The latest edition of TPI’s ‘The Platform’ contains a couple of interesting articles by seasoned deal consultants. One looks at IT vendor management and the other at contract renegotiation.
In recent blogs, I have commented about the growing focus on IT procurement and supply management. TPI confirms my impression that in general, post-award management is tending to be undertaken by groups that are separate from Procurement. Unfortunately, they also observe the fact that such groups are often scattered around the organization with no coordination regarding their precise role and, of course, no central investment to develop skills or provide consistent tools.
Suppliers struggle with this type of fragmentation because it frequently leads to mixed messages. Of course, they sometimes play off the various groups against each other, but quality suppliers are frustrated by uncoordinated interfaces because it delays implementation, slows down performance and frequently prevents timely change – ultimately resulting in disappointing results for both parties. In her article, Cynthia Batty sets out five useful tips for customer organizations to prevent such disappointment. These are:
- Define the terms
- Create a clear definition of roles
- Cooperate with data
- Understand the difference between contracts for services and for products
- Share business processes to achieve maximum control
Failure to address issues such as this often leads to pressure for renegotiation and David Howie discusses some points to consider when preparing to renegotiate. He asserts that there will be more than 500 major renegotiations of outsourcing agreements this coming year and that ‘most major outsourcing agreements will be renegotiated during their term’. Again, these comments reflect those by IACCM and within other articles on this blog. In part, such renegotiations are inevitable – market volatility leads to increasing frequency of change in the original terms. However, much of the problem goes to the fact that requirements are often poorly defined. This does not always mean that they are imprecise; indeed, the problem can be the exact opposite. Too much precision at a time of market volatility makes renegotiation almost inevitable.
David’s article also offers some useful points to consider, though I would have liked to see more thought given to the positive incentives for a supplier to renegotiate. If, as the article asserts, suppliers try to ignore requests for renegotiation, it is perhaps because such conversatiosn tend to be driven by negativity. I do not agree that win-win is not achievable – and indeed, if it is not, then why are the parties remaining in contract?
The article also fails to suggest that the inevitability of change in many of today’s contracts should lead the parties increasingly to embed planned renegotiation into their agreements. If indeed it is so hard to come back to the table (despite disappointing results), it would surely make sense to ensure automatic triggers for fundamental review of the terms and goals. Increasingly we observe renegotiation becoming part of the planned relationship, rather than an enforced – and perhaps acrimonious – event.
Sadly, I only became aware of the work of Ian Macneil when I read his obituary. I wish that I had met him, because his work on contracting aligns closely with the views and mission of IACCM – and offers yet another legal and academic underpin for our vision of the future. Several of his ideas yield critical insights to the work of any contract, legal or procurement professional.
Ian recognized that classical legal practice failed to address the needs and reality of business-to-business contracting. He observed that classical principles are based on assumptions of selfishness which mean that each party seeks to operate at the expense of other parties. He argued that this overlooks the reality of business contracting, which in fact occurs only because the parties have recognized a potential for mutual gain and understand that this can be realized only if they are willing and able to work together.
His writings then go on to illustrate how narrow perspectives and transactional behavior will undermine the relational aspects of a contract. He depicts how companies have choices regarding the depth of the relationship they wish to form – and how this depth must drive very different contract mechanisms. This connection between economic theory and behavioral reality has been increasingly embraced by top economists – but is still largely absent from the practice of law and is severely challenged by the ‘commodity price’ strategies of many Procurement groups.
“Classical law,” comments Macneil, “views ‘cooperation’ as being of little interest and external to the contract.” Yet in business, contracts arise precisely because the parties recognize there is more to be gained by cooperation than by separation. Successful contracts therefore operate with mechanisms that foster cooperation and depend on the parties consciously adopting a cooperative attitude. As an example, they must accept that ‘damages and losses are not precisely quantifiable and it is pointless to try’ (unlike the theories that govern classical law, which assumes precision in these areas).
