Many companies are reviewing or increasingly engaged in business in emerging markets. For some, the driver remains a need to find lower cost sources of supply. But for many, it is because established markets do not offer the scale of opportunities needed to support business growth. Overall market and economic conditions are forcing increased engagement with new and unfamiliar markets, for business development and sales.
New market entry and new customer or supplier adoption always entail uncertainty and risk. Some organizations have great experience and a replicable assessment and ‘on-boarding process’ to gather necessary information and manage these risks. But many do not. They are driven by either the need for speed, or overall lack of discipline, to undertake high-risk projects and to learn as they go.
There are growing resources to assist companies on their journey to the unknown. IACCM has data in its learning programs and undertakes periodic research, such as its 2010 study of the major risks within the top 50 trading nations. But a resource that I strongly recommend is the Supply Chain Risk blog run by Jan Husdal (see www.husdal.com). It offers the most thorough and thoughtful analysis of risk topics that I have ever encountered, drawing on and referencing many of the major works in this field.
Although Jan’s work is in some ways more related to procurement and logistics, there is much here for those in sales contracting or commercial management. His recent paper on emerging markets is a good example and I commend it as a place to get started.
The IACCM executive forum is designed for leaders or aspiring leaders. A book by Robert Kaplan, Professor of Management Practice at Harvard, may offer some useful insights into the characteristics and requirements for leadership. For example, this comes from a recent interview with Prof. Kaplan:
“You must ask “What is your vision for the business that you run?” A lot of the time, people can tell me, and a lot of times they can’t. Why? Articulating a vision is based on what your distinctive competencies are. As the world is always changing, many people have to think about that. They’re not sure. I try to stop people and ask: What are your distinctive competencies? What’s your aspiration? And then I ask: what are the 3-5 things you must do superbly well to achieve that vision? This is a very simple conversation, but often when a leader is having a problem, invariably they are not clear themselves and priorities, or they are clear but don’t communicate it enough to their people. It’s very hard to be a good coach if you’re not clear with your direct reports and subordinates, as well as lateral relationships. How can you coach them if you don’t really know what you what and where you’re going? Everything you do needs to align around that vision.”
I think this statement offers a useful context for the forum (and our subsequent report). We are working to provide a vision, so that the leaders for contracting and commercial management can give thought to their priority goals and assess the competencies their organization must have or devlop to meet the vision and goals. And from there, they have something clear to communicate.
Our research shows that many professionals in our field do not have clarity over their future, over what they must achieve, over how they will contribute – and that leaves them frustrated. But if they don’t know the answer, imagine how people elsewhere in the business must feel – obviously they see associate a function with an unclear purpose as lacking real value. And certainly they do not associate it with leadership.
Agility is about the ability to adjust to fast-moving market conditions. These might be the result of economic conditions, new competition, unexpected geo-political events …
As always, a company’s ability to survive depends on its ability to adapt. So to the extent that there are pressures for adapting further and faster than in the past, ‘agility’ has become an important concept and characteristic. Being more agile than competition is one factor that contributes to competitive advantage.
Recemtly I was discussing this topic with Professor Rob Handfield of NCSU Supply Chain Management College. We agreed it is a subject we will work on together. Our conversation focused on some of the current constraints upon more agile, more adaptive behavior.
The global networked economy has expanded markets and supply options. It has driven commoditization (in the search for price competitiveness); it has driven compliance (in the urge to simplify, cut costs and drive consistency); and it has driven category management (as a way to address the complexity of global choice).
But ironically, these three actions have in many ways constrained the ability of the business to adjust to changing market conditions. They have often undermined supplier loyalty; they have focused on low cost, often at the expense of long-term relationships; and they have caused a transactional focus that prevents leverage in supply management and the development of ‘collaboration’, internal or external.
On the sell-side, there is a tendency to take a more relational view, but it too is driven by large bonuses for getting the contract signed – not for its successful execution. Therefore Sales often behaves in a way that causes mistrust in Procurement – and among their internal colleagues.
