“Was your contracting process defined, or did it evolve by default?”
That is the question asked by Craig Silliman, General Counsel at Verizon Business, in today’s webinar that was jointly hosted by IACCM and Ariba.
This week has been marked by growing evidence of Legal interest and leadership in getting to grips with contract management. For some, it seems to be the pressure of workload that results from an inefficient and undefined process. For others, it may be the result of audit and regulatory concerns. But whatever the driver, this is the third blog this week highlighting leadership by in-house counsel.
I welcome this development because, as Craig and co-panellists Chris Davies from Fujitsu and Debby Leap from HAVI emphasized, progress can only occur if there is leadership. This does not inevitably come from Legal, but the General Counsel often has greater incentives to drive improvement than other executives. Yet as Craig pointed out, this is often perverse, since in reality the major benefits of contracting efficiency are observed in financial results.
The panel members represented different functions – Sourcing, Commercial Management and Legal – yet each agreed that successful contract process reengineering must start with an understanding of the company-wide benefits to be achieved – for example, greater speed, reduced workload, improved controls and faster response to changing business and market needs. The problems created by inefficient and fragmented contracting are primarily resolved through process definition; this inevitably leads to the conclusion that automation is required in order to secure and safeguard the benefits.
“Without an effective and inclusive process, contract decisions are often surrounded by apparent risk and uncertainty,” observed Craig Silliman. ” And when there is uncertainty, it is always easier to say ‘no'”. In today’s environment of rapid and unpredictable change, many of the old rules and procedures rapidly become redundant, yet without a clear process or methods to gather business and market intelligence, the need for change is obscured. The contracting process becomes rooted in protecting policies and principles of the past.
In summarizing the conversation, I observed that ownership, process and automation are game-changing steps and can enable us to respond to the challenge created by today’s global complexity. Since this was recently highlighted by CEO’s as the number one issue for management, it further confirms the increasing urgency of transformation – and the strategic significance that contract management has in 21st century business.
If you have not already started on the journey to reengineering, now is the time to begin!
On the Emptoris blog, Kevin Potts reports on a presentation given by IACCM Corporate Member Cisco.
As I have highlighted previously, Cisco is without question a leader in contract management. It has taken steps to ensure clarity of process ownership and devised a collaborative management system, which together ensure continuous innovation and improved efficiency. This has been undertaken with leadership from the Law Department – echoing the points raised in my blog from the European Corporate Counsel Exchange (‘Contract Integrity On the Front Line’ – October 26th). General Counsel Mark Chandler has emphasized his ambtion to ensure that Legal and Commercial resources (buy and sell) are ‘a gateway, not a gatekeeper’.
As Steve Harmon, Senior Director of Legal Services at Cisco, set out in his presentation (on which Kevin reports), this could not have been done without automation. It is the bedrock for policy and process improvement and enables the agility that is so critical to business competitiveness today. I recommend that all those who care about their contribution to the business should read this report – http://emptorisinc.blogspot.com/2010/10/how-is-contract-management-software.html
Far too many service and solution contracts have performance problems, making them low margin and / or a source of dispute. As businesses increasingly move from product-based to service-based offerings, ‘Contract execution is critical’.
This was the view expressed during a roundtable discussion at this week’s Corporate Counsel Exchange in The Hague. There was wide consensus across an international group of senior attorneys that the challenges and the needs of contracting have changed. The big issues are most frequently about execution and performance, and there is an evident disconnect between the sales / acquisition process and post-award implementation and management. They characterized this in three ways:
- Businesses have moved increasingly from the sale or acquisition of products to the sale or acquisition of services, but many top managers have not understood the implications of this.
- Communicating the terms and the implications of the contract to those who must either agree or implement and manage has become challenging.
- There are specific issues created by mismatched incentives / measurements – in particular Sales compensation and Procurement savings.
Most lawyers feel that they – or professional contracts staff – are often involved too late to influence the statement of requirements or definition of scope – yet increasingly these have become the major source of dispute. As a result, the roundtable participants felt that most agreements are ‘fit for purpose’ from a purely legal perspective, but are much less confident that they meet the commercial needs or interests of the parties. One sign of this is frequent disappointment with outcomes (buyers) and with profitability (sellers).
