Most attempts to compare the effectiveness of virtual meetings with physical meetings are too simplistic. That was the conclusion from IACCM’s executive roundtable in London last week. Participants shared hints and tips on approaches they have observed that contribute to the success of virtual meetings – and may even offer advantages over the physical variety.
‘We tend to see virtual meetings – phone calls, video-conferencing, webcasts – as inferior to physical meetings”, observed one participant. “Perhaps that is because the driver has been largely negative – a push for cost savings, rather than promotion as a positive and perhaps superior alternative to physical meetings.”
Beyond reduced travel expense, how can virtual be superior? One reason is that they can be more inclusive. It is possible to involve a wider range of people, potentially for just part of the meeting. But another more important reason is the versatility they can offer in both the medium and the combination of methods used. ‘Virtual’ includes instant messaging, e-mail, conference calls, webinars, video calls and video conferencing, such as Telepresence. But it is not a matter of choosing just one approach – a well planned meting may use several.
“When we use any of these mediums for negotiation, we also ensure our team is linked to instant messaging,” commented one participant. “That way we are communicating behind the scenes, sending instructions, planning next moves. Those are things you can never do in a face to face negotiation.”
So if virtual methods sometimes offfer advantages, what are some of the hints and tips to make them successful? One interesting comment came from an executive who observed the need to put all participants on an equal footing. He had observed that many virtual meetings have a physical component – a tendency for those based in one location to gather in a conference room or office, with remote participants then joining by phone. “That puts the remote people at a tremendous disadvantage. The meeting inevitably gravitates to those who are together and the rest feel excluded.” He now requires all participants to use exactly the same medium.
In the world of negotiations, a recent IACCM study revealed that the most admired companies are those which excel at planning. And it has become evident that they also plan the methods they will use for communications and meetings and the points at which they will use them. So deciding the right mix and timing of physical and virtual meetings and communication is very much part of the planning agenda.
The roundtable group also discussed recent research findings from Harvard Business School regarding language issues. The research highlighted the alienation that typically occurs in multi-cultural teams, forced to operate in the company language (typically English). Many members of the team feel unempowered and this can be especially extreme in a virtual conversation. Successful leaders recognize this risk and ensure that all participants have opportunities to contribute. They also open a variety of methods – for example, spoken or written – to accommodate different preferences. “In any meeting, I know what I said, but I don’t know what others heard,” said one participant. “By using several forms of media, I may be able to reduce the chances of misunderstanding – and virtual methods certainly increase the options available to me.”
Another Commercial Director – who heads the UK team within a European multi-national – highlighted the fact that language diasadvantages can work in several directions. Although English is the official working language in his company, the native speakers often find themselves at a disadvantage, because non-natives actually understand each other far better than they understand their US or UK counterparts. “If we want to be effective, we must remember to use terms and speak at a speed where they grasp what we are saying. I often observe team members just trying to get their message across by speaking faster and at higher volume – it doesn’t work.”
These thoughts led the meeting to a discussion about the role of the contract as a means of communication – but I will cover that conversation in my next blog. Meanwhile, please share your thoughts and ideas on how to ensure effective use of virtual communication tools.
– inclusive
As in many other countries, until recently the management of contracts in India was seen as a largely administrative task. Large businesses might have a dedicated contract administration department; in others, it was perhaps a duty performed by Sales or Project Management. And for contract drafting or negotiation support, the role would generally fall to lawyers (who interestingly often report to the head of Finance).
Like so many things in modern India, this picture is changing fast and it is reflected in the creation of the new ‘Indian Association of Project Contract Administration and Management”. This title reflects today’s reality – and perhaps indicates that the professionalization of contracting may follow a slightly different path in India. However, its connection with the International Association for Contract & Commercial Management (IACCM) will enable the group to draw from global research, best practice and professional networking.
Many Indian members are already active within IACCM and have been contributing to working groups, the development of training materials and the Association’s overall governance at both Advisory Council and Board level. In addition, several hundred of the ‘new breed’ contract managers have embarked on IACCM Professional Accreditation and training.