We came up with a few questions on which we will be seeking opinions. Among them are:
What does agility mean to you, in your business or the businesses with which you work?
Does it fundamentally differ between buy-side and sell-side operations?
What actions are you taking to enable agility in your business operations? What areas are you prioritising?
Do you think the need for agility affects old risk management regimes – and they will steadily decline or be repaced by more dynamic approaches?
We would love to have your input and ideas – either through comments, emails, or arranging a call.
Some readers of this blog will recall that acceptance / delivery is the most frequent source of contractual claim or dispute. (Ref: IACCM survey on ‘The Most Negotiated Terms’, June 2011).
Digging into this finding, we discovered four major reasons – and I list them in order of significance:
- Lack of clarity / agreement over the requirements
- Undisciplined change management procedures
- Failure of the supplier to deliver to specification
- Customer changed their mind
Factors 1 and 2 both essentially come down to an inability to ensure clarity on requirements. Both sides have some guilt in this. Many customer organizations are fragmented and do not ensure the right conversations. The supplier may be held at arm’s length from the user community and therefore never has the chance to ask key questions. Requirements are rushed, or distorted by powerful stakeholder interests.
On the supply side, the sales team is often conflicted over the extent to which it wants to be honest about real requirements or real capabilities. They are balancing their need to close business with the extent to which this may be jeopardized if internal groups fully understand needs, or the customer has full insight to capabilities.
On top of this traditional dance, we have a world where the move towards more complex services and solutions is making for greater difficulty in formulating precise requirements, especially where ‘innovation’ is involved. And this is then compounded by the speed of change – new conditions, new technologies, new capabilities etc. – which demand on-going review of the original requirements. Frequently, changes and amendments are agreed informally by project or technical teams, leaving massive room for doubt, confusion and potential disagreement at later points in the project.
As Bill Huber pointed out in an excellent comment on my recent post about Procurement, organizations need to become far more sophisticated in their understanding of contract and relationship types. Specifically, they must organize differently for those things that are ‘strategic’ versus those that are commodity. The capability to define and execute on complicated and volatile requirements demands much greater teaming and collaboration; but it also depends on replicable capability.
I think this issue of segmenting organizations to manage the portfolio of external relationships that they need in order to flourish and adapt is a fascinating topic – and one on which I see growing interest. At its simplest, the idea of ‘first order’ and ‘second order’ activity (ref: Michael Cavanagh) is helpful, though perhaps too simplistic in suggesting there is a black and white divide between ‘the routine’ and ‘complex’.
IACCM has undertaken extensive work in this area and is currently documenting some models which can assist in not only segmenting contracts and relationships, but also understanding the variations in process and resources that are needed to ensure an increased probability of a successful outcome. Getting requirements right – and keeping them properly updated – will be high on the list of objectives.
Something that really strikes me is the readiness of Procurement organizations to meet with each other and share information. With relatively few exceptions, I find most Procurement professionals consider it quite normal to contact others in their industry and exchange ideas and experience. They even work collaboratively to establish common views of ‘best practice’ in areas such as skills or RFX templates or commodity research.
For many in Procurement, ‘the supplier’ is the competitive enemy and true market competitors are often ‘friends’.
The comparison on the sell-side of the business could not be more stark. Competitors are companies which challenge for customers. Companies outside my industry are potential customers. I know who I want to speak with and with whom I will happily share information.
The point of these comments is to question whether Procurement should be re-thinking its readiness to consort with competition. If Procurement today truly is strategic (and I personally believe that it should be), then interaction with competitors should be carefully controlled. Equally, since having the best suppliers is one source of this strategic advantage, increased contact with the supply community should be encouraged.
Essentially, the focus should be on developing strong and differentiated supply chains – and that means beating others in your industry, not sharing with them.
Yesterday I found myself once more in the midst of a conversation about the relationship between Legal and Procurement. It had all the familiar tones about a lack of empowerment and trust resulting in protracted negotiation cycles and limited contract flexibility. The background (in this case for a major international banking group) carried all the usual hallmarks: standard templates that are not appropriate for the nature of the acquisition; rigid, risk averse terms and conditions; limited dialogue between procurement staf and lawyers; frustrated suppliers and an inability to adequately trade on terms and conditions.