One attorney highlighted a recent change in his business, where sales commissions are now withheld for 100 days after contract signature and only released if implementation is progressing smoothly. But he also described the difficulties there have been in persuading top management of the need for change in the business. Executive decisions continue to be driven by short-term considerations, such as quarterly numbers, which do not fit well with the needs of long term, service-based contracts.
The session mirrored a number of the themes that have been highlighted in this blog and from research by IACCM. It also confirmed that progress in addressing the issues on which contracting integrity depends is painfully slow. But there are signs of movement, with examples including changes in commission schemes and a shift in the role and measurements of Procurement. But perhaps most encouraging is the growing interest by senior lawyers and their understanding that contract management is very significant to business performance. In the words of one Assistant General Counsel from a major oil firm: “Contract management is an area of great opportunity for Legal”. Perhaps their championing of the cause will at last provide the break-through in senior management understanding that contracts and the contracting process really do matter.
This week I am attending the Latin American Congress on Contract Management, the first such event in the region.
It is an important milestone for the field of contracts and commercial that more than 100 delegates have been attracted to the event, held in Sao Paolo, Brazil. Coming as they do with no strong preconceptions about the role, it is worth noting that the audience is a balance of sell-side and buy-side personnel, predominantly from South American companies, also with a number of lawyers and business executives eager to learn more.
Many delegates are keen to confirm their understanding of the role of contract management because this is not an established discipline in the region. Indeed, many make the point that executive management does not really understand its purpose or contribution. Yet it is also clear from the lively discussions that the discipline is sorely needed. Latin America – and Brazil in particular – is increasingly exposed to world markets, both as a seller and as a result of massive inward investment. As we discussed the need to use contracting as a way to ensure mutual understanding of goals and to safeguard the delivery of intended benefits, many heads were nodding in agreement. The topic of performance management – and especially the impact of terms and metrics on organizational behavior – also excited extensive interest.
A further sure sign of long-term health is the presence of several sponsors offering contract management software and consulting. I was surprised to discover the availability of locally developed software solutions for the Brazilian market.
IACCM already boasts several hundred members in the region and is equipping them with the contracts and commercial skills and methods to ensure a visible contribution to their business. This event will ensure a new group of ambassadors for the discipline and it will continue as an annual forum that enables sharing of both local and global ‘best practice’.
Last week, I interviewed Mr Geert Peeters, Chief Procurement Officer at Levi Strauss. Geert and I will both be among those presenting at the Procurecon conference in Brussels, November 2nd – 5th.
The theme of our conversation was ‘Challenges and Opportunities for Procurement’ (to access the audio file of our interview, click here). On the surface, after more than 150 years in business and with a leading global brand name, it would seem that the role of procurement should be well defined and predictable. But that proves to be far from the case.
A major challenge for Levi Strauss right now is its dependence on cotton. Traditionally a stable commodity, recent times have seen increasing turmoil. This year, prices have risen some 40%, mostly propelled by the devastating floods in Pakistan. But it turns out that supply disruption is no longer an isolated experience; a couple of years ago, it was the disaster in Haiti and before that, the impact of the tsunami on crops in Sri Lanka. Topics such as climate change are therefore very high on the agenda.
“Sophistication in risk management” has become a critical skill for the Procurement function, according to Geert. Procurement staff have also had to re-think the commercial model for their agreements. Historically, forward buying, hedging and other methods to manage future costs were not considered important. But of course this is just one aspect of managing supply risk. Procurement is also actively involved in work to seek alternative materials and to bring innovation to the industry.
Levi Strauss was a leader in introducing a Code of Conduct for its suppliers back in 1993. This aligned with the company’s philosophy of ‘profits through principle’ and is a component of a rigorous approach to Corporate Social Responsibility – another key area for Procurement involvement. Geert explained the commitment to transparency, citing as an example the fact that all the company’s suppliers are listed on its website.
I asked Geert how they ensure flow-down of their ethical standards to sub-contractors. “We have collaborative policing of the Code of Conduct”, he explained. And he went on to describe how the Code is now being extended to the cotton fields themselves – clearly a demanding task, given their remoteness and the difficulties over access to many of them.
Like many others, the Procurement group at Levi Strauss has recognized the growing difference between direct materials and services contracting, with the latter demanding ‘a more commercial approach, because value really matters’. They are also cautious in their use of technology, especially in managing the supplier interface. Geert believes his team must still build physical relationships and be visible to the supply base, while using technology to simplify and assist communication and knowledge transfer.
