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Pressure For More Contract Flexibility Sees Mixed Results

May 23, 2010

IACCM’s recent survey on contract flexibility found that Procurement groups are well aware of the need for more flexibility and innovation in their terms and conditions, but are struggling to respond. The United States is falling behind other regions in its introduction of terms that better reflect today’s risks and opportunities.

More than 92% of those responding to the IACCM survey believe that it has become more important for their company or organization to innovate  in its terms and conditions and 77% report that their company has taken steps to introduce ‘more flexibility and responsiveness’. 65% agree, in whole or in part, with the statement ‘Executive management at my company / organization is aware of the need to find new mechanisms to manage risk and opportunity through changes in contract and relationship terms and practices’.

The IACCM report revealed substantial variations between functions, geographies and industries, reflecting different pressures, but perhaps also sources of competitive edge. For example, almost 60% of buyers ‘strongly agree’ that it is important for their company to innovate (compared with 38% on the sell-side), yet just 24% report that their company is becoming more flexible or responsive. Of course, ‘innovation’ and’ flexibility’ are not always the same thing, but this result certainly suggests that the problem of compliance-driven Procurement groups, lacking real negotiation authority, remains a problem. Certainly my experience is that the Legal function in most large corporations stifles meaningful negotiation by buyers.

 Integrated commercial groups, responsible for both buy-side and sell-side contracting and negotiation, show a significantly higher proportion that have successfully increased their flexibility, with almost 40% ‘strongly agreeing’. This may in part be due to the fact that such integrated groups are typically not in the largest companies and therefore lack the same power to resist market pressures. However, past research has shown that such groups are also far better at gathering and responding to market intelligence and generally have greater influence and status within their company.

Industry variations also throw up some interesting perspectives. For example, in Banking / Insurance and Healthcare / Pharma, more than 60% of respondents strongly agree about the need for more innovation. In Public Sector, (where one might think that current conditions are creating especially strong pressure) the number falls to just under 40%.

At a geographic level, Asia is the region most concerned about being more innovative, although professionals everywhere see this as important. However, the United States is substantially behind all other regions when it comes to taking action to be more flexible, or in terms of executive awareness that change is important. Whereas nearly 50% of professionals in the US see innovation as ‘strongly important’, less than 20% ‘strongly agree’ that their executive management is aware of this need.

Key messages from these results appear to be:

  • Today’s market risks and iopportunities demand greater flexibility and agility in managing contracts and terms and conditions.
  • This demands attention to new contract structures and a re-think of some commercial policies and practices.
  • Companies must re-assess internal authorities and review / approval procedures.
  • Integrated contracts / commercial groups (buy and sell) appear to deliver better performance.

IACCM’s report on Commercial Agility was issued on May 17th, 2010 and is available at no charge to IACCM members.

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