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Failings In Governance – And Contracting

February 22, 2010

The Economist recently ran an article highlighting ‘the failings of Japanese corporate governance’. It suggested a need for more independent boards and for an ending to the heirarchical systems that prevent senior management learning the truth. The article calls for more external (ie non-Japanese) recruitment as one way to ensure change.

The concluding paragraph goes on to make a wider observation: “Many large Japanese companies are now responding to Toyota’s troubles by re-examining such matters as their use of outsourcing to drive down costs, their dependence on external suppliers (most of the accelerator pedals were supplied by an independent American partsmaker) and their relationships with non-Japanese firms. But they might want to use the incident to reconsider their own internal workings, too.”

As observed in previous blogs, Toyota was frequently ready to learn from the outside world – and indeed, its adoption of procurement practices more typical of Western companies was seen by some as contributing to its recent problems. By introducing more aggressive, cost-focused approaches to its supplier management, the loyalty and partnering implicit to ‘the Toyota way’ has been jeopardized.

At the same time, my sources suggest that contracting and contract management are not generally understood within Toyota or other large Japanese corporations. There is no centralized process or skill group, so post-award supplier management remains relatively fragmented. My suspicion is that this has resulted in increasing confusion and inconsistency. As The Economist points out, companies must become more sophisticated in the way they structure and manage trading relationships, especially now that so many of them cross traditional geographic and cultural boundaries. And that sophistication simply will not occur if contracting remains a fragmented, tactical activity with little or no management attention and starved of investment for the right systems and resources.

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