So New York State has now filed suit against Intel, claiming anti-competitive sales practices. This follows suits in the EU and in South Korea, both of which resulted in massive fines (currently under appeal).
Big companies always face a dilemma in assesssing the boundaries of sales and commercial policy. Terms that can be popular with customers may not be approved by competition authorities. Many of these cases relate to discounting policies – and especially in areas like rebates (outlawed by the EU some 20 yeaars ago, but still potentially allowable in the US).
“Rather than compete fairly, Intel used bribery and coercion to maintain a stranglehold on the market,” according to New York Attorney General Andrew Cuomo. It is alleged that rebates amounted to as much as $2bn a year for major manufacturers and depended on their loyalty to Intel. If true, such sums would obviously act as a major incentive for Procurement to ensure that orders were not placed with competitors. In case this approach was not sufficient, it is claimed that Intel threatened to end joint development with customers who strayed.
Traditional Procurement measurements often play into the hands of companies that seek to stifle competition. If ‘savings’ are the main goal for Procurement, then large rebates, hefty discounts and ‘loyalty bonuses’ are very attractive. Once achieved, it becomes very difficult to switch to a competitor since they are unlikely to be able to match these terms. The fact that competition is being stifled or that innovation is being lost is not immediately evident – and when it becomes so, it is often too late.
Such tactics are only effective in situations where a supplier has relative dominance in the market. For the competition authorities, the concern is that commercial policies of this sort stifle competition, leading over time to less innovation and higher prices. The case indicates that US authorities are perhaps becoming more vigilant in their oversight of anti-trust rules – and therefore represent a warning to many large corporations as they assess their terms and conditions.
AS AN ADDENDUM to this article, it has been announced (November 12th) that Intel has agreed an out-of-court settlement with its major rival, AMD, resulting in a payment of $1.25bn. In addition, Intel has committed to a set of ‘revised business practices’, on which I will comment once they become public.
At today’s IACCM member meeting in London, more than 100 delegates heard from IACCM Chairman Tim Cowen about current initiatives on public sector contracting.
Since leaving his role as General Counsel at BT Global Services, Tim has been leading a multi-company effort to address some of the challenges in EU and UK government contracting practices. He explained how past work had demonstrated that government was often ‘shooting itself in the foot’ when it procured major IT or outsourcing services. With the emergence of Cloud computing, there is an opportunity to re-think and learn from past mistakes – or to make them all over again.
Tim described the enormous benefits that could flow from Cloud, with the opportunity to replace or sell heritage equipment and facilities. Estimates of the achievable savings to the public purse vary enormously, but conservative views suggest a minimum of £44bn. over 10 years for UK central government alone.
But many past acquisitions by government have not been successful. In some cases, they have simply failed to deliver any tangible benefits; in others, they tend to overshoot on cost and / or delivery schedules. Research has shown that much of the problem is driven by risk averse attitides and terms, which attempt to place the burden on the supplier. This approach destroys trust and inhibits openness and cooperation.
The work of the Open Computing Alliance (OCA) is promoting focus on governance through contracts. It proposes that both sides must have incentives to perform, including the allocation of appropriate resources and skills to ensure on-going project and relationship management. Tim highlighted how – despite years of evidence to show the negative impact of risk transfer – these tendencies still prevail. He highlighted the recent inclusion of ‘time of the essence’ clauses in many high-risk projects. Such terms enable arbitrary action by the buyer and discourage open discussion or mutual attention to risk.
Tim also expressed the need for greater integration and consistency across government departments. For example, benefits would flow from a consistent financial system that used common accounting standards.
The key lesson from studying years of public sector contracting for complex technology and outsourced services is that contracts which impose burdens on the supplier that do not reflect the intent or structure of the relationship will cause problems. Relationships matter. They must be supported and managed through appropriate terms and conditions that set out balanced and complementary responsibilities for performance.
I am looking forward to talking soon with Professor Guhan Subramanian, Joseph Flom Professor of Law and Business and H. Douglas Weaver Professor of Business Law, at Harvard Business School.
