On the blog ‘husdal.com’, there is an interesting article related to supply chain risk. It highlights a book written some 10 years ago, Acts of God or Acts of Man, which questions why people apparently ignore known hazards when deciding how and where to site or build key infrastructure.
The book observes that modern society is generally well aware of the potential for disasters when it builds in areas subject to earthquakes or flooding or volcanic activity. Yet not only does it choose to continue siting cities, factories, power plants etc. in such areas, it also chooses not to improve design to take account of such risks.
I suspect there are a number of answers as to why this happens. In part, as the author points out, catastrophic events in any particular region are relatively rare, so there is doubtless a degree of risk acceptance, based on an assessment ‘it won’t happen in my lifetime’. Today, there is probably a further factor, which is the belief that people will be protected from the consequences of their decision. They have faith that somehow new technologies will arrive that will make their surroundings safe; or that government would not put them there if it was really dangerous.
As for those governments, they see cheap land, or local politicians push for development, or entrepreneurs see opportunities – and all of them know they will never be held to account. As for safer designs, there are several reasons that doesn’t happen. One, it would be acknowledging the risk and might lead to more questions about the wisdom of building in the first place. Second, it would cost more money and third, it would take more time – and all for a risk that probably won’t occur during my period of control.
So catastrophic risk is no different from other forms of risk. We base decisions on probabilities and we hope for the best. After all, another way that these high risk locations would be avoided (or safety practices would change) would be if the buyers of goods and services stopped buying from such regions. Why are they so willing to put such risks into their supply chain? The answer, of course, is because of relative cost or convenience. Humanity tends to deal in realities, not possibilities. And it is generally reluctant to pay extra to safeguard against those possibilities until the economic case for doing so becomes overwhelming.
I guess the book might just as well ask why the buyers of goods or services similarly ignore such perils
In its latest report on public sector procurement in the UK, the National Audit Office once again highlights the absence of the commercial and contracting skills needed to support successful procurement, especially related to projects.
“The NAO welcomes the current plans of the Treasury and Cabinet Office to strengthen project assurance. The NAO highlights the need for independent challenge capable of stopping projects which do not give the prospect of value for money. This is particularly important as there is still a shortage of the skills needed to manage and oversee complex major projects. Better contract management skills are particularly needed to obtain best value during the contract period, including by ensuring the public sector shares in cost efficiencies achieved in existing contracts.”
For those who engage with public sector bodies in most parts of the world, this will come as no surprise. Major investments in traditional procurement skills and methods have done little to stem the under-perfromance of many project acquisitions. To be fair, it has taken quite some time for the private sector to grasp this issue – and even now, they have invested far more on the oversight of supply contracts than they have on buy-side skills and capabilities. There is a universal tendency to see performance as a supplier problem, rather than a shared objective and challenge.
With regard to the public sector specifically, IACCM has increasingly been selected as a provider of training and skills development precisely because it addresses the challenge of improved collaboration. ‘Adversarial relationships are still embedded in Procurement thinking’, comments Jim Bergman, IACCM’s VP of Training Services. ‘There is a big difference between an adversarial approach which focuses on blame, and a collaborative approach that focuses on resolution.’
It is clearly foolish to believe that long-term collaboration comes naturally to any organization. Their needs and priorities are always subject to divergence and change. But failure to develop the right people and systems to oversee contract relationships leaves both suppliers and their customers blind to what is happening. Good relationships understand that change is inevitable and set up the structures needed for its management, rather than ignoring it until there is an explosion.
* Only 11% of organizations are consistently successful in imposing their standard terms and conditions – but they are overwhelmingly from Procurement.
* Sell-side legal and contracts groups are increasingly struggling to get their standard terms accepted by business customers; some spend a lot of time fighting, while others have recognized smarter ways to manage risks and variations and are changing their negotiation strategies.
* 32% of contracts and legal groups have outsourced some elements of their contracting process, improving its quality and freeing skilled resources for more important tasks, such as earlier involvement in deal structuring and analysis.
* The average cycle time to negotiate a medium-complexity contract is 7 – 10 weeks. But top quartile companies achieve 5.1 weeks and those in the bottom quartile take almost 16. On average, international contracts take about 20% longer to complete than domestic agreements. Companies that shorten cycle times gain the benefits of increased speed to cash and less exposure to competitive challenges or changes in market conditions / requirements.