So what has caused this rapid change? Mostly it is of course the tremendous success that India is having in penetrating global markets, both through its dynamic domestic companies and also due to its well-educated and highly motivated workforce. This emergence onto the world stage has been accompanied by the need to develop world-class standards – including the ability to negotiate and manage trading relationships and commitments through robust contracts. International operations demand more disciplined procedures for defining and managing business risk and trading relationships – and ‘contract management’ provides a critical component. This shift was discussed recently in an excellent paper by Mr. N. Balachandar of Technip India Limited.
Another reason why contracting competence has become so urgent for India is the fact that so much of their development is in the area of long-term services. The strength in outsourcing, contract manufacturing, application development and professional services must be mirrored in the ability to craft and then manage reliable commitments and obligations with their trading partners. Recently, this need for internal contract management expertise has also become the backbone of a new outsourced service offering, with several providers of both Legal Process and Contract Management Process outsourcing now competing for business. This is in addition to a number of ‘captive’ centers of such expertise.
So far-sighted Indian management has already moved on from the reactive role of contract administrators and is advancing the professional status and competence of a new breed of contract managers, who engage in all aspects of the contracting formulation and post-award management. Like business leaders elsewhere, they understand this competence is critical not only to ensure success in their trading relationships, but also in the delivery of sound bottom-line performance.
Contract Management is an exciting place to build a career right now – and the creation of a local network that can spread knowledge within India is a very positive development. Its connection with the worldwide IACCM community ensures that the group has access to world-class training and accreditation and will be exposed to global ‘best practices’. Given the ingenuity and enthusiasm of the Indian people, I have no doubt that they will rapidly be among the leaders in the development of the best practices of the future.
Wal-Mart is determined to offer low prices and instant availability. And so, it seems, is Amazon. Hence the two are increasingly locked in a batttle.
An article in the New York Times describes the nature of the price war that has emerged, with Wal-Mart’s enormous buying power pitched against Amazon’s low-cost distribution model. The story is interesting because it illustrates the growing influence of technology on market competition and the extent to which these new models also rely upon commercial capabilities and influences.
Amazon – with a mere $20bn in on-line sales – cannot compete with the tremendous buying power of Wal-Mart. But it can perfect an alternative and lower cost distribution model. As the article describes, in the US market, Amazon is able to take advantage of the fact that on-line purchases are frequently not subject to sales taxes (representing a typical saving for the buyer of 6 – 8%). For larger items, the Amazon offering obviously includes delivery. And in the larger metropolitan areas, Amazon has now designed a sophisticated distribution network that often allows same-day delivery. They have invested heavily in their supply chain management capabilities.
For all its size in terms of spend, Wal-Mart coveres thousands of product areas, many of which Amazon may not choose to replicate. At present, its great strength is that most people still buy in stores, rather than on-line. But whether Amazon can continue making inroads to shopping habits is the big question. And moving forward, there are many businesses that need to be wary of the impacts that new technologies are starting to have – and ways that these might enable competitors to erode significant areas of their business.
Why does it take so long from the inception of a deal to getting it signed? And why is it that final negotiations always seem to be rushed, leaving many open items still to be resolved by the implementation team?
This was the gist of questions raised by IACCM member Mark Hope in a recent note. He went on to say: “I wonder whether you have or could research data that identifies the ratio between thinking time and doing time, as I think this would be fascinating and actually get to the nub of delay. There is a part of me thinks we as a community are accepting too much criticism for the overall delay and that we should focus on speeding up the buying decision and selection process more than the execution process”.
Mark’s comments relate to relatively large and often quite complex acquisitions, often related to technology or outsourcing. I am sure they resonate with many. We see initiatives kicked off with a great flurry, only for interest to dwindle as new priorities intervene. Then suddenly, an executive somewhere wakes up, or starts demanding to know the status of ‘their’ project – and suddenly reaching closure becomes urgent and everyone is seeking scapegoats for why it didn’t happen already …
Does this sound familiar to you? And does it seem unfair that often the convenient scapegoat is Procurement, or Contracts / Commercial, or Legal? We know we are innocent victims – don’t we?
