Continuing demands for greater transparency in business operations are matched by questions over how to monitor corporate behavior. This raises issues over the extent of regulation, the quality of audit and the extent to which ‘reputation risk’ might cause self-monitoring.
A precise balance will probably never be struck, but the interest in these topics is unparalleled. Last week, while the US trade regulator announced a settlement with Google over privacy protection, the UK House of Lords was reporting on audit competition (or its fears over the lack thereof). Companies today feel obliged to announce their policies in a whole range of areas – data protection, environment, health and safety, corruption are some examples. On one level, they hope to build their reputations through such policies, yet of course they then face incremental blame if they do not meet their own standards. And they can be sure that the media (both established media and the ‘new media’ of bloggers etc) is watching and waiting for them to fail.
As part of our work at IACCM, these fields of compliance and audit have become steadily more important. It is obvious that they are linked to the whole commitment and contracting process. A big question for the contract negotiator or manager is to what extent they should have personal or professional responsibility to ensure that the commitments they make are a) in line with stated corporate policies and b) that the corporate policies against which they are committing are in fact capable of being followed. To that extent, is the contracts or commercial manager also an auditor?
In my opinion, this is not a new question, but it has reached new levels of importance. Personally, I always felt that it was my job to ‘systems assure’ the commitments I was making when I negotiated a contract, and to be open and honest with the customer when I felt that a commitment was at risk. But I think that integrity has increasingly been challenged by modern sales and procurement practices. It feels as if many relationships are built around what the respective organizations can get away with, rather than caring too much about honorable or honest disclosure. In a sense, the behaviors that used to be associated with street traders appear to have permeated even to the Boardroom, with a consequent loss of trust and increased need for regulation and audit.
The contracts and commercial professional sits in the middle of this. Should they have ethical standards, or should they simply ‘play the game’?
Last week the Financial Times carried an excellent insight into the role of patents in business today (Tech Patent Arms War Reaches New Level Of Intensity). It describes how the registration of patents has become a critical competitive weapon – and how this has become a significant barrier for entry for smaller companies, with the possible frustration of innovation as a result.
The story begins 20 years ago when Nokia found itself on the receiving end of a patent infringement suit by Motorola. As a newcomer to the telecoms market, it lacked enough of its own patents to counter-sue. And thus began a registration battle, so Nokia now has nearly 9,000 US patents in its intellectual property war chest.
This is the ammunition it has used recently against Apple. Having provisionally won one case, it immediately filed a further five complaints. Litigation now covers 46 patents in six courts and four countries.
Converging technologies – for example the personal computer and the smartphone – are leading to new levels of intensity and complexity in this struggle for dominance. Indeed, it appears almost inevitable that any new product will offend someone, so a patent suit has become a ‘business as usual’ risk. Now, with emerging markets such as China jumping in on the act, we can only expect enormous proliferation of such actions.
One question is whether small companies can survive in such an aggressive environment. The answer appears to be yes; enterprising attorneys and law firms have of course found a way to ‘protect; these clients. Companies like IPX and Intellectual Ventures buy or register patents and then act as middle-men for smaller companies. Intellectual Ventures has more than 30,000 patents, attracting companies as large as Blackberry- maker RIM to its list of clients.
As the FT observes, these activities smack of a ‘protection racket’ and certainly the costs associated with settling these disputes add significantly to the price of the product.
One consequence of today’s economic realignment is that a growing number of companies are seeking to increase their share of international business. This comes at a time when the regulators’ eyes are especially vigilant towards overseas trading relationships.
In combination, a result of these developments is that international contracting and commercial practices are coming under the executive spotlight. They want to ensure that contract terms are competitive, that contract structures are efficient and that review and approval processes are thorough, without causing long delays.
The result is that IACCM, as the only international association for contracting and commercial issues, has seen a flurry of requests for help in areas such as:
- models for the design and structure of international / global agreements, including signature requirements and methods
- internal review and approval procedures for multi-country contracts
- due diligence methods for validating / monitoring overseas suppliers, sub-contractors, sales agents and distributors
- software tools and systems that can assist in managing the efficiency and speed of international contracting
- skills and knowledge development for staff involved in international contracts, especially in respect of emerging markets
- ‘best practices’ in handling requirements for local content and offf-set agreements
These requests have come from all parts of the world. As competition for international business increases, it seems that no one is immune from the need to improve. For companies that have a long history of international trade, there is a recognition that the rules have changed due to new market entrants and new regulation. For the new entrants, there is a sudden urgency in grasping the methods and practices that will enable them to better understand and manage risks and to improve their competitive position.
