2010 saw a major advance in the implementation of anti-trust and competition regulation throughout Asia.
In a region traditionally renowned for extensive joint venturees, cartels and other collaborative relationships, the speed and extent of the swing towards more open and competitive relationships has been dramatic. Hungry for economic aid, inward investment and global competitiveness, traditional business structures have been crumbling at remarkable speed.
This has a number of major impacts – not least of which is the growing importance of contracts and more rigorous commercial management. As business-to-busness relationships become increasingly arm’s length, they demand fresh approaches to their negotiation and management. This is fuelling, among other things, a growth in demand for skills development and training for commercial, contracts and procurement staff.
Among those introducing new competition laws in 2010 were Hong Kong and Malaysia. Every jurisdction in East Asia – wth the exception of North Korea and Myanmar – now has antitrust regulations in place, or has committed to their introduction. This has already started to have big effects not only on local companies, but also on multi-nationals. For example, Japan, China and Korea joined the EU in objecting to the proposed merger between BHP Billiton and Rio Tinto.
While enforcement standards still vary, fines in the region totalled $1.5 billion last year, indcating a new level of seriousness by many governments. A continuing challenge for companies operating in the region is the variability in the extent and quality of guidance. However, the overall strengthening of legislation in this area is another key milestone in the regon’s competitiveness on the world stage.
Last week, I wrote about a question I received from a Project Manager seeking contract advice (see original article). I said that I would share my response, which was as follows:
“The answer to this depends very much on the overall contracting and negotiation strategy that the Department wants to follow, and this will of course be driven by the key criteria that determine ‘success’.
Overall, what are the fundamental attributes of a good outcome and what capabilities are needed to safeguard their delivery? Once answers to these questions are established, it is possible to determine who will be responsible for ensuring the attributes are met and these can then be reflected into contract structures and terms.
Without this analysis, the detailed terms and procedures listed in the question could be rendered meaningless or counter-productive. Or to put it another way, if there is already clarity on these success criteria, then advice regarding measurements, terms, cost, negotiations etc. can only be given in the context of those criteria. The contract should never be developed in isolation from the overall scope and relational strategy.”
Far too often, people see contracts as some sort of instant-access template that can be applied almost regardless of circumstances. It is viewed rather like a sheet of gift-wrap, something that is necessary, but not fundamental to the value of what lies inside. Yet in truth, the contract defines the content and its value. The fact that people outside the world of contracts often fail to understand this is the responsibilityof the contracts and legal profession; it is a failing we need to address through far better communication and much higher quality advice and support that helps our colleagues in the business understand the role of contracting and the importance of full and inclusive information.
“There is discomfort when people encounter creativity.”
That is an observation by Wharton management professor Jennifer Mueller in a paper ‘Recognizing Creative Leadership’.
In her report, Mueller comments on the 2010 IBM CEO study (previously referenced in this blog) which found that ‘creativity’ is the attribute most valued for leading a large corporation in the future. Yet her research reveals that creative people are not in fact viewed as leadership material. On the contrary, they tend to be seen as ‘quirky’ or ‘unfocused. As a result, leaders tend to be selected from those who are seen as achievers and implementers, rather than people who have innovative or visionary ideas. Mueller writes: “The value that leaders have for groups is in creating common goals so the group can achieve something. And goals are better the clearer they are — you don’t want uncertainty. So leaders need to diminish uncertainty and create standards of behavior for everyone in the group. And they create those standards by conforming to them.”
This resonates with the challenge we face in the world of contracting. Everyone says they want more creativity and greater innovation from their trading relationships – and yet they tend to stifle it through the way that risks are allocated and that performance is measured and rewarded. We are uncomfortable with uncertainty; we value precision; we welcome standards; we monitor conformity and we measure compliance.
I suspect that the overall mix of CEOs is unlikely to change. There will be a few truly creative spirits, but they will be surrounded by strong implementers. In general, CEOs will continue to be appointed from the ranks of proven achievers – and that is probably fine, so long as they recognize and facilitate the creative innovators within the organization.
