialism is attractive because it tends to link to higher wages and greater status and power. So people seek to position themselves as specialist and to form tribes with like-minded individuals. On one level, that of research and ‘good practice’, this is beneficial. When it evolves to constraining others, it is not.

Today, we have myriads of specialists. Professions like law, medicine and accounting have splintered into hundreds of sub-areas of expertise. Other job roles have followed suit. We have the theories of Adam Smith operating on steroids.

And the result? For many organizations, it is virtual inertia and incompetence. It becomes almost impossible to build consensus. Expertise rules, at the expense of balance and good judgment. Decisions increasingly flow to the top due to the incapability at lower levels to reach or enforce agreement. Business and government is becoming overwhelmed by the complexity of specialism.

A new approach

The answer, of course, is not to dismiss specialist knowledge, but to deploy it in new and different ways. Much current specialism must be automated. In the same way as machines took the jobs of weavers, blacksmiths, joiners and turners, they will now take those of many specialists. History shows that we move through cycles during which power groups emerge, gain control and then implode under the forces of progress.

Artificial intelligence systems are making specialist knowledge far more accessible and will make it also more reliable and fact-based. But having rapid and immediate access is not the same as interpreting and, more important, collating all that knowledge to reach an informed and balanced decision. And that’s why commercial judgment is becoming increasingly important – an ability to synthesize and reconcile data that may often be contradictory or in conflict and to develop a viable solution.

Mechanization was highly disruptive, yet ultimately drove improvement in social wealth and welfare. It also required a new breed of mechanics to manage it. Automation will be the same. And just as those who failed to mechanize or to hire mechanics went out of business, so will those who are too slow to adopt automation or to build the skills to manage its output.

 

Payment terms


Payment always feature high in the list of most negotiated terms. The last ten years have seen a steady lengthening of the time it takes to get paid. Recent data showed an average of 57 days, but it is often much longer. Big corporations are creative in the way they measure their compliance with payment terms, with many only starting to count after the invoice has been ‘approved’ – an activity that can add weeks to the cycle.

IACCM research has identified that prompt payment is the number one factor in achieving ‘preferred customer’ status. Paul Humbert recently wrote an excellent article suggesting that this should be a key performance metric, commenting: “There is however at least one purely objective and important metric which is rarely measured; namely, PROMPT PAYMENT of accounts payable. Many organizations routinely fail to pay vendors on time in accordance with the terms of the contract. Why? A lack of priority? An attempt to capture “float”, essentially getting an interest free loan from the vendor? Aside from breaching the contract, failing to pay vendors on time causes serious damage to the relationship. Imagine if someone’s paycheck was delayed by days or even months?”

Business practices cause regulation

Delays in payment are especially damaging for small businesses, which are typically highly reliant on cash flow. Many large organizations remain wedded to a view that ‘might is right’, seeing no problem in using their power to exercise unreasonable – indeed in this case unethical – behavior. It is that inability to make moral judgments that drives the need for regulation.

But morality aside, is it really in a company’s best economic interests to punish its suppliers? What is the cost associated with delayed payment – the administrative cost, the supplier performance cost, the reputation cost? Over time, these costs certainly outweigh any benefit.

Digital reinvention of contract management: does it matter?


There is a lot of buzz about digital reinvention (a term popularized by McKinsey consultants), digital transformation and digital disruption. By whichever name you call it, it’s importance cannot be understated.

According to Mckinsey,  only 8% of companies that they surveyed believe their current business models will remain viable through digitization. That’s significant because digitization no longer means simply revamping your e-commerce site or improving the digital customer service experience and calling it a day. Digital reinvention must run deeper. The companies that win will be those that digitally reinvent processes end-to-end.

Digital reinvention should be every bit as important to your contract management process as it is to the rest of your sales or acquisition process. It is, after all, a critical business activity and the quality of the process remains just as important in a digital world as it is today, perhaps more so.

We live in a time when customers’ expectations have never been higher. Research suggests that 58% of a customer’s loyalty is based on their buying experience—not on your product or service. The customer experience starts at discovery and runs all the way through contracting and beyond. A great deal of the customer experience has been digitized, so much so that customers can in many cases complete over half of their buying journey without even talking to a sales person.

The contract process, on the other hand, is behind. The overwhelming majority of companies — 85% in fact– are using manual processes to manage sell-side contracts. Contracting remains analog. It’s yet to be digitized. Not only is this slower, it also translates to lost revenue. It is estimated that a typical business with 1,000 employees wastes $2.5-$3.5 million each year searching for and re-creating lost documents. Recent IACCM research highlighted the average cost associated with creating and agreeing a contract – and even for relatively low risk agreements, that came to $6,900.

Does digitization of contract processes really matter? The short answer is, yes. As other pieces of the business digitize, the lack of digitization in contracting becomes that much more evident. Already we know of CEOs demanding ‘no-touch’ contracting – a fully automated, end-to-end process. While the rest of the journey speeds up, contracting will be the bottleneck unless we make some pointed changes. That means all eyes will be on you when a seemingly fast sales deal stalls at contracting.

We need to evolve beyond basic contract management and legacy systems. By digitally transforming the sales experience and refocusing our resources to deliver high value contract management, businesses can improve profitability by up to 9%.