This has led to a number of new research initiatives and training programs, and there is every sign that demand will increase in the months ahead. Winning business internationally has become a business imperative – and it would be smart for contracts and commercial groups to be sure they are prepared.
Are we getting value?
That is increasingly a question being asked within business and across the public sector. It is especially applicable in the field of service delivery, where comparisons of cost, quality and effectiveness can be especially difficult to measure.
Last week, I had the chance to interview Mike Maiden, Chief Executive of the West Midlands and Staffordshire Probation Trust, a UK public sector body charged with managing a wide variety of offenders within the justice system.
At first glance, Mike might not be an obvious candidate for an interview on the topic of contracts and commercial management. But the harsh realities of public spending cuts, combined with the new rigors of performance management, have driven dramatic changes to accountability and governance standards throughout the public sector – and Mike has been among the first to grasp the critical nature of commercial competence in this new world. Indeed, as one listener commented: “it is people like Mike who truly understand commissioning and recognise that whilst contracts, procurement and commercials are integral, they are an output of the demand analysis and needs assessment. For so long it’s been the (procurement) tail wagging the (commissioner) dog, and now that is changing”.
Mike explained the increased focus on the delivery of successful outcomes and how that demands a far more structured approach to the design and management of relationships. He described an environment where direct, contracted and (non-contracted) collaborative resources must be aligned and their interdependencies understood and managed. He also outlined the critical role that the right software can play in supporting management of this increasingly complex environment, highlighting the role that the ‘PAM‘ platform has played.
To be effective, all these resource options require discipline and definition; they also demand high levels of visibility and communication on a one-to-one and one-to-many basis. This can be achieved only if there is a commercial strategy that offers the right frameworks and systems. These include steps such as determining when to use formal contracts; how to introduce greater discipline to traditional collaborative relationships with partner organizations; the creation of commercial models to enable concepts such as payment by results, or to incorporate teaming arrangements that enable non-traditional sources of funding; and the introduction of web-based tools and systems that support performance oversight, ensure transparency and assist communication across the service delivery ecosystem, or supply network.
Such a dramatic shift in direction and needs should represent an exciting opportunity for commercial and contracts experts. Yet will they step forward and assist in the design of these new capabilities, or sit back and await instructions? How many have grasped the potential that such a change represents? The indications thus far are not especially encouraging. Those trained in traditional Procurement have rarely experienced the broader aspects of commercial management; and those on the provider side, who could be assisting in the design of solutions, are frequently far too focused on individual transactions to contribute at this more strategic level.
No one is immune from the fundamental changes going on around us. To remain relevant and of value, contracts and commercial experts must take the opportunity to provide the strategic and operational framework for the interdependent relationships on which today’s businesses and society rely. As a community, we provide a service. We must answer the question that I asked in the opening to this article – are we giving value? How will we compare when our management starts to assess our cost, quality and effectiveness relative to alternative sources or solutions?
Make sure you can answer that question; and a good start would be to listen to the recording of the webcast with Mike Maiden, which will be available shortly in the IACCM library.
Yesterday I met with a senior executive from one of the largest oil and gas companies. He opened the conversation by commenting: “For the last few years, we just seem to move from one crisis to another. Every time we think things are settling down, there’s another shock to the system”.
He is not alone in that feeling – and nor is it peculiar to the oil and gas industry. In fact, surely there comes a point at which we may have to conclude that ‘a state of crisis’ is increasingly the norm and that we maybe need to stop handling crises as exceptions, instead planning for the unexpected.
Such a transition would fundamentally alter the way most organizations handle risk – and would have major effects on the approach to contracting. This executive, like many others, grasped that point and wanted to understand more about the implications.
Key to this change is that we must stop allowing the contract to be used primarily as a vehicle for protecting against the consequences of failure and start to use it equally as a tool for reducing the probability of failure. This is what drives a re-emphasis on three key areas:
1) Improving the selection and evaluation process. If we need more partnering and flexibility, we need to be sure we are picking the right custoemr and supplier, with a good cultural and strategic fit.
2) Developing contract strategies which provide agreements and support relationships that suit the levels of risk and the extent of interdependency. The ‘one size fits all’ model is a failure – in fact, in many cases it fits absolutely nothing. Many contracts are not ‘fit for purpose’.