Well, perhaps sometimes we contribute to that delay. But even if we do not, isn’t it time that we recognize reality and do something about it? Because in answer to Mark’s question regarding research data, we do have some very interesting facts. For example, we know that complex contracts require the coordination of multiple stakeholder perspectives and the responsibility for orchestrating those (and then reconciling the results) is often rather vague and inconsistent. We also know that the quality of executive sponsorship is key to project speed and almost certainly a major factor in its success. And we know that the lead-times to which Mark refers are highly variable – some companies have typical closure times of 5 – 7 weeks on projects where others take 25+.
Mark is absolutely right to imply that much of the delay in individual transactions is outside the control of the contracts / commercial / procurement organization. However, I would contend that we are at fault, because we know this is happening, we know that fingers will point at us, yet we do little or nothing about it.
Most executives understand the value of time. They would like faster execution on projects. They realise that ‘panic’ action frequently results in corners being cut and a loss of quality in the results. So why are we not responding to those issues by proposing a more rigorous and measured business process, aimed at improving review and approval quality and cycle times? Why are we not collecting and collating the data to find out what causes these recurrent delays? Why are we not benchmarking our company’s performance with that of major competitors or like industries? And why are we not then reporting to executive management on the steps needed to improve cycle times and generate better negotiated agreements? Some of course are doing precisely this – and helping their company to competitive advantage (se for example the results of IACCM’s ‘Most Admired Companies’ surveys and interviews). But many are not; they are simply waiting for someone else to fix the problem.
Mark has asked an excellent question and makes a very pertinent observation. Because in the end, is the answer not to ask ourselves ‘Do we want to be victims, or leaders?’ Is this not a key example of where we have an opportunity to add value to the business and be instigators of change? And just remember what happens to those who fail to lead; in general, at some point, the accusations that they are ‘the problem’ start to stick – and suddenly the group or function faces massive reorganization and loss of power.
So be proactive. Don’t wait for others to find their answers to the question ‘Why does it take so long?’ If you need data to support you in this initiative, then you know who can help you …. it is IACCM.
IACCM has today published an exciting and challenging report that highlights the role of contracts in delivering business value (or alternatively, the role that poor contracting plays in destroying value). The Executive Summary states:
“Sustained investment in contract and commercial management disciplines will occur only when it is possible to demonstrate that they create and deliver value. The necessary evidence is now available – our choice of contract terms has a direct and major influence on the financial results of the business. Economic value, innovation and cycle time improvements can be radically influenced by contracting strategies.
Benchmarks and research show that employing the right contract structure and terms is not simply about containing unpleasant risks; it is also – and predominantly – about achieving superior economic value from trading relationships. However, realizing this value depends on a shift in the way that contracting is managed and measured.
This report illustrates how contracts have become critical weapons in today’s highlycompetitive global economy. When properly structured and negotiated, they provide a framework for business and relationship management that significantly increases the probability of mutually successful outcomes for all parties, as well as containing the consequences of failure.
The report concludes that transition to ‘strategic contracting’ is achieved only through executive support, demanding new appreciation of the role of the contract and the resources associated with its creation and management.”
It is our hope that this report will be read not only by the community charged with oversight of contracts – Legal, Commercial, Sourcing and Contract Management – but that they will ensure it is more widely circulated an discussed with executive management. As we continue to wrestle with the cosequences of the economic downturn, it is time for leadership and change. We can drive better business results and ensure the security of our jobs and role. Get your copy of Contracts As A Source Of Value.
Today I attended a presentation on ‘quality by design’, delivered by Rebecca Vangenechten of Siemens Life Sciences.
The session got me thinking about how we would embed quality by design principles into contracting. And I realized that there is no consensus on what ‘quality’ means in terms of a contract. Is it to do with design and layout? Completeness? Legibility and clarity? Its effectiveness in protecting the drafter? The extent to which it generates successful results? And without knowing quite why we are doing it, how can we be sure that what we are doing is of real value and quality?