Good contracting, Macneil tells us, ‘escapes the classical legal model and is replaced by very different adjustment processes of an on-going administrative kind. This includes internal and external dispute resolution structures … the relationship becomes a mini-society with an array of norms beyond those that centered on the exchange and its immediate processes.” In this, he is clearly alluding to areas of contract and relationship governance, information flows, transparency and performance management.
There is a further point in Macneil’s work that should especially strike us. He made the observation that classical law – and its attitude to contracting – is built on the premise that the parties are operating within ‘a common base of presumed rules’. In today’s global economy, this presumption is of course a fallacy. The parties frequently have very different beliefs and understanding of ‘the rules’ – whether legal, economic or social. This again points to the fundamental inadequacy of most contract development and negotiation processes. It illustrates why parties who seek to use power to impose their view of ‘the rules’ will almost inevitably destroy the potential value that could have been achieved from the relationship.
This idea that cooperation is the fundamental underpin to contracting is obvious – yet is also a revelation. And with this insight, it must lead all of us to ask what aspects of our behavior threaten cooperation; what areas of our terms and conditions support and enable it; what techniques and tactics in negotiation establish the framework for mutual success. Although aspects of the law represent an important underpin to contracting, the real essence of the process is that it must establish and define the reason for cooperation, the economic exchanges that will occur and how the parties will structure and commit to ensure the gains are achieved.
Intrinsically, most experienced contract professional know this already. Yet we still struggle to put our knowledge into operation. We still revert to our use of ‘potential external sanctions’ as the way to drive behavior. Reading Macneil’s work will help us to think in a new way – and more importantly, to challenge the old way. Today’s business realities depend upon great thinkers such as Ian Macneil. We must ensure his ideas are put to use.
Over on the IACCM message board, a member has asked the question: “I am an attorney in the legal department who supports the Contracts Management Group who report to a business/procurement manager. I am trying to find out if most companies have the contracts group separate from the legal group, or if the contracts group is a part of the legal group. And, if the contracts group does not report up through the legal management chain, how do you handle contract negotiations, administration and management with the group?”
Of course, this is not a new question – but it does seem to be rearing its head with greater frequency right now. As I have observed in various articles recently, business conditions are placing real strains on the contracting process in most organizations. On the one hand, there is pressure for greater control and compliance; on the other, there is the need for increasing agility and the ability to remain flexible. And of course, there is the vivid memory of the recession and the scramble to renegotiate contracts, which bruised many and left others feeling exposed when they discovered the types of agreements they had in place (assuming, of course, that they could even find the relevant contracts!)
These factors have alerted executives to the weaknesses in their contracting process. It has caused internal frictions over control and ‘who is the blame?’ There is debate over the reasonableness of terms and conditions and about the time it takes to make decisions or reach agreement (internally and externally). None of these characteristics is acceptable in fast-moving market conditions.
But what change is wise? The problem is that contracts require balance. They must enable internal business goals and objectives while at the same time responding to the needs and expectations of customers and suppliers. They are instruments of governance that are designed to secure economic benefit. With so many stakeholders having a legitimate interest, they can rapidly become a battle-ground for control, with the most powerful function simply seeking to impose its will. On the other hand, few stakeholders are in fact equipped to represent the holistic needs of all affected parties – so often they turn to legal because no one else wants to carry the baby.
So how should an organization decide where contract management ought to belong? Here are a few ideas – and I will welcome additional comments:
- Give thought to the nature of your business and the scope of the contract management role. For example, contract management in a commodity business is very different from the role in a high value project business. Maybe your company has a mix of contract types – in which case it may bneed a mix of organizational answers.
- Who is willing to take accountability for the quality of the contracting process? Make sure that you have assembled the criteria that represent ‘success’ and then determine who is willing and able to commit to its delivery. For example, is the aim to be ‘easier to do business with’. Is it about increasing the quality and outcome from negotiation? Is it about shorter cycle times? I s it about greater business control? Is it about increased competitiveness? Without broad agreement about what you want to achieve, there will be continued arguments and failure.
