In today’s markets, organizations depend more than ever on the performance of their suppliers. Many people recognize this growing inter-dependency and they realise that it demands more collaboration, where cost competition is balanced by the potential for relationship value.
Yet it seems the only way many organizations achieve that value is by working around their Procurement group. Special teams are created in areas such as outsourcing, IT procurement and Supplier Relationship Management, either to eliminate Procurement’s involvement, or to neutralize its effect.
A few companies are following this approach as part of a strategic plan to eliminate the traditional buyer / purchasing function. They believe that a combination of automation and outsourcing will result in the steady erosion of commodity buyers and, in parallel, they are developing the more highly skilled professionals of the future.
But in many cases, there doesn’t appear to be a plan. New groups are emerging, often with some rivalry to Procurement, and without the remit or the resources to ensure broader organizational learning and improvement. Supplier Relationship Management is currently a great example of this. It is often created to manage just a handful of suppliers, its goals unclear and its message to the outside world confused.
Procurement executives regularly have compelling presentations that suggest they are on top of the challenges and changes demanded by a global economy. Perhaps they convince top management; and in a few isolated cases it may be true. But in most, it clearly is not.
Supplier relationships really are of critical importance and management should be devoting far more attention to this topic. It offers potential for deep sources of competitive advantage, but only if there is an integrated strategy. Procurement must be remissioned so that its behaviours and skills rapidly alter and enable the value that can be generated from collaborative trading relationships.
An IACCM member asked for help with gaining buy-in from his Legal department to the development of standard contract terms. While many organizations have had these in place for years, there are still a large proportion working to develop standards – or perhaps revising their initial approach.
This blog contains most of my response – I am hoping that others will add their thoughts and experiences, some of the ‘do’s and don’ts’ of standard contract templates. In this case, the focus was on Procurement, but I think most of the observations apply equally to sales contracts.
Standard templates improve business control, reduce risk and increase efficiency. They have been adopted by more than 70% of large companies. Specific benefits include:
– Reduced operational costs (managing variations)
– Reduced cycle times for contract review and approval
– Scarce, highly skilled resources (such as Legal) able to focus on important issues and agreements
– Change management simplified (because you know what is in the base agreements)
– Business control increased (variations can be identified; new policies / procedures simplified)
Here are a few examples of recent incidents when having standards proved beneficial.
– When two major companies were recently hit by major reputational issues, the law department had to immediately deal with a range of damage limitation activities, some of which required detailed knowledge of the relevant contract terms. In the words of one General Counsel, “If I had not had standard contracts and confidence in how they could be handled, we would be out of business”
– With today’s diligence procedures, it has become increasingly important for law departments to be able to confirm the nature of their contractual obligations and commitments. For example, M&A activity often demands insight to areas such as termination rights, assignment rights etc. Many GCs are concerned about lack of visibility in areas such as this – and the time delays that can be created by having to check every contract.
– The volatility of today’s economy has made it critical for the law department to know what is in their contracts. Executive management expect them to know whether particular actions can or cannot be taken. For example, during the recession, many companies unilaterally changed payment terms, or sought to exercise termination rights. Without standard templates, this became a time-consuming – and risky – task.
– This issue of volatility is resulting in top companies re-thinking many of their standard terms. For example, we have been in contact with several recently that want to outsource aspects of their contract management, but realize that their agreements may not allow this (due to confidentiality undertakings etc). They are having to check every contract before they can take action – and in many cases go back to individual suppliers to negotiate waivers or changes.
– Law departments in many businesses are increasingly looking at ways to automate their contracts. They want reliable repositories; they want to be confident about the competitiveness of their terms; they want easy access to what has been negotiated; and they do not want to be seen as an inhibitor to getting business done. They also need to address workload issues. So at companies like Cisco, CSC, ArcelorMittal, LG Electronics, Verizon, Dell, Procter & Gamble etc etc, the law department is showing leadership or partnership with Procurement to ensure there are standards in place that reflect business needs and drive savings. In the words of Mark Chandler, GC at Cisco: “Legal must move from being a gatekeeper, to being a gateway”.
So without standards, there is no platform from which to manage change. This is important, because many businesses (especially like yours, where there are multiple brands and profit centers) presume that ‘standards = inflexibility’. But this is actually the opposite of the truth. Standards are in fact a pre-requisite of flexibility. Unless you know the base-line, change cannot be managed effectively or rapidly. You cannot empower the businesses to make decisions.