It’s time to act. That’s why IACCM is so focused on helping the contracts and commercial community to understand the exciting technologies that are fast becoming available. Join us this Thursday for one of those sessions and see how contract lifecycle management technology can streamline your contract process in the webinar: Digitally Reinvent Quote to Contract to Maximize Revenue.

Commercial Round-Up: Highlights of the Week


EU regulation: the European Commission is proposing action in two areas that would have major impact on business. One is the threat of introducing a universal code that would allow consumer class action lawsuits. The other is specific to the retail sector and would be legislation related to unfair terms imposed on suppliers, in particular in areas such as payment terms and unilateral rights to change contracts.

Procurement as a partner: according to a survey released by the Buying Legal Council group, collaboration between in-house legal and procurement yields average savings on legal spend of 21% a year. This drops to just 7% in organizations where collaboration is absent or weak. Of those surveyed, just 25% say that there is a good partnering relationship between legal and procurement.

‘Big Law’ under threat: Corporate Counsel magazine reports a shift away from the largest law firms. A survey by the Economist Intelligence Unit found that concerns over fees and increasing need for deep local knowledge is pushing more business to smaller and more specialized providers – 40% of large corporations surveyed expect this trend to increase over the next 5 years. At the same time, the Financial Times pointed to the continued consolidation of major law firms, predicting that we will soon see the emergence of the ‘$5 billion law firm’ – itself a response to those growing pressures on traditional fee structures.

NOTE: IACCM is currently conducting a survey on law firm fee structures and the success of negotiators in achieving alternative pricing models. To participate (and receive a copy of the report) visit https://www.research.net/r/legaldepartmentspendmanagement.

Cloud security: a report by HelpSystems highlighted the dangers of assuming that cloud infrastructure and applications are secure. It emphasizes that “IT teams, cloud providers and trusted vendors need to work together to establish and implement well thought-out policies to keep data secure”. IACCM’s conversations with leading corporations suggests they are giving thought to these ‘relational’ mechanisms in their selection of provider and within their contracts.

Machines v. Humans: in the continuing debate over whether machines can be trusted to exercize judgment, I was reminded of an article in the Economist from 2011. Researchers monitored over 1,000 applications by prisoners to parole boards. They discovered a direct correlation between the number of applications granted and the timing of lunch and snacks. A full stomach had a major impact on the level of clemency. Bring on the machines!

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Legal costs under pressure: what is the solution?


There is extensive discussion about the cost of hiring a lawyer. At the Codex event last week, hosted by Stanford law school, a number of presentations focused on ways that new technology will tackle the issues of cost and accessibility to the law. Several speakers spoke of the inevitable pressure on hourly rates and alternative charging arrangements.

Broad issues of social access to the law are not the only questions affecting the legal community. In-house groups are also facing increased pressure to control their spend – and this is at a time when workload demands are increasing.

While some are looking at opportunities to cut workload through delegation (and new technology will increase potential for this), there are a variety of other mechanisms available. These include:

  • Greater discipline in reducing spend with external counsel (i.e. fixed fee arrangements, detailed billing reviews, panel discounts)
  • Greater in-sourcing of legal work formerly done by external counsel
  • Delegation of legal department tasks to others in the business
  • Introduction of new technology to simplify / automate legal workload
  • Use of lower cost resources through ‘captive’ legal centers
  • Use of lower-cost resources through outsourced third party legal services providers
While there are a variety of cost reduction mechanisms available, a key question is what impact these have on departmental efficiency and effectiveness. For example, outsourcing to low-cost locations and efforts to develop alternative fee arrangements have generated mixed results. So what are the best steps to take?
IACCM is conducting a survey to test which mechanisms are being used by in-house legal groups most often and how effective they are proving. The challenge of matching resources and workload will not go away, so finding the best answers is of growing importance. This confidential survey will provide participants with valuable insights and benchmarks.

 

Making compliance easy


Non-compliance is risky. It leads to fines, job losses, reputational damage, lost sales. Since it is so important, businesses make substantial investments to reduce the chance of breaches – and of course a major element of those investments is people: reviewers, approvers, auditors, compliance experts.

The problem with those resources is that their jobs depend on complexity and, to a degree, their belief that the natural tendency of others is to be non-compliant. Compliance experts are not generally innate optimists who assume that human nature is inclined to ‘doing the right thing’.

As the volume of regulation grows, traditional control methods are too slow, inefficient and erratic – not to mention the issue of affordability. They have to be simplified – and that demands new thinking and new measurements of success for compliance experts.

Two of the emerging approaches are:

  1. Outsourcing the basic checking process and collection of data. An example is in the area of supplier validation and monitoring, where there are now a variety of external providers offering a service that eliminates the need for individual companies to run checks. This single point of collection obviously reduces workload and cost for both customers and suppliers.
  2. Use of technology. A number of exciting solutions are emerging. Recent trials of blockchain have included automation of data collection from a range of internal and external sources, automating supplier validation and contract award, then monitoring continued compliance through feeds from public or fee databases. Another method is through the use of apps or bots provided to users so that they better understand compliance requirements and input data that supports self-monitoring or automates approvals. A third example is machine-based checking – for example, ensuring that proposed contract terms align with policy and highlighting any exceptions, which are then routed for review.

By improving data flows, compliance teams are also becoming far better equipped to identify the likelihood of specific risks, enabling them to focus (and be measured) on specific mitigation measures for those with the highest frequency. Managing compliance is a clear obligation; competitive advantage comes from expert teams that focus on how to do it better, faster and cheaper.