* Productivity of contracts professionals, measured by the average number of contracts handled, varies by more than 100% between high-performing and low-performing organizations. This is after normalizing for role and complexity and reflects factors such as clarity of process, timing of involvement and extent of automation support.
These statistics come from the myriad of data that IACCM has collected through its recent series of contracting benchmark studies. Participants will shortly receive the full results and start using them to drive performance analysis and improvement. But that means the vast majority of contracts organizations – whether within Legal, Commercial, Sales Operations or Procurement – will remain blind to any significant data, because our research also tells us that almost 90% of organizations have virtually no insight to comparative information on contracting process or organization.
Is this absence of data due to difficulty in acquiring it, or because it doesn’t really matter? Historically, it may well be that no one considered it important. Contracts were viewed as important items, but as by-products of the sales or acquisition process. Today, leading organizations (as revealed by the benchmark study) have grasped that the contracting process is itself important and can in fact drive the quality and efficiency of many internal commercial practices. Academics share this view, with a growing number highlighting the competitive advantage to be gained through superior contract and commitments processes.
If you recognize the importance of benchmarks for your business (and the impact they can have on process improvement and investment), you may wish to take this chance to submit input to the surveys and thereby gain access to the results. There is no charge to IACCM members for this valuable output.
To simplify the process for input – and the time required – we have divided the study into three sections. I hope you will complete all of them, but if you are selecting between them, I suggest that Performance Measurements may be most useful, followed by Value Proposition. All data remains confidential.
The survey links are:
Performance Measurement survey, please visit: https://www.surveymonkey.com/s/PerformanceMeasurements
Primary Areas of Activity survey, please visit https://www.surveymonkey.com/s/PrimaryAreasofActivity
Value Proposition survey, please visit https://www.surveymonkey.com/s/valueproposition
Sometimes, an industry evolves a set of practices that many customers view as deeply unfair, yet once they are widely adopted, there is little the customer can do about them.
That – I am told – is the situation in the technology equipment sector with regard to the provision of product maintenance and repair services. According to my discussions with members of the Service Industry Association, manufacturers in medical, point of sale, computer hardware, ATMs, credit card and other technologies have steadily been imposing contract terms that restrict a customer’s rights and service options in the following ways:
- Buyers of technology equipment do not really “own” equipment because they cannot resell, transfer, or otherwise redeploy without the approval of the OEM. (and payment of additional fees)
- Buyers of technology which does not operate without a non-transferrable “special purpose software” license are similarly constrained.
- OEMS are in many cases denying access to end users (and their repair agents) as an “infringement” of their IP. However, the IP of the unit is not touched or modified by the repair process.
These complaints sound somewhat familar to me. I recall 20 years ago how major manufacturers sought to control the personal computer and server markets through constraining rights of resale or limiting access because of ‘licensed internal code’. They also prevented cross-border trade (and therefore price shopping) by limiting warranty rights to the country of purchase.
The motives of the manufacturers in cases like this are clear. They want to control product resale and thereby protect prices; and they want to earn lucrative service revenues. So are we simply seeing the return of some old practices, which will be eroded either by regulation, or through litigation, or by a new market entrant gaining share by offering more customer-friendly terms?
Obviously third party service providers care about this issue because it threatens their livelihood. But what about customers? Why aren’t they being more vocal? Why aren’t service category managers pushing back on their suppliers?
I would welcome your views and experiences.
The networked world is causing a revolution in the way we acquire knowledge and information, in the way that relationships are formed and in the way that work gets done. Since contracts and ‘terms and conditions’ are a direct reflection of those relationships and the nature of the work we do for each other, they cannot possibly be immune from the impact of these changes.
We have already observed significant innovation in the way contracts are formed and delivered. Examples include the ‘click-wrap’ agreement, or the use of ecommerce in the form of auction software or invoicing. Document exchange and redlining are typically undertaken by electonic means, as is storage and retention. Electronic signatures are steadily becoming the norm. Most negotiations today are ‘virtual’ rather than physical.
Yet these shifts are merely superficial when compared to the more radical impacts on working practices and – perhaps – the extent of need for contracts at all.
