There are of course days when even an enthusiast like me stops and wonders whether it is all worthwhile. Contracts and Commercial Management have been a feature of my life for almost 30 years and somewhere along that path, I became convinced that these disciplines contribute not only to operational and tactical results, but also to business strategy. As a commercial or contracts professional, we gain insights to the way that policies, procedures and offerings inhibit business performance. This insight represents an opportunity to become an agent of change within the organization. But does anyone really care?
Before answering that question, I will illustrate the opportunity we face with a few examples:
- In my early days in the technology sector, increased competition led to the development of volume discount agreements. These became increasingly complex, resulting in a heavy administrative burden, frequent incorrect billing and a regular source of dispute with customers. As if these problems were not enough, it was also obvious that volume discounts are typical of a commodity supplier – and yet my employer at that time was trying to escape the commodity trap. The contracts group was in a unique position to observe these problems and push for change.
- Later on, I saw many organizations struggling with the impacts of globalization. Large multi-national companies could not coordinate their resources to meet market or competitive needs. Management systems, measurement systems, resource allocations, pricing and revenue policies – all of these prevented the types of contract offering and terms and conditions that were needed to address market trends and requirements. Once more, the contracts group was probably the only place with visibility across the business and an understanding of the priorities for change.
- Distribution and partnering relationships are critical to most businesses. Frequently, individual business units have relative freedom to develop their strategies and determine the channels to market or to establish sub-contractors. Many of these relationships fail to perform. They are often costly to administer and may create internal conflicts, as well as external confusion or dissatisfaction. The involvement of a central contracts group can lead to greater discipline and rationalization. It should also offer ‘best practice’ insights, drawing on market and competitive intelligence on effective offerings and terms.
There are many examples where the contracts and commercial teams can observe opportunities to improve and should be offering market intelligence to business unit owners and to executive management. The real hallmark of contracting excellence is when we offer contracts and terms and conditions that represent competitive advantage, not only by better meeting the needs and aspirations of our trading partners, but also in reducing internal costs of operation. This is true whether we are supporting sales or procurement; and it makes Contract or Commercial Management an exciting and rewarding career.
So why do I occasionally wonder whether this is worthwhile? First, within a business it is often hard to gain attention. It requires tremendous perseverance and usually depends on finding an executive sponsor. So those within the contracts and commercial community who want to be agents of change must not only collect the data and build the business case, they must also be sufficiently determined to gain top management’s attention. And even then, success may take a long time to achieve and is not guaranteed. It always seems easier to carry on working at a transactional level and wait for someone else to change the rules.
But that is not the reason why I sometimes have doubts. The thing that most bothers me is the shortage of leaders within our community – those who have the resilience to grasp these opportunities and the desire to build the function’s status and reputation. Many individual professionals enjoy their job; they gain satisfaction from their transactional successes and support on individual deals. They are aware of the things that are regular issues or inhibitors, but do not feel that it is their job to seek changes. They impose the rules, they may even find creative ways around the rules – but rarely do they challenge those rules and cause a fundamental shift in the business. And all too often, we learn that such groups are being taken over, broken up, pushed aside – because they are seen as offering little business value and someone else has successfully argued that they could do the job better.
In the end, my moments of doubt are few and they generally last for just several minutes. Because as I think back, I am inspired not only by the changes that I – together with my colleagues at IACCM – have been able to achieve in some of the world’s largest companies, but I also hear with increasing frequency about the impacts and the inspiration that IACCM is offering around the world. With each year, the momentum increases and the stories of success grow. We are seeing quantifiable and irrefutable results – contract and commercial excellence really does make a major difference.
As we enter 2010, I know there will be many opportunities for us to assist our community in raising its profile and business contribution. Whether you are a practitioner or a provider of services or solutions to the contracts community, I hope that your resolution for 2010 will be to believe in the possibility of radical improvement and to commit yourself to become an agent of change. And don’t forget, you are not alone on that mission; IACCM is a committed and enthusiatic partner.
Together, I have no doubt that we can make 2010 a year to remember. Happy New Year!
There is often lively debate over the role of in-house lawyers. To what extent should legal services embrace commercial policy, deal structuring, negotiation and post-award contract management?
A lack of clear definition frequently results in discord and adversarial internal relationships between lawyers, contract managers and procurement groups. In some organizations, there are complaints that the lawyers are too remote; in others, they may be seen as intrusive. Often, the absence of an agreed scope results in highly variable service levels that depend on the experience and interests of the individual attorney.