- Who has the right skills today, or is prepared to invest in their development (and associated tools and systems)? Contracting is complex and in today’s markets it must remain a focus area. If the prospective owner wants to grab control because they think they will have a quieter life, or can suppress workload, they should think again. Contracting is set to remain a dynamic discipline, as more and more deals and relationships require active life-cycle management.
In my experience, world-class contracting depends far more on the integrity and quality of the process than it does on who owns it. So my recommendation is to first focus on ensuring the process supports the goals and relationship needs of the business. Then from this process, the primary skill and knowledge requirements will become evident and potential organizational alignment more obvious. At the very least, whoever steps forward for ownership then has a clear understanding of what they are taking on.
Finally, just because someone owns the resources does not mean they should necessarily own the process. Today’s best performing contract processes operate with a degree of shared ownership where the ‘owner’ is really the first among equals and consults widely and regularly with other key business groups and functions to ensure that contract management continues to meet the needs of the business.
The subject of IT Procurement has been a real hot button at IACCM this week. I am not sure precisely what is going on out there, but it seems we are back to some fundamental battles over whether IT Procurement should be within Procurement or within the CIO organization. The water appears to be further muddied by the question of where supplier relationship management should belong – and many CIOs are clearly pushing to have both, at least in respect of their suppliers.
I wrote about this some weeks ago, following a session with CIO Magazine, and I can certainly understand why CIOs are concerned about having high quality commercial and contracts teams, given all the change they face. However, this post is not about the organizational or skills question (on which I am happy to share my advice and views), but actually about a report that one of the IACCM research team brought to my attention.
This report is based on a survey of some 200 CIOs in UK local government (state, district or city governments in other countries). It is probably no surprise that these CIOs do not welcome the thought of more central control over their projects and related spend (something that current budgetary conditions make more likely). The article criticizes the performance of “central government in procuring IT, citing a string of major IT project failures and quoting media reports of the cost to the taxpayer due to abandoned central government computer projects, which was most recently estimated by the Independent to be in the region of £26 billion during the last three Labour governments”.
It goes on to recommend that “service-related government IT projects should have a timeline of no more than 18 months and that the framework for selecting suppliers should be restructured to make it more flexible, fairer to small suppliers and more conducive to innovation”.
I think this has the makings of a fascinating debate that is likely to take place in many countries in the coming year or two, not least because of the fundamental role of IT in managing the delivery of public services, plus the fundamental questions raised by the advent of cloud computing. There are certainly challenges associated with central decision making and the political considerations which undermine many projects. But interestingly, the report is most damning about the issue of central government skills and argues that local authorities are better at defining, procuring and project managing their acquisitions. Given the relative lack of trained procurement and project management personnel at a local level, this raises some massive questions over the investments that have been made in training and ‘professionalizing’ such staff in central government.
Of course, another reason for better performance (if indeed performance is better) could be that local projects are smaller and far less ambitious. Perhaps many national projects are simply too big and too complex. This might suggest that central government needs to do more to create enabling agreements (gaining the savings from consolidation) and to become more prescriptive regarding required outcomes, but less so regarding specific solutions.
Overall, this makes for a fascinating debate in which the contracts, commercial and procurement community should be involved and from which it should learn. Our interest should be both as professionals and also as taxpayers.
Dustin Mattison pulled together some interesting comments on Toyota and its ‘silo-based organization’.
It is of course remarkable how quickly people, institutions and companies can switch from ‘hero’ to ‘villain’ status. So recently Toyota was hailed as such a successs story, yet now everyone appears to have known that this was just based on … what, a myth, good luck?
Business results prove that Toyota did a lot of things very well for a considerable period of time. What it perhaps did not do so well was adjust to changing conditions – among them, its own successful growth (but it shares that fault with most industrial Leviathans). I have commented in previous blogs that the warnig signs were there (for example, the reports issued by Professor John Henke). Based on my contacts, it is certainly true that the highly devolved organizational model, on which Dustin comments, prevented strong business functions from developing. I believe that in the field of contracts and relationship management, there was virtually no central oversight. Yet let us not forget that many suuppliers loved this model and felt strong loyalty to Toyota. Before the cynics observe that this lack of central control meant higher margins for the supplier, let me say that there is no strong evidence of that, and even if they did, I suspect the overall relationship costs for Toyota were much lower.
