“In the last couple of years, things seem to have got worse.”
That sentiment about the unfairness of risk allocation in contracts is one I have encountered many times during discussions in recent weeks. There is a feeling that large corporations and major public sector bodies have become more risk averse and have used current economic conditions to exert their strength – liabilities, indemnities, IP rights, termination provisions, performance criteria and (in the corporate sector) payment terms have been areas of focus. And despite their insistence on ‘the integrity of contract’, these same organizations think nothing of using their power to force unilateral renegotiation when conditions change.
Overall, I think things have become worse. Ironically, on one hand economic conditions have forced many corporations to take added risk (new markets, more rapid product development, supplier consolidation are examples), but at the same time they have sought to clamp down further on their established suppliers, without much regard to the business consequences.
Some legal and procurement staff stick to the belief that harsh terms drive performance. Short-term and for commodity acquisitions, that may be right. But for any more complicated or long-term acquisition, all the evidence points the other way – that unfairness undermines loyalty and commitment, leading to poorer outcomes and therefore added risk.
However, while things may have become worse, I see growing light at the end of the tunnel. I have the impression that an increasing number of organizations are starting to question their approach. This is leading to a number who have renounced liquidated damages; some who are questioning how they can be more intelligent in protecting (and exploiting IP); others who are looking for shared approaches to governance through better change provisions, escalation procedures and added flexibility through mechanisms such as ‘hardship clauses’. I believe the door is opening for those suppliers who engage early and demonstrate their capabilities and commitment to deliver.
Relationships that extend beyond a few transactions will always depend on trust and cooperation. Failure to establish and sustain these characteristics will always result in degraded performance and missed opportunities. This truth is dawning on a growing number of those responsible for contracts and they are influencing their management and colleagues to think differently – to distinguish between risk allocation and risk management.
“There isn’t such a thing as an IT project, they are business projects. Virtually none fail due to the technology.”
This quote, from the UK Government CIO, reflects growing understanding that it is primarily commercial and relational issues that undermine success in IT procurement. Indeed, research by the International Association for Contract and Commercial Management (IACCM) suggests that more than 70% of ‘troubled projects’ are struggling due to non-technical factors.
What goes wrong – and how can the problems be avoided?
IACCM has discovered a series of issues that appear frequently to undermine outcomes:
– weaknesses in requirement definition
– poor alignment between business requirements and supplier selection criteria
– inappropriate allocations of risk and the wrong performance measurements / KPIs
– lack of discipline in the management of change
In a world where the pace of change continues to accelerate, it is not surprising that projects are often challenged by high levels of ambiguity, uncertainty and volatility. This is hard to manage when there is a lack of alignment between functional objectives. For example, Procurement is driven by achieving the lowest price, Legal is driven by minimizing risk, and IT is concerned about achieving good outcomes.
The problems are reflected in a series of recent quotes by CIOs:
“Weaknesses in change management are typically a key factor in project failures and overruns.”
“We operate a procurement process that takes too long and prevents the interactions with suppliers that would support innovation.”
“We generally prefer to drive down the price from the supplier, rather than tackle the costs associated with waste and inefficiency. We rarely ask which would yield more, nor the extent to which our inefficiency is adding to the supplier’s costs.”
Achieving Improved Outcomes
The IACCM research has concluded that most organizations lack a strategy for contracting and commercial management. As a result, the CIO rarely has the necessary contracting tools at his or her disposal. This includes the timing of involvement by the people who are key to both negotiation and delivery; it extends to having the right contract structures and service levels; and it is evident in the weakness and indiscipline of change management.
To improve the quality of outcomes, the CIO community must demand more from the organization. There is a pressing need for either increased support or greater empowerment to negotiate and manage the right contracts and relationships for the type of project to be undertaken.
Rapid changes in business conditions, the volatility of market demands and the speed of innovation in technology have combined to make the life of the CIO and their staff more complicated. Adding to these factors is the growing dependence on global supply networks where cultural tradition and business practices may differ substantially from those of the domestic market. To manage this complexity demands different skills and tools from those of the past; it has placed strong emphasis on communications, transparency, negotiation skills and business acumen that have not been traditional strengths. It also requires contractual frameworks that are less about risk allocation and more about governance and management standards for handling the on-going project.
IACCM believes that the answer to these challenges is to equip IT and project staff with greater understanding of the commercial and contractual issues and solutions. With this in mind, it has coordinated the compilation of a worldwide ‘body of knowledge’ – an Operational Guide to Contract and Commercial Management.
It is perhaps surprising that this is the first work of its kind; yet its previous absence maybe explains why so many IT projects have struggled to meet their goals.