My colleague Katherine Kawamoto recently attended a presentation by the leader of an association for sales people. He spoke of the remarkable shift that is taking place in the sale of goods and services and how the sales workforce will be decimated by technology. Traditional selling was about content delivery – gaining share of hearts and minds. Today, that role is increasingly fulfilled by the internet and through interfaces such as websites or ‘apps’. Market winners are those who have superior content and better, more compelling methods for its delivery.
So if traditional Sales people disappear, what does that mean for contract and negotiation specialists, or for Procurement? Why wouldn’t our content also be delivered by electronic means?
And the debate goes further, because much contracting and negotiation today is driven by offering complexity. Yet as The Economist recently reported, many of today’s production processes will be transformed through self-service automation, allowing customers to download designs and drive their own manufacturing. In such a world, the allocation and management of risk will change fundamentally – and eliminate much of the debate that surrounds the contract.
A further influence will be regulation and the development of rules and practices that sit outside today’s legal systems. For many of us, the growth of international trade has driven an increased need for contracts and commercial expertise. Crossing cultural, linguistic, legal and ethical boundaries has obliged us to undertake careful assessment and management of risks. Yet this too is changing – not least because such uncertainties place heavy costs on business transactions. Examples of the change are all around us, as we see increasing international regulation and also projects such as the UNCITRAL work to develop new on-line dispute resolution mechanisms that would sit outside traditional legal recourse, or the EU initiative to create standard forms of cross-border contract.
Those in the world of contracting will not be immune from this content-driven world. Roadblocks will not be tolerated – and for many, traditional contracting process and practice will be seen as either a roadblock, or as something increasingly irrelevant to modern commerce.
This article is just a start to the debate we must have as a professional community. It has drawn on just a few of the ideas and trends that are affecting us and the nature of our work. Over the coming months, we will stage events, discussion groups and interviews to develop a roadmap and to ensure that the IACCM community is seen as offering a pathway to the future.
An IACCM member asked ‘how much does it cost to produce a contract?’
As one of my colleagues observed, this is a ‘How long is a piece of string?’ question, but I thought it would be interesting to try to answer. So I started digging into IACCM’s extensive benchmark data to extract an estimate. I am sharing my findings – and will welcome any additional inputs that might either validate or complement what I discovered.
- The complexity of the contract (at one end of the scale we have a PO, at the other something like a major outsourcing agreement)
- The view we take of what constitutes ‘the contract’ – for example, does it include things like statement of work, schedules, service level agreements etc.?
- Whether or not the organization makes use of ‘master agreements’ which represent the core terms and conditions under which transactions will occur
- Definition of what activities are included in the time calculation (for example, is something like requirements definition viewed as part of the contracting process or not?)
- Whose time we are including in the cost calculation
- Whether we are considering elapsed time (ie cycle time) or actual time (the number of hours spent on specific contract production activities)
- Simple contracts (some negotiation and review (internal and / or external), low risk, relatively low value or spend commitment): Average cost $5,000 (lowest cost $3,500)
- Mid-complexity contracts (significant review, some external negotiation, significant – but not major – risk considerations,): Average cost $19,200 (lowest cost $12,000)
- High complexity contracts (major review and approval, extensive negotiation, high or unique risk factors and value): Lowest cost $40,000, upper cost may be $200,000+
Earlier this week, IACCM issued a research report ‘The State of Sales Contract Management’.
Mark Hope, an IACCM member from the UK, wrote to me with the following comments:
“The survey report is very interesting as far as its scope goes but not as multil dimensional as I’d hoped it would be. Ultimately it focuses on automation as the answer which really is only part of the solution.
In my view, based on 26 years experience on both the sales and procurement sides of operations, the big issue with sales contracting, that differs from procurement contracting, is that of structure and organisation and experience. Very typically, large corporate sales forces are organised by account and typically the vast majority of the sales are standard transactions on standard terms. This often results in Account Directors and Account Managers quite literally being involved in a once in a lifetime bespoke deal.
The problem for the commercial contracts community is that by the end of the negotiation of a bespoke deal on an account, the Account Team they have been dealing with is now up to speed but along comes the next deal on a different account with a different Account Team with little or no knowledge of negotiating bespoke deals and so it all starts again.
The difficulty in cracking this problem is that generally sales forces are commission driven and therefore it is not easy to remove the bespoke busines from the account and give it to more seasoned sales and operational people to deal with, particularly as the bespoke deals are usually the big numbers. Also if a specialised team is set up, the members of this team are likely to become frazzled by repeatedly doing the big deals. It would be interesting to know what sales models in what sectors have overcome this problem and how and may be some research around that would be beneficial?