3) The focus of contract terms must shift to a far greater emphasis on the governance and management principles, providing a framework for the management of change and incentives for both sides to collaborate and share information.
As this executive understood, these changes demand some new approaches, especially in the role and contribution of Procurement. And he also acknowledges that this is an investment that must be made if we are to improve our ability at managing crises.
On his Law Department Management blog, Rees Morrison has recently featured several stories that will be of interest to the contracts and commercial community.
One of these is a comment made by Mark Harris, CEO of Axiom, that long-term contracts typically experience 5 – 7% revenue leakage. In my response, I observe that it is interesting that Mark cites 5 – 7% because that aligns exactly with a number IACCM been highlighting for several years. It is indeed common as an average (not a maximum) and it comes from a mix of sources. Among them are the missed revenue opportunities due to poor negotiation practices; the inefficiencies generated through failure to align business terms with economic cost; and the many inefficiencies and missed opportunities in post award contract management.
IACCM has often cited the causes, prime among them the absence of any coherent ownership of the contracting process.
Rees concludes that, if the number is true and if it is indicative of similar losses elsewhere, then “lawyers are letting down their clients. Somehow, better contracts should put fingers in some of those dikes, savvier interpretations of their client’s rights, or better oversight of executed contracts could turn law departments that can claim a portion of the saved money as profit centers. We need to know if revenue leakage from contracts happens at that rate and what the law department can do to apply a tourniquet.”
I welcome converts to our cause, however late in the day! But in general, I see few General Counsel ready to step forward and take responsibility for improvement in contracting process and practices. There are exceptions – CSC, Verizon, LG Electronics and HP come to mind. But overall, as IACCM research regularly reveals, we continue to fight the battles of the past, buy-side and sell-side, with no regard to the economic cost.
In my last blog, I observed that today there are frequent calls from business leaders for more collaborative relationships. I asked two questions:
- In the business world, are we less collaborative today than we used to be?
- If yes, then why has that happened?
A majority of those who responded feel that business relationships have become less collaborative. Several suggested that trust has declined and that we are far more focused on allocating risks – often with no regard to what is fair or reasonable. There were distinctions made between public and private sector, with some suggesting that the public sector especially suffers from this absence of collaboration. Two of those who commented had a counter-view, stating that absence of trust is innate to human or business relationships and that there has been little change over the years.
The erosion of trust has been widely researched and identified, especially in the US (which, it is pertinent to note, is the country that has driven many of today’s international contract and negotiation practices). Indeed, for many parts of the world, the widespread use of contracts is still relatively recent. As one observer explained, ‘We form relationships and then transactions follow; but in America, everything seems to be a transaction, and maybe a relationship will emerge’.
But these observations are symptoms of a change, not the cause. When it comes to business relationships, I think trust is part of the issue here; and another is the nature and extent of recourse.
‘Collaborative countries’ tend to minimize or do without contracts. In these countries, trust is higher, but to some degree that is because of the broader potential for recourse. Often, this has little to do with the legal system and is based on issues such as reputation and close social and business interconnections. Also, in many of these countries, a system of statute law and a lower propensity to litigate limit the room and purpose for negotiation and in particular the scope of potential damages. Such cultures frequently do business ‘on a handshake’ – or at least, they did before globalization.
So if trust is eroding, and with it a decline in collaboration, what factors lie behind it? I believe there are several fundamental factors – and at their heart lies a collapse of loyalty, driven by ever-increasing competition. Globalization and technology have created new levels of remoteness and impersonaility. Gone are the days when companies feel a bond with their local community, their national suppliers or even their country. Today, many relationships are virtual; they span linguistic, jurisdictional and cultural boundaries. In such an environment, business leaders would say that it was too risky – indeed, foolish – to exhibit trust. And hence the growth of the role of contracts as a substitute for traditional relationships.
Unfortunately, the way we undertake bidding and contracting then adds to the general sense of distrust. As IACCM surveys repetitively reveal, open discussion between the parties is often stifled by today’s price-based and risk-averse procurement practices. And the role of the contract is not generally to enable discussions that might build trust and collaboration; instead, they concentrate on the consequences of failure and the allocation of punishments. They also send a message that price is everything and that loyalty and commitment have no value.
Competition is a good thing, but within limits. If it undermines loyalty, then it ultimately destroys trust. Studies show the importance of trust to economic growth and that its absence adds to the cost of doing business. Amongst these findings, it is interesting to note that “a failure in trust may be forgiven more easily if it is interpreted as a failure of competence rather than a lack of benevolence or honesty”.