The legal role is not always easy to define and this is perhaps nowhere more apparent than in the area of contracting. To some extent, lawyers make thier own problem. Many are not good at sharing knowledge and information. They perceive the law as a matter of individual judgment and are reluctant to entrust others with making good decisions. They are of course right that generalized advice can be misused; but is the risk greater than that which is created by an absence of documented guidance (or perhaps that their clients use the internet as an alternative source of advice)?
As trading conditions have become more complex, law departments have reacted to the growing workload through a variety of approaches. These include a drive for more standardization and compliance and, in some cases, a push to develop (or absorb existing) contract management resources. Recently, there is also evidence of reluctant adoption of contract management technologies that can assist efficiency – and also a readiness to consider outsourcing to low-cost providers.
All of these trends and the associated debates are captured nicely in Rees Morrison’s excellent blog, Law Department Management. A recent example is where Rees discusses the need for pre-legal vetting teams. In another, he highlights an article by the General Counsel at Carillion that calls for greater discipline in defining the role of the law department.
There is no doubt that legal resources are under strain and there is little prospect of early relief. As at all times of stress, it is easy to react either aggressively or defensively. As we enter 2010, I hope we can see more organizations encouraging constructive debate over how best to develop their contracting and commercial capabilities. Procurement, Contract Management, Commercial, Business Development and Legal groups need to work together to understand the true scope of contracting and from there, to develop a process and role allocation that leads to increased competitiveness and greater success. Lawyers are generally in a powerful position and can easily frustrate attempts at change or improvement. I hope to see more of them taking a lead in driving positive re-thinking of their role – and in particular, the best way to support successful commercial policies and trading relationships.
In recent weeks, I have been hearing frequent mentions of ‘hard’ versus ‘soft’ aspects of contracting. The difference seems to be between those terms that are characterisitic of legal and financial risk allocation, compared with those that have more to do with aspects of contract governance and management.
Historically, many lawyers have taken the view that they focus on the ‘hard’ stuff and that the business concentrates on the soft elements. But this has started to change as all those involved with contracting start to grasp the increased importance that the contract has in the broader aspects of relationship success.
A new thought was introduced to me today by complex project expert Dr Andrew Humphries, who asked what consideration has been given to the ‘symbolic value’ of a contract. His point was made in respect of some work he is doing on a long-term trading relationship in which the parties feel better outcomes could be achieved. He has identified issues of insecurity that are constraining the commitment of one party. Like so many relationships, a core issue is around trust – and in this case, he feels that the absence of a contract is part of the problem.
Contracts can and should offer a basic security, part of which is explaining the conditions under which they may be amended or terminated and the results of such termination. The need for these open and honest discussions has increased post-recession. The last year has undermined many relationships, as the more powerful party has often imposed unilateral changes in the terms.
2010 will see a growing interest in some of the ‘soft’ elements of contracting, as we seek to restore trust in trading relationships that have been battered by recent events. It is an interesting challenge for contract experts everywhere to rethink some of the fundamental terms and the way we approach defining long term relationships.
Supplier performance management has become an increasingly important topic in many organizations and has received a boost from the recession. It was a source of real advantage to companies that could both oversee performance and manage supply relationships more flexibly.
At IACCM’s final executive roundtable meeting in London, participants discussed the characteristics of successful supplier performance management (SPM) programs – and questioned whether it is a role that Procurement groups are equipped to perfrom.
Today, the SPM role is sometimes within the business and sometimes in Procurement / Sourcing. In a few cases, it is emerging as a separate group. Many businesses have struggled to develop the right level of collaboration to ensure a robust and consistent program. Also, for most, it tends to be a highly selective focus on a few ‘key suppliers’, even though elements of performance management should apply across all relationships.
One participant asked the question: “Who is accountable for overseeing innovation, for doing supplier development?” In his view, Procurement groups rarely have the skills or motivation to undertake these tasks. “The commercial aspects of contract and relationship management may be better bundled elsewhere.”
A key problem for Procurement comes from its image and its measurements. The participants – who were mostly from a procurement background – feel that the organization remains tarnished by a view that it is about ‘opportunistic’ cost reductions, rather than about the delivery of value over time. “Can you have strong supplier development AND strong negotiation?” asked one.
There was a consensus that there is a growing divide between relationships that focus on cost and those that focus on value – and that it is hard for a single group to manage both. This divide is currently taking many forms. Sometimes it is through segmentation of procurement groups – for example, direct, indirect, IT, outsourcing as separate specialist organizations. In other companies, we see Procurement with very limited influence on post-award activities, such as relationship or contract management. “Procurement is becoming two tribes,” observed one senior director. “In the complex relationships, they may know far less about supply markets and much more about commercial models, the principles of partnering and financial modelling.”
