The Economist has a thought-provoking article that questions the future of outsourcing. Based on a large reported fall in the value of new contracts (specifically in the US), it asks whether the surge to outsource is over, pointing out that it is proving ‘more hassle than it is worth’.
I do not believe that the basic economics of outsourcing are wrong; it is the capability of companies to manage outsourced relationships that lies at the core of disappointment. Far too many outsourcing initiatives are based purely on cost drivers and have not been accompanied by developing the skills and structures needed for their management. Outsourcing has increasingly been treated as a commodity decision, increasingly subject to the same damaging procurement procedures as many other acquisitions.
Driven by poor planning, wrongly focused negotiations and adversarial performance management techniques, many relationships have not flourished. Others were condemned to failure because they lacked adequate quality assessments and selected outsourcing partners based primarily on cost, rather than cultural and organizational fit. Often there has been a weakness in governance – both in definition and in allocated resources. Like so many other supply relationships, the buyer simply stands back and watches while their provider fails.
In the end, this is primarily the result of poor contracting and relationship capabilities. Contract negotiations focus on the wrong terms; third party advisers (who should themselves be subject to the rigor they apply to the outsource provider) create a contentious environment from which they then garner additional fees; post-award performance and relationship management lacks the skills, focus or knowledge required for success.
Outsourcing requires the type of spohistication that is applied to the hiring and management of employees. Just because it is low cost does not mean that it can be ignored. ‘Out of sight, out of mind’ unfortunately rings very true of the way that many treat their provider.
The economic value of good outsourcing remains high. The economic cost of poor outsourcing is also high. As with so many other procurement activities, management must understand that transactional economics and commoditization destroy value. It is time to re-focus and to grasp the point that contracting must be more adept at structuring high performing relationships – and that resources must then be developed to manage those relationships. This i snot new news – but many organizations are still failing to get the message.
Last week I was in Singapore, this week in Australia. In a series of meetings, I have already met with more than 300 IACCM members from about 8o different organizations.
A common theme is the rapid growth in interest in contract and commercial management and a concern over the shortage of qualified practitioners. In a series of round-table discussions, the importance of good contracting practices has been a point of lively debate. It has been exciting to discover the enthusiasm for contracting as a ninstrument of value creation, rather than simply a mechanism for compliance and control.
In some places, this attitude is driven by the absence of a contracting tradition. For example, one group explained that if they produce a standard contract for signature in many Asian countries it will generate one of two responses. In some places, it will be signed without comment because it is considered irrelevant. In others, it will be seen as insulting and questioning trust and integrity. The CPO of one major multi-national described the irrelevance of standard procurement rules and contract practices in his key markets, where computers are rare and concepts of contract compliance are non-existent.
Overall, the trip is providing a wealth of valuable case studies and examples about which I plan to write over coming weeks. It also confirms the point that the key value of a good contracting professional is to be able to make sense of complex and unfamiliar situations, to be adaptive in commercial approach and to produce a contract that defines the governance procedures that will support successful business outcomes.
The IACCM ‘future of contracting’ study is progressing at a tremendous pace, with many interviews now complete and about 20 more in process. This is on top of a web-based survey that was issued this week (click here to view or participate).
The study is already confirming a great need and desire for change. Participants expect the growth of international standards, but they recognize that the key value of this will be more time to expend on increased creativity in contract offerings. They see on-going measures to drive simplification and improve the quality of contracts as tools for better communication and governance. An area that fascinates many is the extent and nature of future conguence between contract management and relationship management – perceived by many academics and researchers as one of the key trends for the future, but full of tantalising questions when it comes to the practical implications.
The study addresses a wide array of topics and has caught the imagination of practitioners from fields as varied as Legal, Contract and Commercial Management, Procurement and Supply Chain, Project Management, Sales and executive management. It will lead to an initial discussion paper, to be presented at the next IACCM Global Forum (see www.iaccm.com/globalforum) and establish the vision against which organizations can measure and develop their strategies for contract and commercial management.
Last week I interviewed Michael Cavanagh, author of the recently released ‘2nd Order Project Management’.
Michael is a veteran of project management and has focused especially in the field of ‘complex projects’, by which he means situations fraught with uncertainty. He draws a distinction between these and projects that are merely ‘complicated’. To be complex, a project will be of high importance and is likely to have uncertain outcomes, or to lack clarity over how it will be achieved. As a result, it demands exceptional judgment and creativity – and the type of leadership that is ready to break rules.
