BP today issued its internal report into the Deepwater Horizon accident. It emphasizes that this analysis did not include input from external sources and it is therefore only one element of the wider investigation into what went wrong – and what must be done to reduce the chances of similar events in the future.
The challenge with all risk management is of course to anticipate, rather than react. No management wants to be caught out by the same mistake twice; no management wants to be shown to have failed to learn from the mistakes of others. There will be many eyes on this report, using it as a way to test internal systems and procedures and to reduce the probability of similar occurrences.
So what did the BP investigators find? ‘A complex and interlinked series of mechanical failures, human judgments, engineering design and operational implementation and team interfaces came together to allow the initiation and escalation of the accident. Multiple companies, work teams and circumstances were involved over time.’
The key recommendations from this report include a need to rethink contractor oversight and awareness, risk assessment, well monitoring and control practices, plus integrity testing practices. So while there are clearly engineering issues involved, the governance of contract relationships is identified as a critical issue. This reflects findings from other industries, which show that our constant development into areas of ever-increasing complexity demand new instruments for their management.
The deabte on this particular incident will continue for many years. But it appears already to reinforce the point that contract structures, terms and oversight provisions need to be substantially revised to cope with the increeasing complexity and risk of today’s trading relationships. That demands new skills and new levels of empowerment. Senior management must start to take greater interest and stop abdicating or avoiding responsibility for an effective contracting process. BP is not alone in this regard; indeed, our evidence suggests that its contracting practices are better than those of many companies. But the report suggests that they weere not good enough to deal with the complex environment in which Deepwater Hoizon operated. And it implies those failings were not only due to BP, but also to the behaviors and performance of key suppliers.
Once again, I cite the observations of Professor Leslie Willcocks, who last year commented that ‘contracting’ is one of the three core competencies required by companies to be successful in 21st century markets. Hopefully, we can all learn form this incident and apply renewed focus to the quality of contract and commercial management.
A couple of times in recent weeks I have heard from organizations that their internal employee surveys have shown that contracts staff feel ‘isolated’. This reflects other survey evidence regarding the sense of being ‘under-valued’ and comes especially (but not solely) from those in a post-award contracting role.
I suspect that the broad sentiment regarding value is because many staff in these positions still tend to be viewed as somewhat administrative. But for others, it can be a problem that increasingly they work remotely from their colleagues, either largely working from home or perhaps within a larger account or project team which has no other contracts professionals.
These two issues – value and isolation – are certainly linked. Indeed, anyone who feels isolated tends to become defensive; and isolation clearly results in reduced skills and value over time. Research has pointed to the fact that people who are well connected (in terms of their professional links) are held in far higher esteem – because it gives them access to more information and unique insights. Genetic research has also shown that people who are cut off from their mentors or sources of innovation steadily lose the ability to perform.
So these sentiments matter and represent a serious challenge to those who manage contracts personnel. It demands steps to ensure greater connectivity, more sources of inspiration and the chance to network for new ideas and fresh solutions. For many, physical meetings are no longer an option in these days of constrained travel budgets. The occasional team webinar or conference call often fails to do the trick. Indeed, I was reminded recently how it can make people feel even more isolated. I was told about a regular team call, where those in HQ would gather in the Vice-President’s office and join the call together – leaving those on the outside even more conscious of their lack of influence and input. Not surprising;ly, most of the conversation was dominated by those in the conference room. Those on the outside were disengaged.
Senior managers must think about ways to keep their people connected. They can do that by emphasizing its importance – and reflecting that importance in their actions. So conference calls, webinars, virtual working groups and project teams, the use of message boards and coomunities of practice are all ways to enable connections, but only if they are managed in a disciplined way and gain the visible attention of management. Participation also needs to be required – for example, it should feature high on personal appraisals. Staff should be rewarded or acknowledged for delivering new insights to their colleagues. For example, there are so many external sources of information that few organizations leverage in any effective way. IACCM has weekly expert interviews; it runs dozens of relevant research surveys; it offers webinars, news updates, this blog ….. how often are team members encouraged to follow these sources and then perhaps give periodic feedback or reports on what they discovered?
Ironically, the volume of information at our disposal and the ease with which it can be accessed are unprecedented. Yet we know from the data at IACCM that many contracts staff take little advantage of this. A networked world has offered new opportunities for ‘inclusiveness’; but it has also left many people feeling isolated. Addressing this issue demands new approaches and new thinking by management and also by any individual professional who wants to progress and to ensure their personal development.