So I have a challenge for you. Without any sense of what is ‘good’, we cannot determine whether a contract – or the contracting process – is ‘fit for purpose’. And that seems to me a serious omission. It also explains why we struggle to demonstrate and describe the value of the contracting process. I need your help in fixing this problem.
It is time for the contracts community – contract managers. lawyers, sourcing professionals – to define what ‘quality by design’ means when it is applied to contracts. To get us started, I posed the following question to some of IACCM’s senior members:
“I am listening to a presentation on quality by design and it strikes me that it would be very helpful to apply that concept to contracts.
However, to do so we must define what we mean by ‘quality’ in the context of a contract. In most cases, quality is determined in the context of outcomes or outputs. What do you think these are in respect of a contract; for example, the avoidance of unpleasant consequences? The enablement of a successful trading relationship? …..
If we can agree quality indicators, we will be able to determine appropriate measurements that in turn could drive benchmarks and improvement.
So what are the quality indicators for a contract, in your mind?”
I received a couple of answers and they illustrate why this should be a key issue for us. I share these inputs with you – but please add your comments so that we can consolidate the thoughts of our community and develop an answer to the very important question ‘What is the purpose of a contract?’
“Quality contracting results in no surprises for either party. The customer requirements and vendor commitments are fully aligned and both parties have one and same expectation of what contract compliance or fulfillment looks like. The outcomes or deliverables for the contract (flowing both ways) are objective and measurable. There is no gray area or white space to be debated at a later time. New players coming into the engagement mid-stream can read the contract and understand clearly what the obligations and expectations of the parties were at signing and are going forward.
Well over 80% of the disputes and disconnects I see are due to poor scope language. And that is not just referring to the SOW, for scope requirements can be in any number of documents. The standard I use is a six sigma concept (at least that is where I was introduced to it) of goals or deliverables being SMART. SMART stands for deliverables that are
- Specific criteria for success or compliance — not vague, but focused and clear
- Measurable — measures that result in any 3rd party, not familiar or close to the deal, can determine objectively whether a requirement has been met or not
- Aggressive but achievable
- Relevant to the strategy or goal
- Time-bounded (there is a due date)
Certainly, most contracts have these characteristics imbedded. The biggest issues, in my experience, are around S and M of the acronym. ”
And a member in Italy suggested that: “Thought it is really difficult and it is even down to how we do measure the success of a negotiation.
I’ve been pondering what could be an objective criteria of a good quality, though I couldn’t find any applicable world-wide. For instance, let’s consider the number of disputes once a contract has been signed. I’ve been engaged to negotiate a 3-yrs agreement of ca 7$75M USD ending up with terrible Ts&Cs (anyone on earth would have considered of poor quality) though we didn’t have any issue w/ the customer for more than 5 yrs. At the other extent we had a smaller value agreement (ca 25M over 2 years) that was almost including standard T&C for my ex-company: after few months we were close to go to court. In fact the attitude to use contract and to be litigious it really varies from culture to culture….
So if anyone has some bright ideas, I will be happy to implement them in my team.”
Please add your thoughts. And thanks, Rebecca, for inspiring the question!
I spent today chairing a conference about contract manufacturing and outsourcing in the health and pharmaceutical industry.
Throughout the event, whether speakers were addressing technical or commercial issues, the importance of ‘the relationship’ in delivering successful outcomes was a consistent theme. And both providers and customers made regular reference to the forces that undermine relationships – in particular when there is an unrelenting focus on price reduction.
The participants came from different parts of the business and most are in senior positions. It is not that they fail to understand the need for efficiency and competitive cost structures. Their point was that many relationships just don’t take off because the parties don’t develop mechanisms to explore opportunities for mutual cost reduction and possible margin improvement. They perceive too many conversations focusing on cutting the supplier’s price or charge (or of course, in times of constrained supply, the conversation reverses and is about price increases).
“Many customers just don’t realize how difficult they are to work with”, lamented one delegate. “What do you do when they don’t value relationships or when they simply don’t have the organizational structure to manage them?” he enquired.