As one General Counsel recently observed (having explored a similar situation in his own company): “I realize that we are often fighting for functional positions, rather than negotiating the real business interests”.
All of this is so avoidable. I have written on the subject in the past and IACCM has highlighted some of the success stories in webinars and Ask The Expert interviews. Companies such as P&G, CSC, LG Electronics and Rio Tinto have moved beyond this internal barrier and are reaping the bottom-line rewards.
To assist the development of better practice and process, this will be one of the topics addressed at the next IACCM conference – the Global Forum for Contracting & Commercial Excellence. For now, let me share ‘ten tips’ for improved Procurement and Legal cooperation (these are not in any particular order of priority).
The relationship between Legal and Procurement frequently constrains value as a result of inflexible contracting and negotiation. At the IACCM Global Forum, delegates will gain insight to more effective collaboration between Legal and Procurement:
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1 |
Develop contract templates applicable to each type of acquisition |
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2 |
Define pre-approved fall-back terms for frequently negotiated provisions |
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3 |
Agree training / competency levels for delegated authority on contracts |
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4 |
Establish regular senior level reviews between legal and procurement |
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5 |
Monitor contracting cycle times and work together on improvement |
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6 |
Develop joint projects e.g. Innovation, performance-based contracts |
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7 |
Ensure category expertise on legal services and consider placement within Legal |
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8 |
Work with each other to develop contracts expertise within Procurement (don’t hire lawyers to compete with in-house legal) |
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9 |
Partnering on development and use of appropriate software tools to ensure visibility and control |
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10 |
Co-develop contracting strategies and strategic plans |
Yesterday I spent a couple of hours with the head of contracts and the CEO of a services company. We were reviewing their business strategy and in particular the impact on their contracting methods and forms.
The company is in process of making a significant shift in the risk it takes on when working with customers. They had undertaken analysis of many of the bad things that could happen to them – the incremental liabilities, the liquidated damages, the risks of termination etc. Extensive work had been undertaken to assess the potential to insure against these risks. And as a result, they were focusing on questions such as ‘How can we persuade customers to reduce the risks they place on us?’ and ‘How can we get our sub-contractors and suppliers to accept back-to-back liability?’
As is so often the case, there had been no broader assessment of the issues that are most likely to cause failure to occur and which, through their mitigation, would reduce the probability of things going wrong. All the focus had been on consequence and how that might be reduced (which, with powerful customers and relatively small suppliers, it probably cannot).
So while we talked about a couple of innovative terms, we mostly talked about reducing probabilities. For example, we explored commercial awareness training and techniques for client teams and project managers. We discussed the governance and relational aspects of the contract which could help mitigate or avoid performance issues: what data or access, what frequency of reviews, what interfaces and interactions with user groups, what escalation procedures, what post-award resource and skill commitments might assist? We also reviewed the way that requirements are analyzed and the quality of opportunity and change management. The focus, in other words, switched from fears about non-performance to safeguarding of performance.
Our next step is to visit a law firm and to work together on the new model agreements. It is a firm I respect for their forward-thinking, collaborative forms of agreement and I am sure we will develop a good model. It will need to be supplemented by some internal training and far more sophisticated risk lists and analysis. But it was great to have this conversation and to confirm that CEOs really are interested in contracting when they hear about practical solutions to their strategic needs, rather than a litany of the problems and the risks that their direction entails.
We are participants in ‘the knowledge economy’. We talk frequently about the need for new and increased skills. ‘The talent gap’ is s a recurrent theme – or excuse – cited by managers as the limiting factor in business progress and innovation.
So what is the best answer to addressing these needs and equipping people for the demands of our competitive global economy? For many, it was thought to be a transition to technology-based learning. The prospect of open access to knowledge, combined with on-demand availability, appeared to many the solution. Low cost, easy to access, infinitely flexible and updated.