On the subject of knowledge, Geert also highlighted the growing importance of learning across industries. Historically, there was a tendency to see the procurement problems and opportunities as somewhat industry specific, but today there are many benefits from cross-learning. Key issues such as climate change, social responsibility, the use of technology and risk management ‘best practice’ are topics that affect any global business and good ideas can come from anywhere. That, he assured me, is why he finds venues like Procurecon so helpful!
The recent report by Sir Philip Green on the state of UK public procurement has revealed consistent waste and value leakage in the acquisition process. Yet in fact, this is not new news and there is extensive support available to remedy the problems. The issues are also not unique to the UK; as the complexity and volume of public sector procurements has grown, the organisation and procedures to manage them has lagged far behind – and in many cases, the investment in new procurement practices and external consultants have directly undermined success and value for money.
There is a carefully researched set of defined practices that organisations need to follow if they are to be successful at managing their supply contracts and relationships. Therefore, perhaps the biggest surprise about Sir Philip Green’s findings on the inefficiencies of UK public procurement is that they are a surprise.
Even allowing for the disingenuous claims of a newly elected government anxious to castigate its predecessor, it has been evident for quite some time that public sector agencies are in general not good at managing contracts or suppliers. Quite simply, the most basic analysis shows that they lack most of the necessary ‘best practice’ capabilities and behaviours. Indeed, this has been pointed out by publications such as The Economist (August 2009) and repeatedly by the UK’s National Audit Office, often in conjunction with the Office for Government Commerce (OGC). Many top suppliers have also been forthcoming in their criticisms, had anyone been inclined to listen.
As the volume and complexity of public procurements has grown, the weaknesses in contracting and commercial management have become steadily more evident. This is a problem also faced by the private sector, which has been similarly exposed by the challenges of managing ever bigger projects, with increased responsibility for ensuring successful outcomes, often stretching across highly interdependent international supply networks. The big difference is that the private sector is mostly taking steps to raise its competency by investing heavily in skills and resources to shape and manage these contracts. Government, in general, has not; it sought to escape the problem by pushing responsibility for success onto consultants and suppliers, engaging in increasingly adversarial negotiations and ill-considered approaches to the allocation of risk.
In recent years, millions of pounds (and other currencies, depending on location!) have been poured into procurement training and staffing, along with expensive acquisitions of minimally useful software tools. But there has been little or no consideration given to the competence needed to frame and manage these acquisitions with appropriate forms of commercial arrangement and relationship governance. It is as if we have spent a fortune buying an expensive new boiler and constantly refilling it with oil, but have ignored the need (and the entreaties of our suppliers) to connect the pipes to a plumbing system.
Best practices in this emerging field of contract and commercial management are available. Indeed, ironically, the UK’s recently renamed OGC has been at the heart of many of them. Of all government agencies around the world (with the possible exception of Australia), OGC did more to develop and document methods and to work with organisations like the International Association for Contract & Commercial Management (IACCM) to understand and validate leading-edge ideas. Its efforts were largely wasted because it lacked authority to impose any central structure on the jealously guarded independence of Government departments. This culture of independence also means that pockets of contracting and project excellence within certain departments have been largely ignored and their successes not replicated. Public sector staff who fill contract or commercial management roles are frequently isolated, starved of training or growth opportunities and lacking significant authority or status.
I am far from confident that the situation is better elsewhere. In the US, for example, the Obama initiaitives to improve contract management appear to heva been diverted onto the ‘control and compliance’ agenda that is actually a key piece of the original problem.
There are solutions at hand. Doubtless this sudden exposure will lead to the emergence of a whole new set of overnight ‘experts’ anxious to offer high-price consulting and organisational design services. But there is also true expertise, in the form of IACCM, its membership and a growing body of international academics who grasp the fundamental importance of contracting and commercial competency to forge successful trading relationships in a complex, interconnected and interdependent world. The fruits of their work and research are accessible through a variety of studies, training programs and publications of which the UK Government (and others) can immediately take full advantage.