The problem with Toyota’s organizational design is that it depended on the competence and insights of a small executive team. The model appears to have lacked appropriate checks and balances and this deficiency became more severe with rapid growth. I agree with comments by Forrest Breyfogle that modern technologies allow very different and better balanced structures, supported by high quality information flows that enable insight and decision making in a far more collaborative way. The old ‘centralization versus decentralization’ see-saw through which most of us have lived is now anachronistic. A matrix that brings together the relevant expert groups (business units and support functions) to have joint and several responsibility for key business activities and processes appears to be the way forward.
Silos always accompany any sort of specialism and to some extent are desirable (for example, ‘professions’, by their nature, are exclusive and therefore create both progress and conflict). Rather than seek to eradicate silos, we have to ensure that the contention they generate is creative rather than destructive.
Yesterday I was asked to write an article about Wal-Mart and its ‘de-layering’ of supply relationships (another word for increasing the number of direct supplier relationships). In that article, I commented that it is possible to have collaborative relationships even with a giant like Wal-Mart – but it depends on the supplier’s approach. If you cannot demonstrate value and introduce new and innovative approaches, don’t expect special treatment.
So it was timely today when I discovered an HBS Working Knowledge article on exactly this theme and featuring two very different Wal-Mart suppliers, one the also giant Procter & Gamble and the other a small pumpkin farmer. I will leave you to read the illuminating story regarding how they gained Wal-Mart’s attention and kept their loyalty. My specific interest was drawn to the statement that , in the case of P&G, ‘both sides eventually eliminated elaborate legal contracts in favor of Letters of Intent’. This was seen as one of the break-through moments in creating a positive and collaborative relationship.
Of course, the difference between a Letter of Intent and a contract could doubtless itself keep us engaged for quite some time. But that is not the point. I believe we are going to see a steady increase in the erosion of traditional forms of contract because they simply do not get the job done. As this story illustrates, instead of pulling parties together, they often push them apart.
This is not the result of contracts per se – it is because of the way that far too many contracts personnel are hard-wired to behave. Contracts staff must develop the commercial judgment to know what type and form of relationship agreement will be best suited to their business objectives. They must escape the trap of established templates and standard term checklists and instead become the effective synthesisers and documenters of governance and performance frameworks that support success. We need a wider portfolio of tested approaches and we must develop understanding of new remedial techniques – very much like the medical profession. Today, we are faced with far too many patients who do not survive our treatment; we need to expand the range of treatments that we have on offer.
“Best Practices should be extended to cover the initial recruitment of persons for a particular function ( procurement or contract specialist ). I have observed in most organisations these functions are not given the same importance, as compared to for example finance, where the bar has been set for entry i.e CPA ,ACCA certification made mandatory for one to be considered. It is a high time IACCM and other professional bodies engage with organisations to make it mandatory for any practictioner within this function to attain the required relevant certification.”
This view was expressed by a student in the IACCM Managed Learning program, on one of the message boards. I understand his frustration.
Professions tend to go through several phases in their development. First, based on a social need, individuals become specialists in a particular field. They learn either from personal experience, or from a specific mentor. Over time, these individuals may start to network and share some experiences; they may even write occasional books, but often they do not fully agree about the scope or role of their activities. The role remains dominated by personal and organizational perspectives of its purpose and the skills and knowledge needed for performance. Many individuals in fact fear ‘professionalization’ because a) it will create standards they might not meet; and b) it will result in a level of discipline that might make their work less fun. Attitudes like this inhibit the status of all practitioners and make it almost impossible to demonstrate the value or contribution of the role.
Over time, if a job is to become recognized as a profession, consensus builds that this particular field is of such importance that it needs standards of practice and a formal body of knowledge. At this point, it is generally able to offer recognized sources of training and people select it as a career path. There is also a commitment to research and wider sources of education and training (for example, universities and business schools) – all the characteristics laid out in the IACCM best practices module.