The impacts of the networked world have been signifcant for most of the world’s population, but perhaps more so for those in the world of contracts and procurement than many others. And for all of us, the maority of those impacts are not yet fully apparent.
This morning I heard a brief radio interview with two authors who have written about the efffect of the networked world on the way that people think. One of them was claiming that the human brain is rapidly becoming ‘rewired’, genetically adapted to the massive flows of information and the ease with which communication is undertaken. He asserts that the emerging generations are ‘no longer capable of deep thought’ and that this will have a long-term and negative impact on innovation.
The other interviewee agreed that we are faced with very real challenges in dealing with the volume and speed of information made accessible by globally networked technologies. But in his view, this means we just need to do things differently. We must adapt to our new circumstances and sort the good from the bad. For example, he cited positive aspects such as the greater ease with which people can now collaborate and the dramatically reduced time and costs of undertaking research. On the other hand, he recognized that the pressure to make decisions faster, to generate results more quickly and to adapt rapidly to the streams of new information that hit us is not just demanding, but can overwhelm our analytical capabilities.
How does this relate to the activities of a procurement or commercial group, making new market or acquisition decisions, or contemplating major bids or contracts, or perhaps undertaking investments in new process or organization? In the old world, we tended to spend a long time gathering information. It took time to research and it was often costly to obtain good data (e.g. we needed consultants, research firms and analysts to gather data for us, at significant expense). Once we had the data, we would progress to analysis and decision-making; we would develop a plan and launch into our project or initiaitve, based upon an appropriate funding or investment plan.
Today, there is a rapidly declining need to turn to traditional market researchers or analysts. Much data is free; and if we want validation or new research, it is far smarter to turn to web-based networks or analysts such as IACCM or others that I have mentioned in previous blogs, which charge a fraction of traditional fees and offer a wider perspective. But it is not just the sources of information that are changing; it is the impact of information flows and access on the way that problems are addressed. For example, the interview suggested that ‘we needd to break big concepts into smaller concepts, big problems into smaller problems’.
This thinking aligns directly with the trend we are seeing in ‘best practice’ contracting. Rather than trying to define long-term, fixed solutions, we are instead needing to develop relationship structures that are far more agile and adaptable to changing circumstances, capabilities and needs. That means much greater use of staged forms of contracting, with more gateway reviews or planned break-points. These approaches in turn demand improved methods to contain development costs – which can best be done through greater use of the networked tools that are themselves underlying the revolution in our thinking.
In truth, the world has always had more ‘gatherers’ than it has had ‘deep thinkers’. That is unlikely to change. But we are certainly at a point where leaders in our community must give active thought to the way we should deliver our services and model our tools and instruments to achieve greatest effect and benefit.
‘You don’t get what you deserve, you get what you negotiate’ is the title of a blog by Jon Hansen, in which he challenges the ‘adversarial state of mind … that for so many years has hindered the buyer and supplier relationship …. negatively impacting an organization’s ability to sustain positive results”.
Jon castigates much of the negotiation training delivered by Karrass and others who encourage the ‘win-lose’ mentality. I agree with his comments. There are still many who see the negotiation itself, rather than the outcome it inspires, as the objective. This transactional, commodity-based thinking certainly does not fit well with many of the relationships required by business today.
Within the article, Jon also addresses the question of ‘lying’ and the sense among many that this is not only acceptable, but normal. He suggests such attitudes destroy trust and maintain the cynicism associated with many negotiators, especially those in Procurement.
While broadly agreeing with the point that unprincipled negotiation will lead to disappointing results, I regret that I do not entirely share Jon’s perspectives on the question of lying. Sadly, this is not so much to do with the negotiators in sales or procurement – it comes from the top. For example, in its recent paper ‘A Conspiracy of Optimism’, the International Center For Complex Project Management identified the ‘conspiracy’ that leads executives on both sides of the table to ‘lie’ to their trading partners and to create a combined version of ‘the truth’ that leads to mutual delusion over what they can achieve, by when and for how much. Indeed, how truthful are any of us when we are seeking to impress someone with whom we want a deal or a relationship?
These executives are also the ones who then set the measurements or oversee the organization that will negotiate and deliver on their stated goals and objectives. And they do not set measurements that reward truth; in fact, the ways they reward people clearly encourage the marginalization of truth – for example, sales commissions based on forecast revenue or volume of deals closed; Procurement bonuses based on estimated savings. How often do organizations even go back and track how close those forecasts were to the truth? It is actually too difficult within current systems – and there are too many factors that may have led to the alteration – so it is easier to keep things the way they are.