For Michael, ‘1st order project management’ is a discipline that follows established methods and principles. It is conducted in accordance with a rigorous project plan, with extensive focus on meeting milestones and ensuring compliance. And it therefore requires a very different attitude and skill-set from the 2nd order project.
Michael’s research has led him to the conclusion that, while both types of project skill are of great importance, they are not interchangeable. Project managers with 1st order skills are not good at performing 2nd order projects. They are not able to deal with the uncertainty, ambiguity and rule-breaking modes of such tasks. Many outstanding 2nd order project managers may not have had formal project management training.
I spoke with Michael while his book was in preparation and provided my thoughts on the role of contracting and commercial skills in these two environments. Our thinking turned out to be closely aligned, with these skill challenges also applying to the contract management, procurement or legal professional. There are some who value discipline and certainty; there are others who flourish in environments fraught with risk and absence of definition. In general, those who are good at one are not especially good at the other.
This conclusion is important when we consider staff selection and functional organization and management. For example, how well do we consider the split of contracting and project activity when we design our organization and plan resources? How well do we analyze and recruit for the differing skill sets needed to perform against business needs? Managers tend to recruit in their own image; so how often do we finish up with a function full of first order or second order contracts professionals, and then proceed to complain that our team ‘lacks the right skills’?
To view a short video of Michael’s findings, click here
A topic that often features on IACCM message boards is the handling of incumbent suppliers, in particular within competitive bidding events.
The precise issuevaries. Recent discussions have included the ethics of ‘false’ bid events (e.g. where the driver is not to replace the incumbent, but to force price negotiation). Another related to the economics of replacement, especially where there are large capital investments. But a recent posting that caught my eye was discussing whether an incumbent should be excluded from competition if they do not meet the bid criteria.
In the case in point, the Contract Manager was concerned because the business manager was insisting on including the incumbent, even though they clearly did not meet one of the non-negotiable criteria for selection. The Contract Manager correctly questioned what this said about the integrity of the process and he felt it was wrong to cause the incumbent to face the expense of bidding in a situation they could not win.
Situations like this are often very telling about the levels of honesty in relationships. Truth is fundamental to any healthy relationship – and in this example, was clearly absent. It seems to me that critical conversations were not being held, internally or externally. For example, had new criteria been set specifically to ensure the incumbent could not win? If so, why? Was this simply a manipulation, or were there good business reasons for switching? If these were around performance or price, had they been discussed with the incumbent?
Then there is the question of why the business manager wanted to include the incumbent in the final round of bidding. I suspect this was because the business manager feared for current performance if the incumbent realized they were going to be replaced. But if so, that is a very short-sighted view, since at some point the incumbent will realize that someone else will win. And the lack of honesty in the process is likely to leave them feeling unfairly treated and potentially uncooperative.
So the conversations between the business manager and the contract manager need to esablish precisely what goals he or she may have and to develop a plan to achieve them. Key to these plans are the conversations to be held with the incumbent. These must address the level of dependency on the supplier for continued performance and an orderly transition. It may require consideration of incentives – for example, the prospects of future business or the provision of some form of transition bonus.
As in all relationships, tough conversatons are often hard to face and they must be carefully thought through and managed. But one way to ensure poor performance is to build a reputation for dishonesty or lack of openness. It is something that customers dislike in their suppliers; they need to remember that this is an issue that goes both ways.
The IACCM annual report on ‘the most negotiated terms’ in business contracts was released last month.
For those who are familiar with the report, there will be few surprises in the ‘top ten’. Liabilities and indemntities, price and intellectual property rights, liquidated damages and performance undertakings continue their dominance. But there is fascinating new content because the study this year included analysis of the most frequent causes of claim and dispute – and this strongly reinforces the message that today’s negotiatiors are failing to achieve the right balance in both pre- and post-award activities.
Much could be written about this (and the full 2011 report can be found at http://www.iaccm.com/library/?id=3958&src=plc ). But if I had to focus on three core messages, they would be these:
- The IACCM studies reveal the tendency by most organizations to focus negotiation on terms which relate to the consequence of things going wrong. This strongly ‘positional’ approach to negotiation (i.e. hinging around ‘non-negotiable’ policy principles that are protective in nature) leads to loss of focus on the clarity of purpose and the process for governance. When they do not pay adequate attention to these key terms and the process that underpins them, organizations increase the probability of project failure.