Contract and commercial management is still on this journey. We have progressed a long way – for example, the IACCM learning program is the first (and only) effort to capture and spread a global body of knowledge. At present, there are more than 4,500 students who are among the leaders in establishing a group of similarly qualified individuals with a common understanding of their role and value. IACCM is working very hard to push for certification and to do this we must also create executive and public understanding that this will result in business and social value. We are encouraging more publications; we are working to get academic programs at universities and business schools; and we are undertaking large volumes of research and authoring.
Now we need you – the practitioners – to show your excitement end dedication by becoming powerful advocates for the value of contract management and the need for employers to demand certified professional standards. And of course, to set an example by becoming certified yourself!
This morning, the UK’s Radio4 ‘thought for the day’ featured a speaker who was commenting about failure. He discussed the way in which business and government each struggle to deliver the results they promised, or which were expected. He then proceeded to observe that the resulting reports and post-mortems rarely manage to provide the sort of findings and insights that satisfy those affected.
In the end, he suggested, most of these disappointing results – on major projects, large deals, key initiatives – could be attributed to one thing – a failure of imagination. Of course they are sometimes overtaken by events that could not reasonably have been predicted, but mostly not. In general, if the project or deal leaders had thought more broadly, considered other perspectives, they might have allowed for the circumstances or conditions that derailed their work.
These thoughts struck me as very apposite to the contracts and commercial management community. In assembling, negotiating and managing contracts, we sit in a unique position. For many of us, the fascination of our role is the insight it offers to the many stakeholders involved in any complex deal or project. For some, that acts as a springboard to wider ‘stakeholder analysis’ which insures we have considered all perspectives and potential risks. I was also reminded of another comment that I read recently, related specifically to contracts: “Failure is usually not from ignorance, but from ineptitude – a failure to apply what we know”. The commentator this time (Rees Morrison) was highlighting how good lawyers and contracts professionals use checklists to eliminate the chance of ‘ineptitude’ and to free their time to think outside the box. Indeed, for some organizations this is leading to more and more outsourcing – have others manage the checklists and focus your best talent on ensuring there is no ‘failure of imagination’.
I was reminded of a previous manager, a past CEO at IBM UK who always challenged us to ‘think the opposite’. By this challenging of our own assumptions and prejudices, we would often arrive at new realizations, new solutions – or simply avoid stupid mistakes.
So what does this ‘failure of imagination’ mean to us? At its simplest, I suggest to anyone in contracts, legal or procurement that we should ask ourselves a simple question: in assembling a contract, in pulling together all the stakeholder inputs, is our primary task simply to integrate and ensure we have a consistent document; or should we instead be focused on ensuring that there is reconciliation, that we have developed creative answers to conflicting viewpoints so that all participants can work in harmony?
Last week, I attended a meeting held by the International Centre for Complex Project Management (ICCPM) in London. IACCM has been working with ICCPM and is curently leading a joint working group on complex project contracting.
Most participants at the meeting were from the defense sector. They described complex projects as those which had three specific characteristics:
- uncertainty, ambiguity, dynamic interfaces and significant external influences
- usuallly run over a period that exceeds the technology life-cycle
- can be defined by effect, but not by solution
Improving performance on these projects is important, because they tend to be of major social and political value. Today, they are fraught with cost overruns and time delays. The extent of these ovverruns is increasing on a year by year rate (which is interesting, given the investments there have been in the professionalization of project management and the range of tools and systems now available). The three factors listed above all represent risk – and can either generate collaboration, or defensive behaviors. There is a tendency for procurement, legal and contracts staff to react to risk through defensive approaches that protect their own company or organization, rather then expose the risks and seek shared solutions.
Perhaps part of the problem is that we are steadily becoming more ambitious in the projects we undertake. But another key aspect is that we are not structuring such projects the right way, in particular how we define and manage relationships. And that, of course, is where the contracting process should be offering some answers.