It may not be an issue today, but at some point, most contracts and commercial groups face the question “What value are you bringing to the business?” And when that question arises – whether it is to justify headcount or to support a business case for more investment – most contract management groups struggle to describe their value in financial terms.
Without that ability to justify (or even better, having proactively provided management with the data), many groups find themselves subject to the ups and downs of the market, or the whims of management sentiment.
Ironically, it is in Government and public sector that the value of contract management is often most evident. This is because the audit process results in far greater visibility of losses – and with increasing regularity, the auditors are highlighting the weakness of contract management or failures in commercial expertise as key reasons for these losses. Recent examples can be found in many countries and they amount to many billions of dollars (see separate blogs or recent articles at the IACCM website).
To support its members in developing the business case for improved contract and commercial management (both sell-side and buy-side), IACCM is conducting a study to discover the extent of corporate financial losses that result from weaknesses in contracting. Its goal is to support members of the Association in their efforts to gain management support or provide strong rationale for budget and headcount.
Given the nature of the survey, the individual inputs will of course remain confidential (and can be submitted anonymously), but consolidated results will be issued to all identified participants. I hope readers of this blog will take a few minutes to share their experiences at https://www.surveymonkey.com/s/CMvalue
There is an interesting discussion underway on the IACCM Forum. It relates to relatively frequent question (and frustration) over the ability to move between industries.
We are often told that organizations should hire for skills, not knowledge. Indeed, one of the top issues raised by functional management is around the skills gap that they face. I hear relatively little about ‘the knowledge gap’. Is this because they see the two as interchangeable?
Based on the experience of many job applicants, specific industry knowledge and experience often seems to trump the value placed on demonstrated skills. There remains a tendency to hire people who fit our existing employee profile – even though we are at the same time saying that profile is not quite right for the future!
I understand that we are often hiring as a matter of urgency and want people who can ‘hit the ground running’. But firstly that assumes there is only one way of doing things and secondly it means we never start to address our more deep-seated problem, which is a lack of diversity and new ideas and knowledge.
So how do job applicants best oversome this narrow-minded approach to selecting interview candidates and hiring? I would love to hear your thoughts, either because you have succeeded in breaking down the barrier, or because you are a manager who deals with hiring.
And just a comment for those who are giving up hope. I managed to move from banking, to automotive, to aerospace, to technology. I recall overhearing my line manager the day I joined automotive saying to my supervisor ‘He comes from banking, I don’t know why they hired him, but we’ll find a way to move him on very soon’. Fortunately, he changed his mind. Now I must give some thought as to why that was, and maybe it will help me answer the question!
Coming soon! Have you applied for your licence yet?
Click for a preview of IACCM’s exciting innovation program licence[3] – and contact info@iaccm.com for more details.
- an ability to simplify the discovery process; and
- The fact that if a company has already built a robust contract management system, it reduces the risk for a merger or acquisition partner and therefore should make the business more attractive (unless of course there are a lot of bad contracts!).
I was reading recently about the financial crash and the author was suggesting that far from too little regulation, the problem is that we have too much. He suggested that much of the governance and regulation in place today is a pretense by politicians that they have things ‘under control’. It is a reaction to events that actually increases systemic risks by creating a false sense of security.
There is certainly some truth in this view. A framework of governance and regulation generates a sense of underlying confidence that reduces the diligence with which situations or decisions are reviewed. That certainly appears to have been true in the financial services industry. If there had been no regulatory framework, would people have had such blind faith in the actions of the industry?
The truth is that you cannot regulate desirable behavior. There are always conflicts between short-term and long-term interests, between personal and social benefit. Certainly we nee d to protect against criminal activity, but we also need to remain skeptical and ask questions about motivation and representation.
This is true in any form of governance system – including the world of contracts. And, as one colleague pointed out recently, rigorous process often causes us to spend more time and effort on getting through the process than we do on assessing the risks that were the underlying reason for the process.
The confluence of concern about risk and demands to cut costs results in a dilemma for many contracts, procurement and legal groups. It generates the frequent question ‘How do we do more with less?’
Of course, if one is simply looking at cutting cost without substantially reducing service levels, the main solutions are to automate and / or to outsource or move some activity offshore. However, concerns about risk typically imply increased review and approval – and hence greater workload. And for smaller organizations, offshoring is not likely to be a practical solution and outsourcing may not generate any cost savings.
In my experience, any successful effort to improve the quality of service while cutting or maintaining the cost of service depends on thoughtful segmentation of the contract base. This does not mean dividing deals based on revenue, or ‘strategic importance’, or similar techniques which frequently bear no co-relation to actual risk.