There is of course some difference between ‘omission’ (failing to divulge the complete picture) versus ‘commission’ (deliberately misstating the truth). However, mature organizations understand that these challenges exist and it is therefore entirely legitimate – and necessary – to validate and verify what you are being told. We do that through a wide range of mechanisms, including market research, references, interviews, requiring certified records etc. We try to ‘hold feet to the fire’ through contractual warranties and respresentations. If we are smart, we also include review, change and governance procedures that enable verification and update.
In the end, it is the overall quality of contracting and contract management that creates effective ‘due diligence’. Negotiation is just one phase in this activity and any organization that relies solely on the effectiveness of its negotiators is indeed foolish – and will reap the consequences by performing poorly over time. After all, once the lying begins, it spreads – and we only have to look at the big corporate governance failures over the years to recognize that is true. Indeed, at one of my past employers, the internal audit function would monitor the company newspaper to see which Sales teams had won the biggest awards – and would investigate accordingly.
At an EU session I attended earlier this year, officials indicated that there would be a proposal to offer businesses trading across borders within the European Community the opportunity to agree to the use of a ‘neutral’ EU set of laws, as an alternative to the normal debate over which national law would apply.
That proposal has now been formally released for discussion.
In principle, this seems a good idea. I think that IACCM should definitely take a position and potentially include in our considerations input from outside the EU. For example, many of our corporate members operate through subsidiaries in Europe and this should in principle offer them significant simplification. However, some might see it as the thin end of the wedge; if they espouse this principle for trade within the EU, why wouldn’t that be seen as endorsing further steps towards more standards – for example, perhaps a convergent agreement that also embraced NAFTA countries or the ASEAN trade block? But many of our members might in fact welcome this potential for growing convergence of legal systems – or at least, an acceptance that organizations trading across borders will have a better structured alternative which equalizes risks.
Until now, most corporate lawyers have steadfastly resisted any move towards supra-national business contracts. The UNCISG has been in place for many years and is almost universally written out from most corporate contracts. In my experience this has more to do with lack of familiarity (and absence of extensive case law) than because it is intrinsically bad. So will this opportunity meet a similar fate, even though it might have significant benefits on business costs and efficiency. The record of the law – and the contracts community as a whole – is not especially positive when it comes to efficiency initiatives. So how will this project fare?
Certainly there are key questions that must be answered and concerns that will need to be addressed. For example, how will such a body of laws be constructed and what principles will govern their drafting? How and by whom will adjudication of disputes or litigation be managed? But at this point the question is one of principle – is this in itself a good and beneficial idea?
You can read the call for inputs and the background to the proposal at http://www.justice.gov.uk/news/newsrelease180810a.htm. Please make your comments below.
The stories about unilateral procurement initiatives continue to arrive. This week, a couple more global corporations have joined the stampede towards longer payment terms. ‘We are writing to you as a valued supplier to inform you that ….’ Well, whatever value I had before this extension of the payment period by 30 days, I have less now! And what a weak excuse – ‘ we are following industry trends and practice’. I thought companies were trying to distinguish themselves, to be differentitated. Wherever did that concept go?
But I recognise that payment terms are a lost cause for now .. although there is a ray of hope from an unlikely source. According to the Financial Times, the automotive industry has awakened from its plummet towards self-destruction and recognized that suppliers have value. They are doing some interesting things (I’ll write more about those another time), but one specifically is that they plan to take steps ‘to support supplier liquidity’. That includes ADVANCE payments on design and development projects (though maybe not so advance if they take 90 days to pay the invoice!).
However, the purpose of this blog is to highlight another new practice in partnering. It concerns one of our member companies (which shall remain nameless) that out of the blue received an invoice from their customer for ‘Procurement Services’. These were billed at 4% of contract value.
Well, we are all hearing about the pressure on Procurement to raise its contribution to the business – but this approach is certainly new to me. There was no contract and therefore – of course – no Purchase Order to support this unwelcome invoice. Yet clearly the Procurement department that issued it does not expect that its suppliers will follow standard purchasing procedures. They see themselves entitled to issue a non-contractual demand for payment – or else you will lose our business.
This is not business. This is blackmail. It is also remarkably stupid. What customer really believes that this action will not damage the trust and loyalty of their supplier? What customer really believes that a supplier will happily yield 4% of their margin – especially for the pleasure of propping up a Procurement department in another company? Of course they will rapidly find a way to cover this cost, by raising prices or cutting services.