So in conclusion:
- I believe that collaboration in business has declined
- I think that falling levels of trust are the cause – and that this has resulted from our hunger to win, without regard to the cost in social or economic terms
- In busines relationships, increased use of technology, growing internationalism and narrow measures of performance have combined to undermine collaboraton
Are business leaders simply hypocritical or yearning for a by-gone era when they call for increased collaboration? Or should we be identifying ways to either redress current behavior, or introduce new approaches that will support greater trust and collaboration between businesses?
Again, I welcome comments and I will make answering these questions my third and final blog in this series on collaboration.
According to the old song, ‘Breaking Up Is Hard To Do’. But as I survey the business world today, it seems that ‘getting together’ and making things work harmoniously may be even harder.
Every day, I encounter questions, advertising materials, conferences and more, advocating the benefits of collaboration. It is an interestring commentary on our times that we appear to find it so difficult, especially since collaborative behavior is the underpin to any form of trade. Yet somehow we have managed to make relationships in business today highly adversarial. The collaborative spirit that is inherent to an organization like IACCM still remains the exception.
I am pleased to be involved in a variety of initiatives related to understanding and encouraging increased collaboration. One of these is the new award program introduced by leading group purchasing organization Corporate United. At their Synergy Conference in Chicago May 3rd – 5th, I will join fellow judges Professor Rob Handfield and Jason Busch (of Spend Matters fame) in announcing the winners of the Corporate United Collaboration Awards program, established to honor supply chain, procurement and other related departments that have ‘demonstrated superior collaboration with an internal functional group and/or an external supplier’.
I welcome this and similar initiatives to encourage more collaborative behavior because without collaboration we limit value creation and long-term economic growth. But at the same time, I cannot help but ask why we need such focus on what should be an innate characteristic. Is it not amazing that we need to make awards to people who cooperate with their fellow employees? Is it not remarkable that we see collaboration between a supplier and a customer as something exceptional? What has brought us to this position?
I have a list of factors that I have observed which appear to be the enemies of collaboration. Some are cause, some are effect. I will expand on these in my next blog. For now, I would very much welcome your thoughts on these two key questions:
- In the business world, are we less collaborative today than we used to be?
- If yes, then why has that happened?
For years, Western (democratic) nations argued that collaboration with autocracies and dictatorships would lead to greater distribution of wealth and growing internal pressures for democratic systems.
In reality, the results appear rather more variable. For example, the collapse of Communism has led in many cases to the growth of corruption and an unaccountable elite. The early hopes of democratic reform in countries such as Russia and the Ukraine have been stifled by the emergence of strong leaders who appear selective in their application of the law. Now we see similar turmoil in the Middle East, causing us to question many of the political assumptions that were made regarding the path of progress in the region.
An editorial in The Jordan Times by former Jordanian Foreign Minister Marwan Muasher(now a senior fellow at Yale University) addresses some of the myths and realities exposed by the current unrest. Of particular interest for those in the commercial world is his observation regarding economic liberalization. Mr Muashar says that Western governments (and large international corporations) convinced themselves that ‘economic liberalization should precede political reforms’. This was perhaps a convenient excuse for doing business with unpleasant and repressive regimes; we could convince ourselves that this was morally justified since it would. over time, lead to greater distribution of wealth and thence to growing freedom for the people. Co-incidentally, it also served the short-term exconomic interests of those governments and corporations.
But in reality, says Mr Muashar, the benefits of privatization, economic reform and increased international trade went largely to ‘political and business elites’ because it occurred in an environment where there was no system of checks and balances. As a result, the Arab people ‘have come to view liberalization and globalization negatively’. The article suggests that to be successful and sustainable, economic reform must be accompanied by the creation of institutional mechanisms of accountability. The real sources of public anger are not high prices or unemployment, but rather they are driven by a sense of inadequate governance and fundamental unfairness.
This suggests that governments and international corporations from outside the region face a challenge of building trust with local populations. But they also face a period of sustained uncertainty, because the implosion created by popular unrest has revealed the lack of established institutions for improved governance and hence it is hard to predict what systems may emerge. In some respects, making investments at a time of such uncertainty will be risky, but failing to make them is probably even riskier. We must show the positive aspects of economic liberalism and globalization or otherwise face the prospect of a potentially hostile and alienated world region.
Commitment Matters 