In conclusion, I’m sure automation has its place but, in my view, a company’s organisational structure and the experience of the practitioners are the key problem areas. Whilst I have focussed on the sales force above, we in the commercial contracts community have similar issues but probably to a lesser extent as many of us do bespoke deals a lot of the time as our “day job”.”
I agree with Mark that a major problem for ‘big deals’ is that those appointed to lead them frequently have little direct experience (and I would welcome the observations he seeks on possible answers). But I think thazt the challenges of sales contracting and commercial competency are much bigger than just the occasional large opportunity. I think they permeate the entire area of commercial policy and practice, contracting standards, implementation, post-award management …. as the report highlights, there are substantial revenue and profit opportunities that most companies are missing.
So my reply to Mark was: “I agree with all you say, but ….
We did not enter this study with any particular expectation regarding results and nor did we have any particular automation focus. However, in analysing the results we discovered a far more significant connection between automation and performance than we expected. This was, in fact, the ‘new news’ since I am not aware of such a strong link ever being established before, especially to the type of automation adopted.
Therefore our report sought to go beyond another reiteration of the standard problems and to see whether there was any key to fixing them. It seems to me that the link here is the improved quality of process and communications, together with better data sharing and capture. Automation does not flourish in isolation, but it is enabling earlier involvement, elimination of the trivial work undertaken by many commercial staff, increased understanding by account teams, more internal collaboration, increased re-use of solutions – all problems indicated in your email.
Perhaps, if we understand that many of today’s problems have resulted from global technology, we might also accept that technology use is a key piece of the solution. It will be effective only if we focus on defining a process, deploying skills, documenting and sharing knowledge – but I am satisfied that it has become a dependency for good performance in any medium / large organisation.”
Beware a CFO bearing gifts.
That is one of the messages I take from a report produced by CFO magazine and presented at AribaLIVE by their head of research. The study explored CFO views on ‘managing risk, working capital and supplier relationships during the economic recovery’.
Almost 60% of those participating state that their company is increasing its pursuit of strategic alliances. They confirm that the focus of business activity has moved from short-term cost-cutting and cash retention to strategies for growth and investment, with particular focus on global conditions. And the good news is, the CFO community recognizes the importance of external relationships to enable their company ‘to thrive in the recovery’.
Thus far, the results are probably no surprise and confirm broader trends in management sentiment. What I find interesting are the perspectives that are then revealed in terms of how CFOs perceive risk and what they see as ‘an alliance’. Many confess to having put tremendous pressure on their suppliers during the recession – they ‘extracted better prices and more favorable terms from their weaker suppliers’. But now the story has changed and they want partners who provide ‘sources of capital, process improvement and expertise with which they can share the risks and rewards of mining new and mutually beneficial ground’.
Only a few appeared to really understand what terms like ‘partner’ and ‘alliance’ actually mean. There was little evidence that many have thought about the evident inconsistencies between the recession-based behavior and their needs in a time of growth. It is evident that for many CFOs, relationships are extremely tactical and opportunistic – in fact, highly disposable -which may go a long way to explaining why they often achieve disappointing results.
A few of those interviewed showed understanding that deep external relationships require real commitment at executive levels, and demand an investment in skills, tools and systems. “Partners need to set strict rules of engagement, delineating day-t0-day interactions and setting boundaries around what information employees can and cannot share. The intensity can be exhausting”, commented one VP of Finance.
Some CFOs show strong risk aversion – for example, while demanding growth, they are reluctant to enter emerging markets. “Countries with weak laws make enforcing contracts almost impossible”, said one, who seemingly failed to make the connection that growth will be extremely difficult to achive if it is restricted to established markets and ways of doing business. Few – if any – highlighted the need for new and better ways to deal with risk, perhaps through innovative forms of relationship or the development of new market entry partners.
The message I take from this survey is that those of us in the commercial community are not doing a good job in advising and supporting the executives in Finance. We are failing to develop the business case for more flexible and sustainable external relationships; we have not succeeded in explaining how market risks can be better managed; we are not creating the business cases that support investment in building commercial and contractual capability, or generating the high-level relationship management resources and skills that business today requires.