I would love to know who sits behind this marvellous idea to shift costs and revenues within the business. Is it Finance? Do they reallythink suppliers will simply absorb the overhead? Or is it Procurement, desperate to find ways to justify its existence and ‘show value’? If I were the CEO, I would want to know why I was spending 4% on such an unimaginative organization. And rather than impose 4% levies on my suppliers, I would offer to split the difference and abolish the Procurement department. That way, I would have happy suppliers and I would be a total of 6% better off!
Now maybe there is a counter-side to this story, in which case I would love to hear it.
Last week I read that English law is increasingly being selected for international contracts, at the expense of US law. This is apparently because of the perceived risks associated with the US legal system – a greater propensity to litiagate, the more aggressive behavior of US lawyers, the unpredictable (and often headline-grabbing) scale of US court awards.
There have been previous studies that suggest an aversion to exposure to the US legal system – for example, a paper in the Journal of Empirical Legal Studies (Volume 5, Issue 1, 1–20, March 2008) compared the choice of law in arbitration cases and demonstrated an overwhelming preference for English law (though the relatively poor showing of US law might be explained by the aversion of US corporations to the inclusion of arbitration / mediation clauses in their contracts).
As with all data, it is hard to establish the truth. However, the recent IACCM study on the risks of doing business internationally also picked up a sense of fear about the US legal system. While the headline cases are unrepresentative of the norms in litigation, they do create an underlying perception in the rest of the world, because the headlines are all that people see. This can easily be reinforced by other data – for example, why do US corporations need in-house law groups that are double the size of non-US corporations (findings of Rees Morrison’s international benchmark study)? Isn’t a higher frequency of litiagation inevitable when there are so many more lawyers than in other countries (although the scale of this imbalance is frequently overstated)? Shouldn’t people be scared when the US appears so ready to apply ex-territorial principles and to position itself as having jurisdiction over the world (for example, one-sided extradition rights or the recent Supreme Court case over class actions – see http://business.timesonline.co.uk/tol/business/law/article7079461.ece))?
The number of lawyers in the US has certainly created a lower-cost access to the law – but of course that is part of the problem, at least when looked at from outside, because it increases the propensity to initiate actions, regardless of their merit. And of course, the external party is inevitably placed at a relative disadvantage in terms of cost, understanding, familiarity with the system, language etc.
On the counter-side of these arguments, there are many who would say that US lawyers tend to be far more business-aware than their overseas colleagues. Others would point to the rigor of US regulation, driving the relative growth of in-house legal departments. Many would highlight the extent to which the US legal system has led the world in creating a relatively fairer, more open and less corrupt social and political environment.
In the end, there are no absolutes of right or wrong in making a choice of law or jurisdiction. Decisions will be made according to competitive principles. But there are two key messages worth considering. One is that the laws of competition are just as applicable to lawyers and legal services as to any other area of commerce – and globalization is removing the protection that traditional national jurisdictions conveyed. Lawyers everywhere need to be aware that they are increasingly in a battle to demonstrate the relative value of their services.
The second message to consider is what exactly that ‘value’ is about. To what extent does the law industry understand the way that shifting social attitudes may be impacting expectations from the lawyer? Has the apparent increase in more tolerant and collaborative approaches extended to the way that people want their legal advisers to behave? Might the real challenge for US law and lawyers be that they have an image that is increasingly out of step with wider business and social values?
Yesterday I wrote about the ‘conspiracy of optimism’ that has been identified as a key challenge for successful project execution.
Another topic that arose at the ICCPM (International Centre for Complex Project Management) event was around the quality of requirements.
I raised this issue at the conference since it is a recurrent theme for IACCM members. The annual study of ‘most negotiated terms’ reveals that this is the area where negotition professionals believe more time should be spent. After hearing this story, the reaction of the project management community (and some procurement experts who were present at the event) was interesting.
There was unanimous support for the view that the quality of requirements definition is generally poor. In fact, there appeared to be consensus that ‘the current requirements process is broken’. In addition to a general failure to capture and define comprehensive requirements, it fails to address or acknowledge the inevitablity of change (or scope creep – but often the two are hard to distinguish). The ‘single point of contact model’ (for supplier / customer relationships and requirement definiton) does not work any more (this conclusion came from very senior government representative who is looking at procurement policy); so a key question is ‘How do you contract for uncertainty? What skills and knowledge does this need?