- There are several key phases where misalignments often occur – the translations between goals and scope, to selection criteria, to performance measures, to on-going amendment and change. The 10th annual survey has – for the first time – explored the most frequent sources of contract claims and disputes. The results are a powerful illustration of the weakness of today’s requirement management and relationship management procedures. The number one issue is acceptance and delivery – surely a massive indictment of project management quality if contracts can reach this final stage before fundamental problems are identified.
- Our research shows that large organizations – public and private sector – rarely monitor and analyse their experiences from bidding, negotiation, or contract management. Therefore few are learning from repetitive conversations or outcomes – for example, what common factors may lead to frequent areas of claim or dispute? This reflects what is perhaps a fundamental weakness common to both contract management and project management – each situation is viewed either as ‘tansactional’ (and therefore subject to a standard form of contract irrespective of suitability) or as unique, in which case it is handled as a ‘one off’ or ‘one of a kind’ activity. Yet in truth, there is often significant cross-learning to be gained from the portfolio of activities under management. This is an area where ‘complexity’ is glorified, when it might be simplified.
Chief Executive magazine ran an interesting article about ‘the Netflix Pricing Fiasco’.
Apparently Netflix raised prices without adequate consideration of market reaction. The Chief Executive article highlights some of the factors that should have been considered and suggests ways that the impact of the price increase might have been mitigated.
This story reminded me of the similar ‘fiasco‘ that ensnared Serco earlier this year, when the CFO attempted to pass on Government price cuts to suppliers – with retroactive effect. My blog on that topic asked the question ‘Where was Procurement?’ (Sadly, when I posed the question to a room of CPOs, they couldn’t see anything wrong with the CFO’s action).
My point with both these incidents is that many companies seem to lack a good commercial barometer. Their internal mechanisms lack clear checks and balances. No one appears to accept accountability for the integrity of decisions that affect trading relationships. The CFO was left to push through a decision that may have seemed smart finacially, but was a disaster commercially.
A good commercial function provides exactly this type of ‘glue’. All businesses operate with contention systems, based on distinctive functional viewpoints and interests. The question they face is one of balance; is the contention system constructive (generating good ideas and decisions) or destructive (creating contention and blame)? Most contention systems require a coordinator – rather like an orchestra needs a conductor. And today’s volatile and rapidly changing markets need such skills and capabilities more than ever.
But far too often – as would appear to be the case with Serco and Netflix – no one is stepping up to the role.
“It’s clear that inventors are leaving states that enforce non-competes for states that don’t.”
That is the conclusion of research just published in Harvard Business School ‘Working Knowledge’. And of course it matters, since invention lies at the heart of innovation and growth.
For anyone unfamiliar with a ‘non-compete’ clause, it is a provision within an employment contract that bars the employee from leaving the organization and working in a competitive role for a specified period of time – typically 2 years. Such provisions are unenforceable in some jurisdictions (such as California).
A key question for anyone in the world of contracting is whether similar consequences flow from restrictive or onerous terms in other forms of contract. For example, what is the result of a clause that demands IP rights, or imposes liquidated damages? How does a supplier act when there are unlimited liabilities or a right of termination for convenience? Even ‘compulsory’ innovation clauses can be damaging, esecially if the supplier cannot be confident about how their ideas will be handled.
Much of the evidence in this area is anecdotal, and of course business-to-business relationships are not the same as those in business-to-employee. However, it seems to me that similar principles are likely to apply – relationships that impose ‘unfair’ levels of control are likely to prove counter-productive when it comes to things like loyalty, innovation or flexibility.
Of course this does not always matter. We don’t need or expect innovation, loyalty or flexibility from every relationship. But just as non-compete provisions are now undergoing re-examination in some US states, smart businesses also audit their standard contract terms and strategies to be sure that their focus on control is not ultimately damaging their ability to compete.
Yesterday I met with a newly-appointed Group Head of Commercial Management at a large international defense supplier. One of his first moves was to undertake a study of the satisfaction of internal customers as well as the contract mangement team. He found a high level of consistency in the replies. Among them were:
– There is a lack of clarity in the purpose of the function
– Although individuals work hard, the function is often a bottleneck
– If there was earlier involvement, the process would work better
– Functional leadership is lacking visibility and direction
– What is the value statement?
– Why aren’t the processes and service levels more consistent?