In the IBM study, many CEOs expressed a lack of confidence in their ability to take charge in times of complexity. Those leaders were ostensibly promoted “based on this prototypical perception of leadership and now find themselves in a world that has vastly changed, one that requires much more creative responses and thinking.” In IACCM studies, we observe similar insecurities among those charged with forming and managing trading relationships. Many in the world of contracts, legal and procurement sense that things need to be different, but are not sure in what way. Of course, a key role of IACCM is to provide those innovative concepts; but for them to work and be effective, each professional must increasingly be open and receptive to creative ideas. To maintain relevance andvalue, professionals must become comfortable when they encounter creativity – and must be ready to change methods, terms and practises in ways that enable the management of uncertainty through innovation.
We do not all need to be visionaries, but we must be ready to welcome. promote and adopt creative ideas. Otherwise, we are working directly against the CEO’s number one priority.
Many Contracts, Legal and Procurement professionals face the challenge of early involvement. If only people sought our advice sooner, we could add so much more value.
The issue is of course about more than timing. It is also about the quality and depth of involvement and how much time our ‘client’ will allow us, and how much we will allocate. Part of the solution (in my opinion) is that we need to raise the undersatanding and awareness of our clients in respect of what we do and how it can contribute to their success. We also need to increase their awareness of the right questions to be asking, and the types of information we will need in order to offer an intelligent and helpful response.
I came across an example this morning, when the following queston arrived in my e-mail.
I have been in communication with a friend who has some questions regarding (major project) contracts. I am writing to inquire if you have any data or advice regarding any of the items in the list below, to assist in developing the contract or advancing negotiations.
General areas of interest include:
- Basis of Payment, incentivised payments with KPIs
- Negotiations with prime contractors
- Contractual clauses used
- Cost estimating for design/build/testing
- Overall processes employed — design – build – test – acceptance
- Into-service transitioning & contract structures
Is that list long enough?!!
At ths point, I do not plan to share my reply because I am hoping you might comment with your ideas. I am sure many of you have had similar requests from business units or project managers. How do you ‘hook’ them into doing the right thing, rather than scare them away with the wrong reply, or a reply that is too late? And what is that reply – what advice should we be offering in response to question like this? (In this particular case, it is interesting that the project manager feels the need to step outside her own organization to get answers, rather than using the internal Procurement and Contract Management resources.)
Tomorrow, I will share what I said in response – and maybe by then I will also know how my reply was received! Meantime, what would you do?
The Economist recently ran an article that discussed the major reasons for the economic success of the western world. Among them it highlighted the emergence of the limited liability company, an institution which was for many years unique to this region of the world.
The article highlighted the importance that limiting risk has to the development of entrepreneurialism and the commercialization of innovation.
So will current legal practises associated with the allocation and management of risk destroy western enterprise and innovation? As lawyers push increasingly for expanded liability – consequental loss, unlimited damages etc. – are they hastening the decline of the economies they serve? As politicians (many of them also lawyers) seek to ‘de-risk’ society, are they crushing social enterprise and endeavor?
This link between liability and economic development seems important to me. I see many examples where ill-considered risk allocation results in significant damage to business health, prosperity and competitiveness. I think it is a serious issue which should be the subject of much wider debate.
Most contracting processes are highly rules-driven. The terms are dictated by a range of stakeholders from Legal, Finance, Operations, Product Management and various other functions. Contracts or commercial staff mostly have limited authority to make changes; their role is to impose standards or to reconcile and manage differences between stakeholder perspectives and market needs, negotiating within permitted boundaries. On occasion, they may develop creative commercial solutions to intractable problems.
Last week I met with Barbara Chomicka, who project managed the highly successful Mediacity development in Manchester, UK. This $500m project was at the leading edge of technology and included a complex mix of suppliers, operating under both public and private sector procurement rules. Unlike most major construction projects, it came in on time and within budget.
In addition to her project management skills, Barbara is a qualified architect and a Certified Member of IACCM. I was particularly interested to discover more about the approach she had adopted to contracting and risk management.
In common with a growing number of today’s complex projects, Mediacity involved many uncertainties. The specifications were in many areas imprecise or highly generalized – for example, that the buildings must comply with the environmental and regulatory standards applicable in 5 years time. The major certainties were the date for completion and the reputational damage that would occur in the event of failure.