This survey suggests that CFOs appreciate the importance of increased external collaboration, but that most have little understanding of its implications. This provides an exciting opportunity for the contracts and procurement community to offer valuable insights to their CFOs and to make the case for new investments in commercial and relational capabilities. I hope that you will read the report and prepare the conversation; let me know if you would like some help.
This week I am at the AribaLive event in Nashville. It has brought together more than 1,600 delegates and an overriding theme is Ariba‘s new mantra of ‘collaborative commerce’.
For many on the sell-side, this may seem a rich irony as they look at the role Ariba has played over the last 15 years in driving more confrontational procurement behaviors. Its advocacy of spend management and e-auctions are prime examples of the drivers behind commoditization and the destruction of traditional relationships.
Yet I think Ariba is sincere in its understanding that the next phase of commerce demands moving on from this platform and allowing reengineered trading relationships to flourish. The old basis for trading relationships had to change and there was inevitable resistance and breakage. Now it is time to move on.
Certainly that has been a key part of the Executive Forum debate in which I have participated and provided many insights from IACCM, which is of course the main forum for ‘collaborative commerce’ in practice..
The theme of that Forum has been the role of Procurement in 2020 and it is drawing from work undertaken by Roy Anderson, a former CPO at several major US corporations. The interviews he undertook for his study show a high degree of alignment in CPO forecasts about the future. I will report more on these in future blogs. Some of the key points are a widespread agreement that Procurement must become far more focused on value, not price; on outcomes, rather than measuring activities; and it must focus efforts on strategic initiatives and outsource the rest.
Within this, I led a session on the future of contracting and negotiation. We discussed why a global economy has made these activities more important; and also why the nature of contracts and negotiations must change. Many started the session by seeing contracts as irrelevant. By the end, it was widely accepted that it si the current form of contracts and negotiations that is the problem. The agenda must change; the purpose must change; and if Procurement is to be considered ‘valuable’, it must show some leadership in driving that change. In particular, a ‘strategic function’ does not simply act to implement the policies and procedures of others. It does not simply perform a role of imposing standards or monitoring compliance. It assesses business and economic impacts. It has a clear view of where it is headed next – for example, towards collaborative commerce.
As one CPO commented to me last night, “If you want a smooth landing, you must keep your eyes on the horizon. If you watch the runway, you’ll land with a massive bump. In my experience, Procurement leaders almost all have their eyes on the runway”. I welcome the Ariba agenda because I think it truly can assist a refocus.
Is your contracting process a source of value, or is it undermining value?
That is a question we should all be asking, especially following the results of a recent IACCM study on ‘The State of Sales Contract Management’. It revealed the extent to which contracting process and practices act as a barrier to good business decisions, with 40% of survey participants saying that their contracts are a definite source of competitive DISadvantage! And if you are in Procurement, don’t stop reading – this data is relevant to you as well. Because if your suppliers are not achieving value, nor are you.
The study has confirmed frequent weaknesses in internal collaboration, leading to imprecise requirements and poor communication. Those are the types of weaknesses that can permeate a business, leading to problems in performance on customer commitments and inaccurate information flowing to operations teams within the supplier. The study highlighted the impact of these issues – for example, how they lead to claims and disputes over price, acceptance, scope and a range of other contract-related topics.
These failings cost money and damage corporate reputations. The situation has been getting harder to manage, as the complexity of today’s business relationships and supply networks increases. To quote from the report: “The internet age and growing deal complexity have resulted in increasing confusion over what constitutes ‘the contract’”. Yet a few companies are mastering this complexity by ensuring that they have a process and systems tightly coupled with their sales activity. And one key finding is that “Automation has a consistently beneficial effect on the quality and integrity of the process, yielding substantial increases in the satisfaction of all internal business groups”.
Most organizations have not yet grasped the scale of lost revenue or lost savings opportunities tied up in their contracting process. The size of this opportunity and the approaches needed to drive improvement will be revealed in the white paper ‘The State of Sales Contract Management’ and also in presentations at AribaLIVE and in webinars later this month. Meantime, how would you answer these questions:
- Do you see contracts as a source of competitive disadvantage for your organization, or for your trading partners?
- Is your legal team or contracts group effectively managing risk, or is their inflexibility or risk aversion actually proving to be a source of risk?
- Have you automated your contracting process – and if so, have you benchmarked its performance?
Commitment Matters 