– Too much fire-fighting, too little focus on cross-group learning and efficiency
These comments were reflected (although more succinctly) in a note I received today from a senior contracts exectuive in the oil and gas sector (this time dealing with procurement contracts): “The challenges are huge and range from internal stakeholder engagement, to contractor / global capacity, internal controls (or lack thereof), too many cooks, local vs whole of organisation strategies, etc, etc ….”
In other words, highly consistent messages that occur with remarkable frequency. I have written before about many aspects of these opportunities for improvement and how they can be addressed. It remains astonishing that, even though the focus and importance of contract management is increasingly recognized, the functional approach remains largely tactical. The newly appointed Head of Commercial asked at one point: “At IACCM, you must see all the companies that have real leaders within Commercial or Contract Management – the people who are really leading change and improvement. What percentage would you say that is – perhaps around 50%?”
Paul Mallory (IACCM’s Global Head of Learning) and I looked at each other. Both of us were thinking of the 80 / 20 rule, but as Paul then said, “20% is rather generous, it is probably more like 10%”.
Those 10% are revealing the tremendous difference that good contract management can deliver to the business, yet progress remains alarmingly slow. Perhaps it will only come when new leaders are introduced – people who do not have a background in the contracts or commercial function. Certainly the evidence points to the fact that very few incumbents have the enthusiasm or imagination to carry the function forward.
IACCM’s Global Forum (www.iaccm.com/globalforum) will feature an executive program that explores ‘The Future of Contracting’ and will equip leaders to promote and drive the changes required to manage trading relationships in today’s market conditions.
On the IACCM LinkedIn group message board, Veronica Whitmore entered a plea for more supplier innovation – a plea that was picked up by John Hansen in his blog.
Veronica said: “I write tenders & oversee tender evaluations for an Australian government body – and I’ve always included criteria around “innovative” business processes & systems. Sadly, the responses to these questions are usually very disappointing and just offer up the industry standard fare…
I don’t think that a supplier having a competitive advantage contradicts the concept of a fair and level playing field – it is almost a silly comment to my mind. Just because it is a government tender it doesn’t mean we are looking for mediocrity and / or uniformity. I for one would love to see a tender response that made me say ‘wow’… still waiting… ”
I think this is a big topic – and very worthwhile. As we all know, lack of innovation is one of the most common complaints about suppliers; yet suppliers say that it is often the customer that frustrates the innovation. So what may be causing the problem that Veronica outlines?
I don’t know what percentage of client organizations invite ‘innovation’ in their tender documents. And of those that do, I suspect in many cases it appears to be a bit of throw-away – “Oh, and by the way …”. It seems rare for innovation to actually have any specific weighting in the evaluation criteria …
And there are several reasons for this, not least of which is the fact that the standard tender process cannot sustain a true ‘level playing field’ if it also seeks true, radical innovation. So we are probably talking about two different processes – one where you know what you want and may be open to marginal variations; the other where you truly wish to find a new form of solution.
But is Veronica still right to be disappointed in the supplier response? First, suppliers respond to the things that they think will make them win – so if innovation is not a high priority, it will receive little attention. Second, as mentioned above, real innovation will often challenge many of the assumptions that procurement included in their requirements document. In other words, if I offer innovation, I may need a completely new bid document … and I rarely find procurement groups that are open to that particular challenge.
And then there is simple logistics. Suppliers are complex organisms just like customers. Assembling the team to get the basic bid completed on time is usually hard enough. Getting an expanded team together to brainstorm and produce innovative ideas is a tough proposition. And some on the team are reluctant to play ball. Sales is often nervous about confusing the customer – or even worse, causing a delay. After all, if I offer something ‘wow’ (to use Veronica’s term), chances are that you will go back to the drawing board and re-issue the tender … so what does that mean to timeframes, competition etc?
Another factor is that if I have something really innovative, do I want to expose it in the context of a competitive bid? There is a high risk that the customer will then reveal my idea to others, to test their ability to do something similar. If I am really innovating, I probably prefer to initiate that discussion by a different means than a bid response document …. and I may prefer to have the conversation somewhere else than Procurement.
So – as Nick Sullivan explained in his response – we should not think of traditional bidding as a way to solicit innovation. And Frank Ibazebo goes further by recommending the use of ‘trial tenders’ in cases where you are seeking innovative ideas. He also correctly points out that the key is to be clear about your tendering strategy and this must be driven by clarity over your objectives.
Commitment Matters 