The answer is really quite simple, though often hard to deliver – especially through a commission-based sales force. It reminded me of a blog I wrote earlier this year on the subject ‘fear corrupts’. We have three options. Typically we stay quiet, we hope for the best, we persuade ourselves that things will be OK. And we move forward with a contract that contains hidden and unidentified costs and risks associated with the absence of efficient contract and relationship management. Alternatively, a few suppliers are brave enough to no bid. These are mostly efficient and highly successful organizations that don’t need the risk or the low margins that are associated with ‘difficult’ customers.
Recently I came across one supplier who was breaking the mould. They decided that the right answer was to be honest. They had the courage to declare a ‘service premium’ as a separate priced item. They explain to their customers ‘Here is the achievable price, but here is the actual price to you’. This approach rapidly gained customer attention and led them to wonder how many suppliers were charging a hidden premium to cover their risk aversion, or bureaucracy, or slowness to reach decisions or manage changes.
Healthy relationships require honesty and openness. We all need more courage if we are going to drive business improvement. We actually do our trading partners a tremendous service when we point out the ways that make them difficult to do business with. If they are serious about cutting costs, they will welcome the insights and opportunities these revelations represent. After all, they even save the fees a consultant would charge to tell them the same things!
In the last few days, IACCM kicked off its working group on complex project contracting. This joint initiative with the International Centre For Complex Project Management (ICCPM) has attracted more than 30 volunteers from 8 different countries and a range of industries.
There was lively discussion about the precise issues that the group should address. External commentators are increasingly highlighting the important role of contracts and contract management disciplines in overall business performance, but quite what is wrong often remains unspecified. The working group’s discussions led to the conclusion that the main problems that arise in project contracting relate to clarity of requirements and expectations, and the framework through which these are executed and managed. These issues impact performance and become more severe in complex projects because of a) typically long timeframes and therefore the project is subject to extensive uncertainty and change; b) difficulties in establishing and maintaining ‘competitive’ prices and undertaking on-going management of costs and benefits; c) complex projects are frequently subject to cultural variations between stakeholders and this increases the potential for misunderstanding.
These problems contribute to a variety of project failure characteristics, ranging from complete abandonment, to other factors such as severe delays or cost overruns.
Contracting methodologies and structures for handling disputes are well established, but there are no consistent contract formation or contract management methods that are used to address the problems outlined above. This applies to both the structure of the contract and its related terms and conditions, and to the deployment of appropriate resources at the right time and with the business acumen required to oversee and adjust the contract. The problem applies across the project life-cycle, from inception of the bid to close-out.
Today’s case studies are mostly anecdotal. They show specific projects that have worked well, but the analysis is too limited to draw deductions. It is the beleif of the team that different projects may fall into distinct ‘types’ and that be identifying these types, we can perhaps establish relationship and contract characteristics. Based on this, the working group has established the following goals for its initial deliverables:
- To define relationship types and the contracting principles that should apply to each of them;
- To develop a resourcing guide for each relationship type.
The work will draw on previous publications and expert input and all suggestions will be welcome.
[1] It is suggested that we use the recent Helmsman Group report to assist in defining the indicators of complexity
“Loss aversion is the systematic mistake of segregating gains and losses — evaluating decisions in isolation rather than in the aggregate — and over-weighting losses relative to gains,” according to Maurice Schweitzer, professor of Operations & Information Management at The Wharton School of Business.
Prof. Schweitzer makes this assertion based on growing studies on the impact of behavior on decision making. This is important because behavioral analysis increasingly shows that we often do not make economically rational decisions – even when we are ‘experts’. For example, a study of top golfers has shown that they tend towards safe shots, rather than winning shots. And hence the observation that even they – as leading experts – focus on the immediate risk of doing well on a specific hole, rather than their overall tournament score.
This is highly relevant to all those in the world of contracting, because the comparison relates to our focus on individual transactions, rather than on the portfolio of contracts and relationships. By having this focus, not only do we sub-optimize business results, but we also create unintended risks.