Compliance has always been an important principle within business. Any social organism needs rules that govern aspects of its behaviour and of those who are part of it. Some of those rules are internal and relate to things like authorities to make decisions or procedures to be followed. Others are external and are imposed through regulations, laws and broader social standards or voluntary codes.
Over the years, the range of rules has increased. Within business, managers have bought in to the idea that internal compliance raises efficiency and in many cases adds to organizational effectiveness. External stakeholders have increasingly felt a need to define rules and principles which are designed to ensure ‘socially desirable’ behaviours and ‘beneficial’ outcomes.
Rules-based systems require monitoring and new rules generally become accepted and effective only if there is a rigorous system of control. However, over time there is a danger that rules will generate a bureaucracy with no real purpose except to oversee compliance. Not only does this result in additional cost (potentially to a point at which it erodes the benefits of efficiency and effectiveness), but organizations run the risk of losing flexibility and the ability to innovate.
This balance between compliance and innovation is a major concern for senior managers – and it must also be a concern for a community like ours. To many, we are the bureaucrats, the people who police the rules. They do not automatically see or accept the need for centralized procurement of everything, or of standardized froms of contract. In their view, any benefits that might once have flowed from the creation of such ‘expert’ groups have been outweighed by the extent to which we delay decisions, we stand in the way of opportunities, we prevent spontaneous or entrepreneurial initiatives.
Our community tends to suffer more than most from swings in our power and influence, including whether we are centralized or decentralized. This is because we have failed to achieve balance between compliance and creativity. And one result of this is that we are rarely able to describe the economic impacts of our work, beyond perhaps putting a theoretical value to some aspects of cost reduction or cost avoidance.
Examples of such compliance-based activity include the elimination of ‘maverick spend’ or the collection of service level credits. On the sell-side, they may include the percentage of agreements reviewed and approved, or the extent to which standard terms and conditions are utilized. The problem with so much of this is the fact that we cannot actually be sure that the results of our work generate value.
Rules are inevitable in any complex organization. It is right that we then monitor adherence to those rules. But the real value of compliance is the recognition that it represents a base from which deviation can be measured and managed. And it is through those deviations that we may discover new rules, new standards that generate additional benefits and may become a source of competitive advantage.
High value contracts, legal and procurement groups are not focused on compliance as the core of their work. Indeed, they seek to automate such activity, because their focus is on innovation and change. They are spending time observing shifts in the market, influencing internal and external stakeholders, monitoring competition and researching new ideas. Their internal clients do not see them as an unwelcome police force, but rather as a source of solutions that will help the organization to win.
I must admit that I do not understand why those in the financial services industry need such large bonuses. I am not alone in struggling to grasp what they do that offers such tremendous social benefit (indeed, a report in today’s Financial Times claims that “Top Bankers Destory Value” for society). No one has explained what unique talents or education these financial experts bring to their work. I am unclear what loss there would be if they were no longer bonused in this way and felt ‘obliged’ to move to alternative careers. Indeed, if they are so talented, then perhaps those alternatives would be of greater social benefit. And if they are not so talented, perhaps they would simply remain in their current jobs anyway.
I am steadily becoming more convinced that bonus schemes cause undesirable distortions in many areas of our economy – including the world of contracts. It will come as little suprise that, in IACCM’s survey on ethics earlier this year, one of the main concerns expressed by members was the extent to which sales staff are incented to exaggerate commitments. Many contracts and purchasing professionals wrestle with the mismatch between sales’ promises and contractual limitations. This is often the cause of mistrust and of the battle over risk allocation that distorts many negotiations.
As a specific example, last week I was talking with a senior governemt official about the public procurement requirement to avoid direct discussion with individual suppliers. We discussed the fact that open forums prevent suppliers sharing new ideas and describing possibilities for differentiated solutions – a factor that some of my senior contacts suggest is significant in the frequency of project failures. The official agreed, but explained that the policy cannot be breached due to the propensity of suppliers to take legal action when they lose. And he suggests a major factor is the distortion caused by short-term bonus schemes – the severity of personal loss that results from failure to win a major bid.
In a simpler world of product sales, where force majeure was an accepted principle, bonuses perhaps made sense. But today, in a complex global environment, they cause distortions that generate unacceptable risk. For all of us in the world of contracts, perhaps the time has come when we should consider becoming advocates for a new approach to reward systems – an approach that would be more consistent with the ethical standards of contracting and the delivery of value.