At the outset, a key decision was made. It was estimated that traditional contract negotiation would take a minimum of 6 – 8 months, and that this would make the completion date unachievable. Therefore work commenced under a Memorandum of Understanding that released an initial $8m to enable start-up . Once this was exhausted, further top-up funds were released. More formal contracts were negotiated in the background while work continued.
Another strategic decision related to the criteria for supplier selection. Given the many uncertainties, it was obvious that individual price estimates would have limited meaning and that the key to delivering within budget would be the combination of experience and attitude. In appointing suppliers, the contractor was looking for evidence of collaborative working and a sense of shared ownership for problems.
This spirit also influenced the approach to risk management. There was no formal risk register. The integrated project team operated on principles of openness and transparency. When issues arose, they were immediately communicated across the team to enable resolution or mitigation.
In combination, these approaches add up to a contracting strategy. They broke many of the rules associated with traditional contracting, yet they led to a successful outcome. Certainly I am not suggesting that they represent a model for every project or relationship, but they illustrate the need for contracts and commercial professionals to exercise judgment and to develop flexible approaches to their work. It is the ability to understand when the rules do NOT apply that is the essence of good judgment in every profession. In the world of contracts and commercial, we need more people who exhibit this courage and understanding.
Barbara Chomicka is presenting at the IACCM EMEA conference in Amsterdam May 9th – 11th – see http://www.iaccm.com/emea for details.
Are many new outsourcing deals on hold until we have a better mousetrap? Has the adverse publicity regarding disappointing – and failed – outcomes resulted in many executives questioning the whole principle of outsourcing as a way to run their business?
These were among the questions that were addressed during my recent conversation with Brad Peterson, partner at law firm Mayer Brown and a widely recognized expert on outsourcing. Early in our discussion, Brad described how the market today is far more driven by renegotiation of existing contracts than by new deals. The surge in outsourcing that was expected as a result of the economic downturn simply has not happened.
Quite clearly, many business leaders remain strongly focused on reducing costs; and outsourcing is still widely perceived as a route to cost reduction. So why wouldn’t volumes be soaring? The answer seems to be two-fold. First, cost reductions are not always proving sustainable. Second, many relationships are proving inflexible in the face of rapidly changing market conditions. Hence there is more concern right now about restructuring what is already in place, than there is about adding to the portfolio.
The interview explored the reasons why current outsourcing deals struggle to deliver to their value potential. And much of the problem seems to lie in the unilateral focus on up-front cost and the failure to think through the true value sources and priorities. This means that far too many contracts are awarded on the wrong principles and the wrong terms and conditions. Resulting relationships not only lack harmony, but are often dysfunctional from the outset.
One key point to emerge during our discussion – which picks up on a theme from a number of my recent blogs – is that renegotiation is perhaps becoming ‘the new normal’. One major learning from recent outsourcing experience must be that long-term (3+year) contracts are inevitably subject to change – not just once and not just minor. Change must therefore be facilitated through appropriate performance monitoring and through clear change procedures. Establishing these begs a number of questions regarding the underlying economics of the deal and may well require new thinking about the scale and source of investment. In Brad’s experience, this issue is becoming better understood, but is not yet adequately addressed in most contracts, except that the right for the customer to terminate early, with a specified termination fee, is becoming more common.
We also discussed a recent report from EquaTerra that suggested contracts are becoming longer and that negotiations are becoming more confrontational. Brad agreed with both findings and commented: “Before the recession, there was more talk about partnering and collaboration. The downturn switched customers back to an unrelenting focus on cost; this has forced suppliers to cut corners, to find sources of saving. Overall, this makes things more adversarial”. And when it comes to contract length, Brad sees increased regulation as the major culprit. He cited as an example the ‘virtual doubling’ of privacy and data protection rules in the last 3 years.
The full interview is available to IACCM members on the website at www.iaccm.com.