I thought it might be helpful to share a couple of methods that we have used with our members at IACCM. I’d welcome other ideas or approaches so please make a comment if you have one.
- Confidentiality / NDA
- Agent / remarketer agreements (including involvement of an agent or remarketer on a specific deal)
- Teaming agreements
- Joint ventures
A lack of strong leadership frustrates many contracts, procurement and legal professionals. In the most recent IACCM survey, they indicate that functional management frequently fails to provide adequate strategy and direction – and of course, this undermines their status and their confidence about the future. Many are concerned about their career path and their organization’s ‘failure to invest in its people’.
It is findings like this that have encouraged IACCM to undertake a comprehensive study of ‘the future of contracting’. Our aim is to provide authoritative insights and ideas on how the contracts and commercial process will evolve, enabling current and future leaders to develop a more robust strategy and to ensure investment in the skills and resources for tomorrow. A two minute video describing our goals, methods and early findings can be accessed at http://www.iaccm.com/library/?id=4096
But it is not only IACCM that is focused on the future. A growing number of academics have recognized the importance of contracting and many are working in partnership with the Association to drive research and to incorporate contracts and commercial knowledge within the University and Business School curriculum. A sample of those research papers will shortly be presented at the IACCM Academic Forum, featuring content from a range of top institutions in America and Europe. The papers will also be published and made available for IACCM members. Topics include:
– Visualization: Seeing Contracts for what they are, and what they could become
– Learning in Evolving Corporate Models in the Construction Industry: A Case Study
– Contracting Capabilities in Management of Innovation Networks
– Why a contracting party may be less cooperative after having suffered a loss
– Global Sales Law: An Analysis of Recent CISG Precedents in U.S. Courts, 2004-2011
– Protecting Networked Innovations with Contracts
– User-Centered Contract Design: New Directions in the Quest for Simpler Contracting
– Public Procurement as an instrument for driving regional innovation
– The Role of Proactive Law for System Level Innovations
All of this content will be available to delegates at the IACCM Global Forum in Phoenix, Arizona on October 26th – 28th. In addition to the 2 day agenda of industry break-outs, case studies and keynote presentations, they will also have access to an outstanding series of workshops. The workshops feature inspirational leaders on the following themes:
Synergy Between Contracts & Sourcing
Finding Added Value in a Commercial Negotiation: The Creation of Trust
IMPACT! What Difference Do You Make?
Plus there will be an Executive Forum where senior management can gain early insight to the Future of Contracting study results and share in discussion about their implications.
Details about the conference can be found at www.iaccm.com/globalforum/
But if you cannot be there, don’t despair! We will ensure that all our members benefit from this wealth of information and learning. Over the coming months, we will issue reports and run webinars and expert calls. The presentations form the conference will be available in the Member Library in early November. The book of academic papers will be published that same month.
Tough economic times tend to place ethics and honesty under stress – and I am seeing growing evidence of ‘underhand behavior’ as the pressures mount.
There are perhaps three major areas where we must be watchful. One is around competitive behavior; another is around the ‘truth in bidding and negotiation’; the third is in honoring commitments.
When it comes to competitive behavior, actions can take many forms. These range from the formation of cartels designed to reduce competition in bidding, to unfair or unprincipled actions towards competitors, often designed to put them out of business. The way that patents are used is one example that I have cited in previous blogs. Deliberate misrepresentation of a competitor’s performance or capabilities is another. Using subterfuge to gather competitive information is a third.
Many of these actions are not illegal, but they should cause buyers to be alert. A smart buyer understands that any gain they receive from anti-competitive behavior will be short-term. First, it should alert them to the character of the company and its likely post-award behavior; and second, if it succeeds in reducing competition, prices will rapidly rise.
‘Truth in bidding’ is a topic on which IACCM has run a series of workshops. As in the post-award ‘honoring of commitments’, there are faults on both sides of the table. Measurement systems provide incentives towards acts of omission and commission when specifying needs or capabilities. Commercial staff need to operate with increased skepticism in discovering the accuracy of requirements or commitments. Unfortunately, it seems there is also a need for increased rigor in monitoring actual performance and the management of change. Hard times lead to the temptation to understate or overstate the impacts of changes (depending on which side you are on). They also lead to an increase in inaccurate billing, including such areas as overstated hours or application of the wrong charge levels.
It is nice to believe that contracting can always be used as a vehicle to create harmonious and high-value relationships. Unfortunately, we also have to remember its importance in rooting out dishonesty and unethical practices.
Commitment Matters 