Overall, ‘contracting excellence’ is driving a minimum 5 – 7% improvement to the bottom line. Standard terms are only one element of this – but they are a fundamental element and without them, other improvements simply can’t be made.
However, be careful not to drive a ‘one size fits all’ approach. You must think through the types of relationship you wish to enable as a business as well as the categories to be covered. The structure as well as the content of contracts will be affected by this portfolio. For example, IBM, has 8 relationship types that it enables; and there are then variants depending on what is being bought – for example, software, services, products, ‘solutions’. The terms and conditions must be drafted to sit within each relevant contract template. Many times, the same term can apply to every agreement (for example, the Force Majeure clause); but others must be sensitive to the type of acquisition and the relationship (for example, IP rights).
Once you have templates, you can also develop a ‘playbook’ that offers guidance around the rules and procedures to follow when changes are to be made. The key point with standards is that if they are suited to the nature of the transaction or deal, they offer real efficiencies and enable the parties to focus on selectedd areas for negotiation.
There is strong competition for business. There is a lot of uncertainty about existing contracts. In this environment, terms and conditions have the dual challenge of becoming simultaneously more creative and more protective.
The number of job openings for high-quality contracts and commercial management professionals has increased. Salary levels for these positions are down a little, but have remained robust. In general, contracts and commercial groups have not seen the attrition levels of some other functions.
However, there is no question that management is becoming far more demanding of its contracts / commercial staff. They want people with a strong commitment to success, people who can close deals or ensure their delivery. They demand creative thinkers who can make the difference between winning and losing business – because today, commercial creativity is a major source of competitive difference. At the same time, the business needs practitioners who can protect and defend margins and ensure trading relationships remain strong.
So I am observing great interest in new terms and conditions, in better ways to package business relationships. Issues like agility and flexibility, imaginative ways to address revenue recognition, new approaches to pricing and financing, change management, intellectual property, termination rights – these are examples of the subjects under fierce debate. The key driver for all of this is the need to operae within an acceptable economic framework – not just our own, but also that of our trading partner. Top commercial and contracts pr0fessionals are those who devise and manage mutually winning deals.
Over the next few years, market volatility will continue. Many companies will face regular renegotiation of their public sector contracts; this will flow into their sub-contractors. The President of Hitachi recently alluded to this challenge in an interview with the Financial Times. He also highlighted the increase in competition, both because of general cut-backs and due to new market entrants. The IACCM message boards and mail boxes have been filling with debates and questions that illustrate the major role that is being demanded of the contracts and commercial community.
So is it a good time to be a contract or commercial manager? The answer quite clearly is yes – but it is also a challenging time, where an increased contribution is expected and where results must become far more visible. Top performers will flourish.
In the past, the only way to become a ‘top performer’ was through a combination of the right personal skills (that won’t change), the right overall experience and (if you were lucky) some good mentoring. There was no structured community to provide advice, to answer questions. There was no structured training – just a few sporadic classess, or materials that focused on the more administrative aspects of contract management. There was no defined profile of the role, the required skills, or a professional certification. And today, this has changed – IACCM offers fast, practical routes to gain structured training, to validate skills, to become certified and to participate in a vibrant professional community.
So as the world becomes both more challenging and more rewarding for contracts and commercial managers, it is easy to understand why IACCM continues to add new members at a rate of more than 500 a month. Yet more evidence that this is indeed a good time to be a high performing and professionally well-connected contract or commercial manager.
One of the discussion forums at the recent IACCM Europe, Middel East and Africa conference focused on contract claims and disputes. IACCM research has shown that the frequency of claims and disputes has increased by more than 30% in the last 3 years, so the topic rightly generated considerable interest.
The moderator, Richard Russell, initially focused on defining the difference between a claim and a dispute. He suggested that ‘claims relate to alleged non-performance and represent the assertion of a right’. Failure to resolve a claim may, of course, lead to a dispute.
During a lively discussion, delegates compared differing industry practices, observing that some have entrenched expectations of a claim / dispute procedure ‘as a form of economic restoration or rebalancing’. It was also noted that tough economic times lead to a greater inclination to use claim and dispute procedures.
The discussion led to broad agreement that claims and disputes are primarily about issues of quality and several participants confirmed that their company’s analysis pointed to around 70% of claims being commercially (rather than technically) related. Their incidence is also higher in contracts related to solutions or services, when there si more potential for disagreement or confusion over precise specifications.