A good start would be for us to start sharing information about some of the distortions we observe that result from the behaviors induced by bonus and other incentive schemes. Any initiative for change must start by illustrating the damage that is done by the current approach. Do you have examples?
“A business is a network that allows us to make offers”, according to Fernando Flores, entrepreneur, politician and innovator.
Mr Flores has led a fascinating life, including at the age of 27 a brief period as Finance Minister in the government of Savador Allende. Following several years of imprisonment by the Chilean military junta, he was able to start a new life in the United States, where he quickly started to apply his fascination with computers to innovative business process and management systems. Today he is once more a politician and Senator in his homeland of Chile.
Out of these interests and experiences, he developed ideas that are highly relevant to all those involved in contracting and business relationships. This quote, taken from a recent edition of Strategy+Business, illustrates my point:
“Spend any time with Fernando Flores and he will assess you. He may make an offer, which you are free to accept or decline. If you accept, he will make a commitment to fulfill his promise. These simple words, or “speech acts,” form the vocabulary of a set of practices that he has deployed across three continents. Their purpose is to help organizations realize improvements in productivity, coordination, and culture — by codifying and making effective the directives and agreements at the core of business conversation.”
One of the terms that Mr. Flores uses to describe his philosophy is ‘commitment-based management’. At its core is the principle that words are cheap; generalizations are easy; value is introduced when commitments are specific and measurable. “Most communication between individuals consists not of pure information, but of prompts for action”, he observes. But of course we have a choice as to how we respond to that prompt – for example, do we say we will ‘make best efforts’ or do we promise that functionality will be delivered? Do we say that delivery will be ‘as soon as possible’ or that we will have the project complete by Friday?
Underlying this work is the point that organizations exist to produce value, but that value is undermined if the organization cannot make and honor commitments. It is through commitments that we bgenerate trust and loyalty.
Turning to the world of contracts and negotiatiosn, we can immediately see how they influence these critical characteristics.
- Through the initial phases of the contracting process (the selling / supplier selection phase), we should be generating the discussions that are required to establish needs, their alignment (or misalignment) with capabilities, and the sort of commitments required (by both organizations) to support success. A key danger here is that the parties exaggerate their capabilities and create expectations that cannot be met.
- During the contract formation and negotiation process, we should be documenting the results of this first phase and turning generalized offers into specific commitments. Where things often start to go wrong are that either the commitments are left vague, or that the negotiators actually seek to limit the implied commitments that were offered. This may be because the promises made in the bidding process simply were not true, or because the standard practices, policies and risk appetite of contractrs staff are not aligned with those of their colleagues in Sales or the business unit.
- Assuming that a contract is established, the critical test is whether commitments are then met. In the post-award phase, we have not only the challenge of meeting what was offered, but also of managing changes to business conditions, capabilities or requirements. IN the real world, nothing remains static, so organizations must have the ability to reassess and re-open their commitments. The critical issue – fi we are to retain trust and cooperation – is to do this overtly and to avoid surprises.
Emphasizing this point about managing change, Flores believes that individuals and organizations are never fully trapped in any situation, even one as drastic as imprisonment — if they remain willing to change the way they think and talk about it. “We human beings are linguistic, social, emotional animals that co-invent a world through language,” he says. “That means that reality is not formed by objects. That opens a different world of possibilities.”
Flores argues that the obligations people create for themselves are stronger and more psychologically binding than the directions they are given by someone else. Hence we can assume that contracts, by capturing and recording ‘speech acts’ and embodying commitments, fulfil a critical purpose in binding organizations together. For those who question whether contracts have value, Flores’ work has led to an interesting statisitc. When companies assess the percentage of the time that promises are met: “In the best companies in the world, they say about 60 percent will be fulfilled. In normal companies, it’s around 30 percent”. So just imagine if we improved the process of ‘commitment management’ to a point where, as a matter of course, all those involved with delivery felt bound by their promise. And in that world, a contract would become the charter of commitments, rather than a charter of aspirations, surrounded by caveats and exclusion clauses.
We all communicate … but to what extent are we understood?
Today’s professionals increasingly operate with a variety of media and across a wide range of cultures. We deal with people from different professional backgrounds, from diffferent industries and from different countries. We regularly participate in calls and meetings where a proportion of the participants have a different native langauge. So we write and speak … but do we give sufficient thought to using terms and language that will be readily understood?
Of course, in some instances, people use ‘jargon’ quite deliberately. Traditional professions have all developed terms and language that aid efficiency in internal communication, but excludes outsiders. Alan Greenspan apparently confessed to the use of obscure terms whenever he testified to Congress.