Sub-optimization occurs because ‘playing it safe’ most or all of the time results in a predictable outcome, but one where we can rarely emerge as big-time winners. We fail to gain competitive edge because we consistently achieve par, but rarely score a birdie. Unintended risk arises because we are concentrating on the acceptability of individual deals and not the cumulative effect of many deals. The collapse of the bankign industry is a classic example; each individual sub-prime mortgage made perfect sense. Many thousands did not.
The Wharton study goes on to observe that behavior “reflects a bias towards avoiding loss” , In business people view performance in the context of a specific account, or a particular contract …. “People make mistakes when they view related decisions independently.” The study also refers to Prospect Theory, a concept in economics which was developed by psychologists Daniel Kahneman and Amos Tversky in 1979. Prospect Theory predicts that people become more risk averse when they are recording gains than when at risk of suffering a loss. Again, for those in the world of contracts and the law, this reflects our tendency to seek holes in new opportunities – which of course is frustrating for the optimists in sales and often also for executive management.
What lessons should we learn? Perhaps the key point is that we must find ways to undertake analysis and make risk judgments in a more composite fashion. We need tools that allow individual decisions to be made in the context of the overall contracts portfolio and that offer visibility to past experience across the organization. Most contracts and legal groups undertake deal analysis and review on a case by case basis that relies almost exclsuively on individual judgment. We lack data to observe volumes or patterns. Our insight to portfolio risk and opportunity is typically limited to personal or team experience. As a result, we are most likely overly conservative on individual opportunities – but may be guilty of allowing unacceptable risks to arise in the overall business portfolio. In addition, the limits of our personal experience may leave us unaware of the perfectly good opportunities that we are missing as a result of overly cautious risk assessment.
As The Economist points out, market segmentation is a topic of growing interest and sophistication (see Segmentation). Traditionally, it is the process by which we slice ‘markets’ into different types, in order to improve services and increase revenues. However, the technique is increasingly used more broadly by any organization or group providing products or services, in order to ensure the efficiency and relevance of their offering to customers or users.
I find the topic of segmentation fascinating because of course it has direct relevance and application in the world of contracts and relationship management. As The Economist points out, the technique was a direct reaction to the ‘one size fits all’ mentality of Henry Ford. While the Ford approach was undoubtedly efffective in delivering high volume, low cost products, it was not effective at meeting the needs of specific groups – for example, those with large families, or greater wealth.
Large corporations have tried to simplify the complexity and risks of contracting with similar ‘one size fits all’ models. Under pressure, they would agree to custom negotiations and some have developed a limited portfolio of contract types, or allow customization through pre-configured fall-back terms.
However, these methods continue to lack real sophistication. Contracts contain commitments and also set the framework for how the relationship will be managed. They contain provisions related to responsibilities, change procedures, rights and obligations. Often they ignore the value that the other party may place on these provisions – so sometimes the terms are over-engineered and sometimes under-engineered. Identical products or services may be put to very different applications within a customer organization – and therefore demand very different commitments from the supplier.
This concept of needs-based segmentation is still relatively immature and unfortunately many contracts groups – buy and sell – are relatively remote from their product and service development teams. Those products and services are therefore brought to market with ‘one size fits all’ terms and conditions, which can then be changed only through individual negotiation. Not only is this inefficient, but it creates risk. This risk is because we find ourselves making non-standard commitments that the business has not enabled – hence the cost of performance is greater and the risk of non-performance higher.
I observe some companies aligning contracts and commercial staff with the product or service lifecycle management teams and ensuring one basis of market segmentation is the understanding of different commitment requirements. Of course, this analysis may lead to certain segments being viewed as unattractive because of the implied terms and conditions. For example, risk averse customers (or suppliers) may not be selected because of the low margins they represent. Indeed, I was talking just today with the head of supply management at a major financial services company and he was observing how some of those he views as top suppliers are becoming more and more selective about when they decide to bid. And he realizes that he should view their no-bids as a warning sign that maybe his requirements are wrong.
All of us in the world of contracts – whether buyers or sellers – are dealing with markets. I believe that we ignore the principles of segmentation at our peril. It is something we should all understand and use to the fullest possible effect.
Commitment Matters 