These observations tie back to the IACCM research on the most frequently negotiated terms. When identifying the most important terms (as opposed to those that today gain greatest focus), IACCM members highlight scope, change management and communications as the areas that will best safeguard successful results.
Virtuallly none of the companies represented in the discussion undertake regular tracking and analysis of claims and disputes. For those that do, the findings assist in improving procedures and practices and in steadily eliminating the sources of claims. It was also apparent that relatively few companies undertake regular review of their contract review and escalation procedures, to see whether issues could be identified and resolved at an earlier stage.
Overall, the session demonstrated another area where the contracts and commercial community could be operating more proactively to bring value to the business. The combination of increased focus on the relevant terms and conditions and more thorough analysis of the reasons for claims and disputes would result in significant improvements in contract performance for both buyers and sellers.
It is now almost three years since IACCM urged its members to start thinking of themselves as ‘managers of uncertainty’. The point being made was that a globalized economy and a steady shift towards greater inter-dependency was making traaditional approaches to risk management inadequate and potentially inappropriate.
Recent events continue to illustrate this point – most notably the disruption that resulted from the volcanic eruptions in Iceland. Traditional risk registers would have been very unlikely to predict such an event and planning for it would have been considered highly inefficient.
The Economist has published an excellent article that reinforces this point. In discussing the future of risk management, it comments: “The aim is less about trying to predict what unlikely events may come along, and more about creating mechanisms and relationships that would help the firm and its partners respond with agility if disaster did strike. Such exercises, when done well, help their participants to develop a capacity to devise quick, creative solutions to unexpected problems, and to build trust among those who would have to take crucial decisions on the spot and those who would have to follow them.”
Once again, the point here is that business today needs to spend less time building rules and pushing risks onto other parties, and far more in creating collaborative networks and superior communications (but don’t forget to plan a fall-back in case it is those communication networks that fail!) Instinctively, many contracts and commercial professionals know that this is the smart way to go. Yet far too many contracting processes remain rigid and focused on the same adversarial terms and conditions.
Today, IACCM published the results of its annual survey of the Top Ten Negotiated Terms. Once more, it reflected virtually no change in the dominant issues – none of which are about forming collaborative networks. The contract remains fixated on trying to create certainties in a world where increasingly uncertainty reigns. We know that The Economist is right when it says we should be “creating mechanisms and relationships that would help the firm and its partners respond with agility” – so what are we doing about it?
Certainly some IACCM member companies are taking rapid steps to deal with uncertainty – and Contracts and Procurement groups are occasionally showing leadership in this work. Our recent survey on ‘commercial agility’ generated a large input and revealed a strong understanding that things must change – but also indicated that most are still playing at the edges, rather than addressing the core challenges.
I will write further on this topic when the Commercial Agility report is issued next week. But meantime, have you been taking steps that will help you deal with future uncertainty better than your competitors?
I wrote recently about the growing importance of change management . I was highlighting the need for properly defined change procedures that assist in maintaining alignment between the contracting parties and therefore play a key role in building cooperation and trust.
The frequency and speed of change (up by more than 30% in the last 5 years, according to recent IACCM research) has made it increasingly important for organizations to define the way it will be managed. Failure to do this almost inevitably results in disputes and means that opportunities for increased value or innovation will be lost.
Last week, a message board posting by an IACCM member shed a different light on this problem. Essentially, this professional was asking ‘How do you get internal and external management to engage in the change control process?’ Even though she works at one of the companies that is acknowledged for the excellence of its post-award contract management, she finds it extremely difficult to gain management attention or have them follow the established change procedures. That lack of discipline means that key conversations either do not occur or are not recorded, changes happen informally and when things go wrong … fingers point everywhere except at the true cause.
To see whether this was more than an isolated incident, I spoke with a few senior professionals in industries where efffective change management is critical to cost and performance – for example, aerospace, engineering and outsourcing. It became clear that the experience of the original author was far from unique. In the words of one very senior commercial executive: “The lower level contracting professionals follow process whereas seniors circumvent the process because they get paid to make really big decisions. In my career, (I found that these) very big decisions were very rarely written down. In my view, the level of risk rises in direct proportion to the level of seniority making the decision.”
Of course, one would expect that senior management is involved in the riskier decisions. But the point here is that senior management may often be the source of risk because it considers itself above trivial things like process and business discipline. Good change management is without question a source of better relationships and higher profits; but often, it seems, executives may be the ones who are the enemies of properly managed contract change.