Contracts and contract negotiation at their best offer a forum for disciplined discussion and interchange. At their worst, they stifle such exchanges. This is where having the right personnel with the right motivations in the room or in the team becomes critical. Indeed, from their analysis of the ‘big issues’ that undermine success, ICCPM highlights a wide range of areas that ought to be addressed by the contracts process:
- unaccommodated / unaligned stakeholder views of ‘success’ – an alignment that the sponsor and the commercial team should together be ensuring
- tension between product success and project success (product versus outcome) – a key problem for traditional purchasing groups
- lack of understanding of non-technical risks – because they tend to be suppressed and handled through risk allocation terms and confrontation
- use of competition as a weapon – again, a procurement technique that often is not appropriate for complex projects where teaming is essential
- institutionalized procurement practices – their words, not mine!
- current tools and decision processes are unsuitable for analyzing uncertainty – contracts rarely deal well with uncertainty
- inevitability of scope creep (cost and scehdule) especially if the contract is entered into too early- or perhaps if the governance process did not anticipate and enable required changes to be undertaken in an open and disciplined form
This fascinating list of findings is of course being considered by our working group, but it clearly raises questions about contracts and contracting skills that must be answered. Interestingly, it also raises questions about the nature and role of project management in such situations. One issue certainly seems to be that too many project managers are drawn from a technical background and lack the commercial and relationship skills upon which most complex projects depend.
I have found most contract and commercial staff are supremely uninterested in supply chain management. Especially for those on the sell side of contracting, few see it as having direct relevance to their work; most view it as ‘something to do with logistics’. I think they are wrong and that supply chain should be a key area for focus by any self-respecting commercial organization.
An article in Strategy+Business, entitled ‘Virtuous Connections’, illustrates this point. It tells a story that demonstrates the impact on customers of poorly managed supply networks. It also shows how a failure to properly understand and segment customers lies at the root of the problem. Here is an extract from the article:
“(The supply chain manager) began to implement (his) concept by tackling Chem One’s customer segmentation problem. At that time, the company didn’t prioritize its customers. Good customers, bad customers — large, small, loyal, or intermittent — all were equally important. If any of them asked for a product with rush delivery, Chem One’s service representatives would simply agree to it, without first considering the cost or the value to their own company. These rush orders upset the planning schedule and required manufacturing to shorten its production runs. The orders that had been delayed as a result of these sudden changes then became “rush” orders themselves, perpetuating planning instability and suboptimal manufacturing. Service levels declined, and costs increased.
To mitigate this situation, West and his team dug deep into Chem One’s sales records, analyzing each customer by its size, needs (for example, did it have a just-in-time system?), and strategic importance to Chem One, along with a few other variables. After this assessment and discussions with salespeople in the field, the team gave each customer a priority code. This code, in turn, dictated how its Chem One customer service representative would respond to its requests for rushed or changed orders. Immediately, unplanned deliveries were reduced significantly and customers were given a more realistic picture of product availability and shipment schedules.”
As contracting experts, is this not the sort of analysis we should have at our fingertips? As the people evaluating and making commitments, should we not be making decisions based on the relative value of customers? We enter into contracts to achieve mutual economic gain; how can we make risk and commitment decisions without visibility into the relative economic contribution of each customer or prospect?
I know that many contracts groups do attempt to segment the customer base, but I would suggest that the basis for segmentation is typically very rudimentary. It tends to be based on deal size, or the ‘strategic opportunity’ that the business perceives, rather than on any structured performance data. As a result, we often finish up offering the best terms to the lowest margin customers. We build in system disruptions for business that has relatively low value, and fail to understand how this will impact our more valuable customers.
The problem – in my experience – is that sales contracts and commercial groups operate on a deal to deal basis. They rarely have wider insights or understanding of customer portfolios. This distorts our understanding of the true impact of term and condition variations as well as our appreciation of risk. Through that wider understanding, we would do some things more often and others much less often. Supply chain insights and discipline would be an excellent way to start handling business opportunities and markets with greater sophistication – and to increase the value that we bring to the business.
Commitment Matters 