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The Silent Killer Of Expected Results

March 17, 2009

Renegotiation of existing contracts is pervasive, with more than 70% of corporations reporting extensive levels of activity. However, just 30% have a defined strategy for renegotiation.

These statistics offered an important backdrop to the interview I held yesterday with three top practitioners – Dan Mahlebashian, Chief Contracting Officer at General Motors; Tim McCarthy, Worldwide Director of Pricing and Contracts at Rockwell Automation; and Bill Huber, Director of CPO Services at TPI.

Each member of the panel confirmed the trend towards renegotiation, highlighting several factors that are driving it. But while precise industry considerations may vary, there is no question that the most common cause is the push to reduce costs and improve cash flow. Tim McCarthy, who is on the receiving end of renegotiation requests, has no doubt: “The issues are pricing and payment terms.”

Bill Huber and Dan Mahlebashian both expressed concern over renegotiations that focus narrowly on price. They pointed to the fact that cost reductions and efficiencies can be achieved from a variety of approaches and that it is possible to do this in more of a win-win style. They shared Tim’s concern that a narrow focus on price reduction inevitably undermines the strength of trading relationships. In answer to a listener question, they agreed that such approaches risk destroying value-add and innovation from key suppliers. “Simply treating all negotiations as one would a commodity – focusing on price – is very dangerous,” according to Bill Huber.

The contract management organization at General Motors is working hard to avoid this approach. They have found great support and cooperation from their major outsourcing providers – and that is not a characteristic they paln to put at risk. “In terms of immediate steps,” commented Dan Mahlebashian, ” we look to restructure contracts and relationships. We are looking for simplification, re-scoping, taking out elements of performance that are no longer necessary or so important.”

Bill Huber agreed with this thoughtful approach and observed that smart companies are looking to re-address structural aspects of their deals, as well as pursuing opportunities to consolidate activities into a smaller group of providers. But he emphasized that this approach cannot be followed with every supply relationship. Sourcing groups must segment their supply portfolio and understand the differences between true commodities and the relationships that differentiate business performance. The most talented experts within the contracting or sourcing organization, those who have the capability of driving innovation, and value creation and framing risk/reward options for executive decisioning must be dedicated to the those critical, differentiating relationships.

Top Suppliers Also In On The Action

Bill highlighted that the traffic is not all one way. He has noticed that market sensitive providers are recognizing an opportunity to upgrade their customer portfolio. For suppliers who have no immediate cash or credit concerns, this is a time to be more selective in which accounts they gain or retain. These ’suppliers of choice’ (in most cases, the well-established brand names) are demonstrating increased due diligence and are today more likely to withdraw from the bidding if they feel a customer is at risk, or is seeking to impose strongly one-sided terms.

“These suppliers are also looking to expand scope with existing clients, to overcome reductions in service due to factors like reduced sales or headcount,” Bill said.

At several points in our conversation, the experts focused on the issue of strategy. “You need a strategy,” said Dan Mahlebashian. Tim McCarthy agreed strongly. While emphasizing that each situation requires case-by-case handling, he has no doubt that companies which fail to consolidate and learn from experience will struggle to survive. Tim highlighted examples of issues – such as contract suspension and supplier termination for convenience – where there may not have been documented policies in the past. “This (current economic) situation is causing a need for a whole new set of policies and practices; you cannot just make those up as you go along.”

A Breakthrough Opportunity

Each of the participants was equally vocal about the importance of contract management and commercial expertise. “A failure in contract management is the silent killer of expected results,” stated Dan Mahlebashian. There was consensus that this is a time when contracts and commercial personnel must rise to the challenge and the opportunity for greater status and responsibility. Bill Huber highlighted the unique insights that those in contracts organizations possess (buy-side and sell-side). Tim McCarthy and Dan Mahlebashian have both observed the need for contracts groups to show leadership and ensure executive management has visibility into market conditions and the strategies needed to survive and flourish.

“It is time to raise the stature and visibility of the function – we have been waiting for this opportunity”, said Tim McCarthy.  He also agreed that current economic conditions have removed any doubts about the need for contracting to be viewed as a life-cycle activity. All the participants observed that modern contracts professionals and organizations must take accountability for deal outcomes, not just the input of a signed contract.

In order to drive a renegotiation strategy, it is critical for those in the contracts, procurement or commercial organizations to network more effectively. They must consolidate experiences and jointly develop and propose solutions. They must understand and distinguish between relationship types and avoid ‘one size fits all’ approaches. And the networking goes beyond simply internal groups. The panel highlighted the way that successful companies are using IACCM as a focal point – through message boards, through use of the IACCM networking facilities and through research and conference calls. They also observed the importance of physical events, such as the up-coming IACCM conference in Orlando, where much of the discussion will focus on today’s challenges.

The Path To Success

I asked the panel to tell me three things that they would recommend as a way forward for contract management and commercial groups.

Dan Mahlebashian offered the following advice:

  1. Standardize your work environment, both contracts and processes. It really helps both suppliers and customers if there is a predictable base for driving improvements and changes.
  2. Ensure a structured discipline for governance – oversight of performance, the relationship and financial management.
  3. Leadership. It is critical that we are equipped and ready to deliver against executive needs – and also to push back when the business may be driving in the wrong direction.

Tim McCarthy drew on a slogan used at Rockwell Automation in identifying his three imperatives:

  1. Listen. Take your time to understand the driver behind customer requests. Get into their skin, rather than react with a defensive position.
  2. Think. Based on your listening, work with others in your organization to map out a path forward that benefits both sides. Explore ways to change the tenor of the other party’s demands.
  3. Solve. Bring your ideas to the customer. Demonstrate you have listened and show concern for their needs. Communicate  how those needs can be met with a more creative ‘win-win’ solution.

Bill Huber also highlighted three steps that he has observed in the organizations that appear to be coping best with current conditions:

  1. Strategy. You must have one. And it must tackle issues such as what resources you have available (internally or externally) to address the demands of the current business environment. The strategy must set scope and timing based on agreed priorities – it is a time for targetted shots, not a scattergun.
  2. Segmentation. Activities must be prioritized and driven by the importance of the relationship.
  3. Negotiation. Organizations that lack a  structured process  for executive review and disposition of alternatives for innovation outside of simple price reduction in the context of negotiations  must establish one. For those organizations who have previously adopted this approach, it is time to evaluate how it can be taken to the next level..

“In the end, we come back to leadership,” concluded Tim McCarthy. “Our professionals have a unique perspective. Today we are faced with new challenges. If we don’t lead, who will?”

 

 

 

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