Is that true in your organization?
The news that the Institute for Supply Management (ISM) and the Chartered Institute for Purchasing and Supply (CIPS) have entered into a ‘reciprocal agreement’ whereby they recognize each other’s professional credentials will be welcomed by many. I am sure there are hopes that this will lead to even more integration in the years ahead.
For the individual professional, this announcement means greater portability of their credentials – though it still leaves more than 80 countries with their local purchasing associations and accreditation standards. However, one must assume many of them may now seek to gain cross-recognition with the ISM / CIPS powerhouse.
However, the real driver for this link-up is not of course the individual member, but rather the major international corporations which have been calling for greater consistency since ‘globalization’ began. I recall speaking with CIPS and ISM on this issue many times over the last 20 years – an indication of just how slow change can be.
Unfortunately, the time it has taken to make this progress does not augur well for ISM, CIPS or the professionals they represent. In my opinion, professional associations must show leadership; if they cannot change, then how can they be effective agents of change for their members? If it has taken so long to acknowledge the merits of their respective certification programs, how long will it be before they tackle the more fundamental issues related to the evolving skills and knowledge of the supply management professional?
Although the organizations claim a combined total of 150,000 members ‘and individuals holding their professional credentials’, it is clear that they face growing competition and challenges from many directions. Traditional associations are being squeezed by a large number of up-starts, especially in the supply management field, as welll as options such as LinkedIn, Plaxo and a wealth of networking sites.
Given this diversity of choice, there are many who now question whether the old-style, one size fits all, mass association can survive. In my view, it can (and indeed should), so long as it can find a way to meet both individual needs and collective interests. This requires a strong management system which marraiges of convenience are unlikely to produce.
My experiences in working with ISM have been overwhelmingly positive and I wish them well. I think the questions for both organizations will now be whether they see this shift as a major accomplishment in its own right, or whether it is simply the first small step in a series of much more revolutionary changes that they – and their members – desperately need in order to remain relevant.
A few weeks ago, I wrote a short article on the importance of communication. It highlighted the growing challenges for the contracts and commercial community, as increasingly we need to work across cultures, languages and become expert in the use of new technologies that transform the way we communicate.
Communication skills are important in most jobs, but they are fundamental to the performance of ours. We must be able to work with others to assemble and interpret a range of (often conflicting) stakeholder views and inputs; we must be able to reconcile those views and propose solutions. And then we must communicate and manage the results – and increasingly also deal with continuing change to whatever was agreed.
Keeping stakeholders (internal and external) on board throughout the contracting life-cycle is a demanding job. Encouraging and supporting good communication is an absolute requirement. It is the only way we will manage risks; it is the only way that we can remain pro-active; it is the only way to maintain cooperation.
Our community is innately aware of the importance of good communication. IACCM‘s 2009 study on the ‘Most Admired Companies for Negotiation’ highlighted that the number one characteristic of the winners was – yes, you have guessed it – the quality of their communication. Timely, appropriate, clear, informative.
So it should be a cause for real concern that a more recent study suggests that poor communication skill is a key weakness in today’s contract management staff. This is especially pronounced for those in Procurement, where colleagues and suppliers feel there is a reluctance to provide information, there is a lack of empathy and understanding of broader business perspectives, there is an unwillingnesss to consider the impacts of communication techniques on outcomes and there is a tendency ‘to create barriers to open communication’.
These failures, where they exist, inevitably result in missed opportunities and reduced status. Such individuals and groups become defensive and increasingly uncommunicative. People often ask me ‘If there is one thing I should be doing to advance my career or function, what would it be?’ Based on these findings, the answer for many of us must be: ‘Improve your communication skills’. We must become more proactive, better at selecting the medium for communication, more ready to listen, more prepared to facilitate discussion between others and more skilled at explaining positions and describing sources of value.
Last month, I wrote about the growing interest in more flexible contracts and ‘commercial agility’.
The speed of change in today’s markets has forced many organizations to look at business risk and its management in new ways. This has impacted the way they think about contracts and to innovate in key areas of commercial practice and policy. In my earlier article, I listed some of the terms and clauses that are most afffected.
For some, the pressing issue is to increase their flexibility and limit the scale and duration of commitments; for others, it is about speed; and sometimes it is driven by issues of competitiveness and innovation. For example, to attract suppliers with high value goods or services it may be necessary to throw established rules and procedures out of the window and explore new ways of partnering.