Companies in Asia traditionally have not had contract management functions. Indeed, in many cases there was not even a law department. The same applied to certain areas of Finance, such as Treasury. Now, lacking the constraints of reorganizing, some of these companies are adopting technologies that enable them to leapfrog their Western competitors.
Despite the fact that contract management and legal have no estabished history in most parts of Asia, the situation is changing fast as encounters with Western customers and suppliers show the benefits to be gained from contracting and commercial competence. The fact that there is no entrneched organization to overcome means that Asian companies can adopt ‘best practice’ without a need for painful reengineering of existing processes. An article in GT News descibes a similar pattern being followed in the area of Treasury and highlights its implications for Western companies and their employees.
“The growth of Asia as a financial power, driven by China’s extraordinary economic engine, has been on the mind of western corporates and banks alike for a number of years now, in terms of both the challenges and opportunities it produces. One thing is for sure, there is a vibrant and fiercely competitive corporate culture rapidly emerging in the region.
One example of how this competition is manifesting itself is in technology ‘leapfrogging’ – enabling treasury departments in Asia to gain an edge over their western counterparts. Leapfrogging refers to the fact that, by and large, corporates in Asia are unencumbered by legacy systems within their treasury and can implement a brand new cutting-edge system from scratch – ‘leaping’ them to the front of the efficiency line ahead of western corporates, who can take years removing legacy systems, preventing them accessing the best technology available. This can inevitably lead to a lack of competitiveness compared with their Asian peers. Faced with this situation, it could be easier for western treasurers to look east for their next career opportunity.”
Job hunters aside, this warning should act as a wake-up call to all those who have either resisted the inroads of new process and technology, or have failed to push through on rapid implementation. At IACCM, we know there is a similar trend beginning in Legal and Contract Management functions because these companies are talking with us about best practice – and more importantly, are then hastening to implement it.
An IACCM member from Finland recently asked for my thoughts on service quality and performance. I thought the question might be of wider interest – and by writing my thoughts, I hope others will be encouraged to offer their comments as well.
First, I am assuming the initiator of the question is asking about the interconnection between service quality and performance as they relate to inter-company contracts (since the question could equally apply to the role of performance measures in driving internal service quality). Focussing on the former, there are various aspects of this on which we have been collecting data or commenting in recent times.
- Research by Wharton Business School, looking at the Rolls-Royce performance based offerings (and comparing them with traditional cost plus or hourly rate offerings) found a significant advantage was obtained over time in terms of lower costs and greater innovation.
- Other research – I believe in the construction industry in particular – suggests there is no advantage in performance based contracting. However, I suspect the life-span of the respective arrangements might account for this, together with the frequency of change and aggressive focus on cost that are typical of the construction industry.
- The Gulf incident brings a further perspective. It has been suggested that performance management was not to blame, but post-event analysis suggests there may have been a failure to recognize the behaviors that specific performance measures induce. For example, a measure to continually reduce cost may lead to cutbacks that damage quality or safety (for example, fewer or less qualified resources, cut backs on maintenance etc); similarly, strong pressure on availability levels may cause personnel to err on the side of risk rather than caution (for example, if alerting the customer to a safety issue might result in unscheduled maintenance).
We are seeing a growing recognition that performance measures must always be designed to support the full set of value criteria that are important to an organization and then tested against each other to see whether they represent balance. It may also be significant to think about the nature and duration of the relationship being formed and whether it is sufficient for performance based measures to work. In particular, can the holistic performance criteria be used to affect payment schedules, so that issues such as quality become part of the reward structure?
This same point applies to the supplier selection process. If the quality of performance over time is important, then the weighting or evaluation criteria must reflect this. Often, we encounter weightings that are far too limited (eg simply based on price and availability), or where the final criteria are ‘adjusted’ to fit the supplier that internal pressures say must win, rather than the one that should win. If the selection process lacks quality, it should be no surprise if supplier performance shows similar failings.
Finally, the relevant organizations need to be honest in their appraisal of their own and each other’s cooperative instincts and to structure their approaches to performance and quality accordingly. I believe that performance based and quality success come from situations where there is a well-established and fully supported commitment to communication and governance. It is the procedure and adherence to it that will support quality. However, a good supplier will find ways to ensure they have the feedback needed to ensure on-going high quality and user satisfaction, because they want to retain their customer and gain future business. They will do this in spite of a poor procurement process, but enthusiasm will be undermined if the customer continuously engages in behaviors that ultimately make their business unprofitable or simply unpleasant as an organization to do business with. Suppliers do ‘fire’ customers, or simply let the business whither away. (Indeed, having the courage to fire a customer is sometimes the surest way to rebuild the relationship).