Yet research suggests that technology-based training is not delivering the results that were expected. A recent article in the New York Times reports on studies within the school system that show investments in technology are not generating positive returns in terms of student achievement. And if the generations that have been reared on digital media are not prospering, no wonder that many in older generations feel that the pressure for e-learning is misplaced.
So should we return to the classroom? Well, the evidence there also remains mixed. A recent report by the UK’s National Audit Office castigates government agencies for wasting money on ineffective training programs, largely classroom based.
In many cases, the problem appears to be that objectives are unclear and appropriate measurements are lacking. Indeed, education is suffering the same problem as many service industries; intangible products are hard to design, evaluate or assess for their outcomes.
Many in the field of contract and commercial management are largely self-taught. Traditionally there has been very little training available and they have in any case been starved of budget. The exception has been when there are specific methods to be learned – for example,, when a key aspect of the role is to monitor compliance. This aligns with comments made by Michael Cavanagh on a recent IACCM ‘ask the expert’ program, when he distinguished between ‘first order’ and ‘second order’ project managers. Michael described projects that require rigid methods and oversight (first order projects), for which standard methods and techniques are appropriate. But for complex environments, he discovered that traditional professional credentials can be a handicap, because such projects require broader judgement, networking and analytical skills, not associated with the typical ‘trained’ project manager.
All of this is thought provoking, rather like the unending debate over the value of MBAs or whether entrepreneurs go to university. Perhapa it si the case that a proportion of people need highly structured teaching because their only ambition is ‘to do a job’; whereas others are inspired by what they do and are anxious to ensure self-improvement, in which case they will seek and find the best way to raise their personal skills and knowledge, regardless of what ‘formal teaching’ is available.
I’d welcome your thoughts on the right approach to training and skills development – if there is one!
As we prepare for the IACCM Global Forum in October, we pulled together some samples of research reports, audio recordings and articles. They offer quite extensive commentary on the current challenges facing contract management, together with some case studies and ‘best practice’ tips and guidance.
I thought readers of this blog might enjoy access to these resources – so you can find them at http://iaccm.com/globalforum/library.php
Lax accountability, poor planning, inadequate competition – and $30bn of waste in contracts. Those are the findings of a commission that will shortly report to the US Congress on spending in Iraq and Afghanistan.
The US has invested more than any other country in having a uniform approach to contracting and has poured millions of dollars into training and process standardization. They even have a ‘professional association’ that safeguards these standards and supposedly unites the government Contract Management resources with those of suppliers …..
So does this suggest that contract management is itself a waste of time and effort – or is it that Federal Contracting rules, practices and organization are at fault?
IACCM sees plenty of evidence that contract management can deliver considerable value. The fact that contracting remains poor in many organizations is mostly due to either a lack of rigor or the view that contract management is more about process than it is about judgment. In some organizations, it is transactional and inconsistent. There is no clear definition of role, responsibilities or enterprise process and strategy. In others, there is clear definition, but the role is focused on compliance and ensuring adherence to the rules.
Where contract management flourishes is in organizations that have understood it is not just about implementing rules, but is also about exercising judgment. That is where ‘commercialism’ comes in – good contracting is about doing more than implementing instructions in accordance with the rule book; it is also about making sure those instructions make sense and are sustainable. Of course, Contract Managers won’t make the decisions; but they should be raising the right challenges and forcing the executives and experts to think about what they are doing.
We must hope that this report prompts the Administration to consider fundamental reform in its approach to contract management. It should avoid the temptation to add further to the bureaucracy of review and approval. It should not hire hundreds more ‘contract professionals’ to oversee the outdated and ineffective FARS and DFARS. That is not the answer. In fact, it is arguably the extent of current review and approval that stifles good judgment. It renders every individual feeling powerless and insignificant. If any organization wants better results from its contracts, it should think about how to increase accountability for producing good contracting instruments and procedures. It should also ensure someone owns the development of contracting competence and has the tools to oversee its implementation and practice.
Commitment Matters 