As I mentioned in the earlier article, IACCM planned to do more in-depth research on these trends – and that research has now started with a brief survey. It can be accessed at https://www.surveymonkey.com/s/agility and, as with all IACCM surveys, all participants receive a copy of the results. Its purpose is to discover how many industries are thinking in terms of commercial agility and whether it spreads across geographies.
IACCM intends to follow up from this initial survey to explore more specific areas in which contract and commercial innovation is occurring and how these changes are being implemented. This may include selective ‘roundtable’ discussion groups.
It is through change initiatives such as this that contracts and commercial staff gain strategic influence and organizational status. My suspicion is that we will find only a small number who are ‘leading edge’ in this area; but I hope that the ideas it generates will enable others to step forward and raise their profile to new levels.
Take a look at the business and technology sections in any serious newspaper today and you cannot help but be overwhelmed by the way that information flows are transforming our world – and how surely this will revolutionize the way that we form and manage trading relationships, no matter which market sector we operate in.
I will take just a few examples from today’s press.
Facebook is once again cited for the pressure it is placing on regulators around data privacy rules. Its attitude that users must opt-out rather than opt-in has already resulted in action by the authorities in Canada and has now raised the concerns of regulators in Germany and Switzerland, who claim that photos of third parties must have their approval before they are posted. Facebook’s director of public policy takes the view that ‘There seems to be a real disconnect between the regulators and the people .. they are embracing sharing with one another’. And the evidence suggests he is right.
In reality, how do people react to be being ‘targeted’? It is an issue raised by the British election campaign, with claims that cancer sufferers are receiving specific mailings which attempt to create fear about health service policies. If true, this is clearly an example where personal records are being built by someone who can then make money from their knowledge. Of course the politicians cry ‘Foul!’, but how much do the wider public really care?
The magazine ‘Business Life’ is just the latest to suggest that the issue is largely generational – that the ‘oldies’ seek to protect bygone principles and sensitivities, alien to today’s tech-savvy youngsters. For those who have been raised in the internet world, ideas of privacy and secretiveness are from another era. They thrive on the latest gossip; they admire those who push at boundaries; they are the first to view confidential information and intellectual property rights as concepts to be breached. Raised in a celebrity world, reputations are here today, gone tomorrow .. but also perhaps restored at some future date.
In this new world, loyalties are short-lived. So when Twitter needed to plug gaps in its capabilities, it was delighted to have the contribution of voluntary application developers, who in return were able to advertise their offerings at no charge. But once established, Twitter has turned its back on these developers and is formulating a new charging and advertising model to monetize its potential. The exciting, open forum innovator becomes instead the revenue hungry predator ….
And as mobile devices become the new face of technology, Apple increasingly challenges many of the incumbents. Its devices –the iPad and iPhone – offer instant access to data and to software as a service (SaaS) applications, such as customer relationship management. This enables suppliers to obtain instant information – especially in areas related to personal or business information – which guides on-the-spot decisions. These may range from a credit check or buying history, to decide whether to do business, to instant guidance on patient treatment, which may save your life.
As i read all of this, I think about how it will impact the way we construct and manage our contracts. The answer will of course vary depending on the nature of the product or service being provided, but all relationships will be impacted by the availability of real-time data. A current example that will affect all of us is the switch in the iron ore industry from annual pricing to quarterly priced contracts. Technology has made it possible to monitor and analyze spot market trends in a far more dynamic way. Might this be a future trend in commodity pricing generally, perhaps ultimately spreading even to consumer markets?
To take another example, to what extent may suppliers use customers to assist in the development of new product or services and then start to charge a higher price for the ‘enhanced’ product? In primitive forms, this concept has always existed (from informal feedback, through to the more structured ‘beta testing’), but the advent of message boards and instant messaging has made the potential for ‘joint development’ far more immediate and dynamic – and of course challenging to traditional concepts of intellectual property rights.
Future profitability will increasingly depend on smart contracting, whether it is a Facebook model that pushes at the boundaries and tests acceptability of new standards, or Twitter that successfully exploits the work of others, or Apple that creates new go to market models and partnerships to marginalize incumbent technologies. The information age is still in its infancy; the winners will be those who are ready to challenge traditional policies and practices, to formulate new commercial relationships and offerings that leverage the flows of information and knowledge to drive proactive update and change in their trading terms. The contracts community must be at the forefront of this change in order to ensure its strategic relevance.
Commitment Matters 