Commenting on my recent blog, ‘Why Agility Matters’, David Rajakovich raised an interesting question. While broadly agreeing with the important role that contracts can play in improved communication and the management of risk, he questioned my statement that market volatility is increasing. He suggested that this might be a view ‘based on randomness’.
There are certainly many who share the opinion that the world of business today faces greater volatility than in the past. But is that a legitimate view? Might it be that we simply face different types of volatility today?
To take an example, there is little question that trading relationships are more international and that businesses are potentially more vulnerable to events in far-off places than they were 20 years ago. Globalization has shifted many sources of supply and increased the direct dependency on labor forces, political, economic and environmental events in overseas locations.
But does this in fact increase volatility, or simply change its sources? There is a counter-view that says wider market choice actually helps to immunize business from volatility by increasing choice and that the real point is more that we must tackle greater complexity, rather than greater volatility.
A recent report by The World Bank examined the volatility of prices in 45 major commodities going back to the 18th century. It concluded that “structural breaks marking increased price volatility are followed by breaks marking declines in volatility so that there is no upward or downward trend in volatility over time” – but of course this does confirm that there are periods of greater or lesser stability and we do appear to be in one of those at present.
Another factor that may lead to this impression of increased volatility is the speed of technological change. An article in the Financial Times recently suggested that the period of competitive advantage from innovation has reduced by more than 90% in the last 150 years. So to the extent that ‘volatility’ relates to ‘speed’, there appears little question that things are becoming more volatile.
In a speech at the end of 2010, Richard Lambert (Director-General of Britain’s CBI) made a compelling argument that today’s business conditions are indeed substantially more volatile, when compared to the relative stability of the previous 10 years. He suggested that the extent of that volatility is substantial and will have major impacts on the way that businesses organize, on employee relations and on the scale and nature of investment.
Volatility – and stability – are always relative terms. Overall, I will stick with the view that we are operating in a period of relatively higher volatility; and of course this matters because it increases uncertainty and therefore risks are greater. And for those in the world of contracting, it means we must structure agreements (and management systems) that can cope with this uncertainty through greater flexibility.
For any regular reader of this blog, you will be familiar with my general theme of ‘change’ (or often, my concerns over its apparent absence!).
A good example of our changing world is reflected in the findings of a recent UK court case, in which the judge has determined that a string of emails was sufficient to constitute a binding contract – and awarded damages in excess of $50m for non-performance.
Among the key points are the fact that there was no single document that represented ‘the agreement’ and there was no signature. In his summing up, the judge observed: “As to commercial good sense, it seems to me highly desirable that the law should give effect to agreements made by a series of e-mail communications which follow, more clearly than many negotiations between men of business, the sequence of offer, counter offer, and final acceptance, by which, classically, the law determines whether a contract has been made”.
Although the judge went on to say that he had been influenced by the fact that guarantees within the particular industry “are often negotiated and concluded by the sort of e-mail exchange seen in this case”, it is clear that negotiators and business-people must take increasing care to ensure that their true intent and extent of commitment is clear. With data suggesting that more than 80% of business-to-business contracts are now developed and communicated on-line, the potential for similar findings can only increase.
Agility matters because of the need to innovate. And innovation comes not only from our own ability to innovate, but also the ability to take advantage of the innovations generated by our business partners.
This matters to those in the world of contracting because contracts and the way we define and allocate risks has fundamental effect on the extent to which innovation occurs. If we allocate risks – rather than creating relationships that seek to manage them – then we stifle innovation – because the innovation itself becomes a source of risk.
So ‘good contracting’ focuses on mechanisms to manage change, on concepts such as shared risk registers; on terms and performance metrics that encourage open and honest conversations.
Today’s contracts are not agile; they tend to stifle agility and flexibility, because we try to create precision in situations where there is great uncertainty. Contracts must first be vehicles for mutual understanding and communication, a record of our expectations, promises and responsibilities, and an understanding of what happens when circumstances change and how we will deal with those changes.
Today, the one thing about which we can be certain is that change will occur and that trading relationships will need to adapt. In any agreement that lasts more than a few months, the greatest certainty is that whatever we think we want will not in fact be what we actually want.
We must therefore focus on designing contract terms that support agility.
Commitment Matters 