The question that is raised in an article in Strategy+Business is whether we are good at separating ‘bad’ jargon from good. Some jargon can assist efficient and lively conversation, but we must ensure that we have considered our audience before we start to use it.
What are some of the things to watch out for?
- Industry-specific terms and expressions
- Terms and expressions specific to a particular profession
- Cultural expressions
- Generational terminology, slang etc.
Increasingly, we see the development of ‘new’ languages, such as abbreviations used within instant messaging, which again exclude those who are not users of such tools.
If we do not communicate effectively, not only do we run the risk of misunderstanding, but research shows that team members, participants and audiences become alienated and potentially negative to the speaker’s goals.
So communication matters – and ensuring you communicate in a way that suppports understanding is even more important.
Last week it was reported that Apple were refusing to service PCs that had been returned for warranty repair by smokers. Citing Californian regulation, Applye considered such equipment contaminated and representing a health hazard to the repair teams.
Hot on the heels of that development comes a report from Louisiana where a group of restaurants are challenging the warranty exclusions of a vendor and its reseller because of losses they suffered due to software flaws. The restaurants are claiming that the solution providers were negligent in providing a system that was vulnerable to hackers, causing the restaurants to suffer significant loss.
Writing in Channel Insider, Larry Welch states: “In 2008, the restaurants discovered the Romanian hackers had exploited a software vulnerability in the remote access application and were siphoning off credit card information. According to IDG News Service, the breach cost on restaurant more than $50,000 in remediating customer credit records, audits and security upgrades.”
The lawsuit asserts that the provider of the systems was aware of the flaw and should have taken steps to work around it or to have advised its reseller to take such steps. Its failure to do so resulted in the restaurant systems not meeting compliance standards for data security and credit card handling.
This challenge on the basis of what is ‘reasonable’ has been upheld in other jurisdictions, but not for such generic products. With growing pressure from Federal authorities for increased quality standards in software development, this lawsuit may provide an early warning of far more to come. And arguably the problems could multiply when software is delivered over the Cloud. Will providers be held responsible for ensuring that users are alerted to exposures that might make such applications unsuitable for certain purposes?
This seems to be a lawsuit worth watching. As does the success of Apple in redefining warranty obligations.
Yesterday I wrote about one topic discussed at a recent IACCM executive forum – the use of virtual communication techniques. Subsequently the meeting turned to some of today’s big challenges in structuring deals and forming productive trading relationships.
“Always insisting on competitive bidding and driving for the cheapest means that from day one suppliers have to watch costs. That means we lose the ability to give stuff away and build collaboration,” commented one participant. The group agreed that collaboration is the only way that new sources of value will be uncovered and that the focus of so many deals on lowest cost and risk avoidance condemns many contracts to disappointment or failure.
By way of contrast, the discussion moved to the UK’s Heathrow Terminal 5 project, hailed by many as a great success. Mark David decribed key aspects of that project and the role that ‘contracting culture ‘ played in its results. The contracting authority – BAA – decided to retain risk and not to appoint a prime contractor. It also formed an approach that guaranteed margins, encouraged and rewarded innovation, offered team bonuses and established a pool of money to protect contractors from errors and oversights. This created an environment of cross-organizational teaming and cooperation, because no one had the need to engage in protective behavior.
So why aren’t similar approaches more common? “Because organizations are driven by a Finance / Procurement partnership that is obsessed by short-term savings and a belief that competition is the only way to achieve them”, commented one seasoned Commercial Director. In his view, relationships and value are sacrificed for these short-term goals. He suggested that many executives recognize the problem – but take the view “You are right, but we have to make this quarter’s numbers”.
The contract tools, models and measurement systems in use at most companies have not adjusted to a service-based world. They simply cannot assess the cost of short-term wins over longer term value. Another aspect of this problem is the ability to build ‘commercial agility’ – that is, being able to adapt to fast-changing business conditions. “For us, the Commercial role is to enable agility within the internal ‘regulatory’ framework,” said a commercial director at a major defense and aerospace company. Participants confirmed that they – and their contracts – must increasingly be capable of applying discipline to what may happen in the future. Change is more frequent, driving many to seek shorter term contracts or increased termination rights.
In the end, the issue of short-termism was felt by all participants to be the biggest challenge of delivering more value and innovation in trading relationships. And although they felt that Procurement practices play a major role in this, they also blamed the overall compensation and reward systems that continue to prevail in most companies. Sales behavior is also driven by short-term gain, and the role of contracts / commercial groups must be to offer an objective view unclouded by commissions or theoretical savings – and to identify bad business, but also to advise management on what would make it good.
Commitment Matters 