In meetings today, I heard similar issues form two senior commercial attorneys who are engaged in managed services and cloud computing. They were complaining about the challenge of getting engaged sufficiently early to assist in shaping the deal. ‘By the time we are introduced, both sides think they have reached agreement. They don’t want to hear that their current structure contravenes laws or regulations. They see comments like that as negative, as introducing obstacles. Yet these obstacles are real – and avoidable. They simply require a different deal structure – which would have been so easy to do when the discussions began.”
None of this is new news to seasoned lawyers or sales contract negotiators. But it does appear to be outside the traditional knowledge or experience of most buyers. As we move to a world of more services and solutions, including many cross-border or multi-country deals, the need for increased commercial input and understanding during the requirements definition phase is very important. Of course, that is what IACCM and its training programs are designed to deliver, but from all the discussions this week it is very clear that there is still a long way to go in penetrating the Procurement community.
In a subsequent conversation with a group of senior Procurement staff, the topic turned to compliance and leakage. I steadily realised that that this group was in fact asking how they could prevent changes to scope and requirements. Unfortunately they are fighting the wrong battles. They had failed to understand that constraining the business to the solution they originally contracted might indeed deliver the original savings – but at the expense of the solution and value that the business actually needs. There is still some way to go before buy-side and sell-side negotiators are working towards a common agenda and finding ways to jointly manage change and uncertainty.
I have just returned from a symposium on complex project management, hosted by the business school in Lille, France. The event brought together some of the leading minds from the world of project management, including a number of acclaimed authors and the leadership from the International Centre for Complex Project Management (ICCPM). I was honored to present the perspective of the contracts and commercial world in this forum.
I perceive project managers having similar challenges to those of contract and commercial managers. While they moved down the road to ‘professionalization’ several years before IACCM, they are still wrestling with many open questions regarding their exact role and status. They also face some problems that conract management does not – such as competing professional associations with their varied views on the underlying body of knowledge.
However, I find ICCPM has many ideas and approaches in common with those of IACCM. Not least of those is its openness to collaboration and the view that, as non-profit associations, we are often helping organizations achieve competence, rather than dictating an organizational model that involves hiring more and more of our professional community.
Among the many interesting aspects of ICCPM research has been a recent study that led to a paper titled ‘The conspiracy of optimism’. They found that organizati0ns – both customer and supplier – consistently over-estimate their capabilities to deliver complex projects and consistently under-estimate the associated costs and time required. In addition, even though these experiences occur consistently, management only accepts and welcomes those who reinforce their own optimistic view.
So maybe that explains why contracts, commercial and project staff are often not the most popular. It is our tendency to highlight the challenges and question assumptions that makes us unwelcome team members. And so at the end of the process, when it may have slightly cold feet, management calls us in to protect them from the worst ramifications of that optimism, by ensuring some fall-back clauses that limit the consequences when it all goes wrong. Sadly, they overlook the greatest value we can offer – of helping to structure such deals in ways that they would be far more likely to succeed – or sometimes, of course, of avoiding them altogether.
IACCM recently completed a study on the relative ease of doing business in almost 50 of the world’s major markets. I find the results extremely interesting – and potentially of great use to contract negotiatiors.
The study asked members with direct experience of negotiating in overseas countries to rate their experiences on a scale of 1 to 5, where 1 was especially difficult and 5 was positive. IACCM then asked the participants to identify which of 9 categories of ‘issue’ they had encountered. These categories were:
- Ethics / business culture
- Contract or negotiation skills / understanding
- Problems with payment
- Demands for performance bonds or guarantees
- Dealing with licenses
- Local laws or regulations
- Maintaining rights to assets or property
- Language
- Enforcing contracts
The survey has three major purposes:
- For the overseas negotiator: the findings will assist in anticipating some of the risks and issues they need to address or overcome. Of course, it may even mean they decide against a market entry at all.
- For the domestic negotiator, the survey offers insight to external perceptions of their country and equips them to think about how they may adddress the fears that their counterpart may have in doing business with them.
- For government agencies, the findings represent an agenda for improvement.
IACCM plans to dig deeper into the initial results and to capture specific issues. For example, if a country scores badly on local laws and regulations, what are the precise concerns or experiences that have generated this rating?
The study has already generated a high level of interest from professionals and the media. It is anticipated that it will become an annual study to ensure continued awareness for international negotiators, to provide advice on possible solutions and to monitor progress on improvements.
The table of results is available from IACCM, by writing to info@iaccm.com.
Commitment Matters 