There are various articles related to these topics in past editions of IACCM’s Contracting Excellence magazine (available on the web site). There are also several blogs that I have written in recent months that expand on some of the points above.
Another aspect on which I write regularly is the internal connection between performance measures and service quality. I believe strongly that companies should look at how they allocate internal accountability for the quality of their internal policies, practices and procedures. It is the failure to have clear points of ownership that frequently leads to the failure of service quality. Again, my blogs often return to this topic (see for example https://tcummins.wordpress.com/2010/10/04/the-costs-of-poor-contract-management/)
Other blogs that might interest you include:
https://tcummins.wordpress.com/2009/12/01/perspectives-on-contracting-today/
https://tcummins.wordpress.com/2010/09/08/contracts-risk-deepwater-horizon/
https://tcummins.wordpress.com/2009/11/13/risk-management-behavior-is-key/
“The need for skills and information to maintain a competitive advantage has never been higher. Professionals today are under an enormous amount of pressure to keep up with the latest developments in their industry as well as document, report, audit, and share information in ways they’ve never had to before.
In an environment with an aging workforce combined with attrition resulting from downsizing, a ‘knowledge vacuum’ is being created as people with irreplaceable knowledge literally walk out companies’ doors. Leading companies recognize that developing successful products requires creative people with in-depth knowledge, and that they must actively acquire and share best practices throughout the organization.
Part of the challenge is to transform the ‘Not Invented Here’ Syndrome. No longer can companies afford to have information silos which result in costly duplicate, redundant, or unnecessary efforts.”
This summary could well have been written by one of our members from the world of contract management or sourcing. In fact, it refers to the field of engineering. But it could also have come from many other functions, all of which seem to be struggling with similar questions, challenges and disruptive forces.
So the good news is that we are not alone. On the other hand, it also means that other groups within the business are trying to work out their new positions within the heirarchy, trying to ‘stake their claim’ to the higher ground. So the debate for those in the commercial and contracts world – as well as procurement and to some extent legal – has a degree of urgency. And not just the debate, but of course also the action.
It is a time for courage and leadership. Within this blog, and through the work at IACCM, we have sought to lay out the opportunities and the change agenda. It is up to the professional community itself – and individuals within it – to decide on whether to take action.
“Some of the most successful resolutions (to negotiation) have been when there is nothing left to hide. Openness clearly leads to more value, yet often it requires a crisis to make it happen.”
This statement came from a discussion I was having today with the Vice-President for Commercial Management at a major outsourcing provider. Many in our community – buy and sell – bemoan the absence of open communication and recognize the impact this has on negotiated results. But recognition of the problem does not lead to change …
The executive with whom I was having this discussion described how his function is moving from a role of ‘reactionary customer protection’ to ‘proactive business winning’. This is an increasingly common trend, but like many others, it is unclear how that transition will be made.
The IACCM studies of ‘the most admired companies’ offer a range of insights. Perhaps the key issue is the quality of teamwork in both parties. Not only must the internal planning procedures be collaborative, but the business-to-business communications are fundamental to building trust. Flexiblity is not the most valued attribute in negotiation; it is the quality of communication. That means ensuring the right people with the right information are engaged at the right time, to enable open discussion and joint problem-solving.
In many organizations, there are several factors that work against this. One is the tendency (identified in the recent research by the International Center for Complex Project Management) for executive sponsors to engage in a ‘conspiracy of optimism’ – expecting results that cannot be achieved, at unrealistic prices and in unachievable timeframes. In principle, early engagement of the contracts personnel might reduce those risks – but in reality, contract management, legal and procurement staff are often involved too late. At that point, the contract becomes an instrument of protection, rather than a tool to assist realization of the opportunity.
Far too many opportunites are missed because negotiations become driven by protection, rather than open discussion of how the parties will mutually address the risks and create a relationship committed to success. This is not inevitable, but it is far too frequent and it requires organizations to re-think the way they assemble, empower and manage their negotiation teams and planning.
Commitment Matters 