Professor Subranamian has been writing about what he terms ‘negotiauctions’ and the challenges of dealing with ever more complex deal-making. He perceives the business world increasingly integrating traditional negotiations with auctions in order to achieve greater value.
His ideas are certainly interesting. As previously reported in this blog and elsewhere, the indiscriminate use of auctions can be extremely damaging to key relationships and business outcomes. Yet traditional negotiation is often inefficient and tends to be more subject to personal relationships and influences. Professor Subranamian is not unaware of the difficulties that face businesses in establishing successful deals. He highlights that it is not simply a matter of agreement between buyer and supplier, but each is also undertaking internal negotiations at the same time.
This challenge of ‘doing the right thing’ came up again today, when I met with two fomer General Counsels, one from banking and the other from technology and outsourcing. Each of them was reflecting on the difficulty of overcoming organizational metrics, especially in long-term deals where value is not achieved at the point of signature. They discussed how Sales motivation systems and Procurement measurements still hamper the creation of longer-term value and tend to drive to less efficient and more acrimonious relationships.
So I have a lot of questions in store for the Professor and I am sure many IACCM members will look forward to hearing him on a future Ask The Expert call, when they too can seek answers on the ways that Negotiauctions may help us do better deals.
Another of the topics discussed at the recent IACCM meeting in Boston was the growing use of Codes of Conduct or Codes of Practice by many corporations.
Despite recent rejection by a US court of complaints brought against Walmart for a claimed breach of its Code, there is still uncertainty over how courts may view such actions in the future. But regardless of the legal implications, we must assume that executives introduce such codes because they are considered important. In most cases, they tend to address key reputational issues that could adversely affect brand image and value.
Richard Cellini, of Integrity Interactive, highlighted the challenges in overseeing such Codes. “Management needs help with issues around ethics and compliance – staying out of trouble”, he observed, citing a range of examples including Siemens, BAE, Mattel, Pfizer and the many other complaints and fines over issues such as data privacy. “In the end, these incidents have far more visible impact than topics like liabilities, indemnities and choice of law.”
The discussion centered around the role of contracts and sourcing staff in overseeing and managing the implications and actions associated with Codes of Conduct and corporate social responsibility. “These initiatives are viewed by many as ‘off-contract'”, commented one, “And that means they are not seen as relevant or part of the job role.” But in the end, these ‘promises’ are also commitments and breaches clearly represent risk – both areas which are without doubt considered within the general job role and competence of contracts staff.
There was also discussion of the complexity in overseeing such Codes, especially in a multi-national / multi-cultural environment. With regulation increasing – for example in areas like product origins and employee work status – there is growing need to consider where responsibilities for compliance should lie and the extent to which these need to be reflected in contracts. Today, term and condition implications are often ignored, or alternatively are poorly enforced.
“Regulated industries are often the worst”, said Richard. “Having invested in large compliance functions, management often deludes itself that they have achieved control. But without the right interfaces and tools to manage their trading relationships, this control is simply a mirage.”
In the US, those leading the administration’s contract reform initiatives have apparently condemned ‘relationships’ because these are seen as too ‘cozy’. Certainly, recent criticisms of defense procurement (with suggestions of tie-ins between major contracts and campaign funding) are just the latest in a series of events that rightly lead to concerns about the closeness of relationships between key decision-makers and promote a need for improved oversight.
Yet at the same time, we have IACCM members on both the buy-side and sell-side complaining about the weakness of relationships and how this prevents the delivery of value. For example, in last week’s webcast on The State of The Global Economy, one senior Procurement representative bemoaned the problems they have in re-opening negotiations on contracts affected by the recession. “We don’t want to simply push down prices or extend payment terms”, she commented. “We want to have a full discussion on how we can work with our suppliers to rebalance value. But it seems impossible to get most of them to engage.”
I think there is a common problem that underlies these two very different issues. It is not that we lack relationships – but rather that we lack the right relationships, because we tend to see them predominantly in terms of people rather than organizations.
When I ran large business functions, or led organizational change, I was frequently frustrated by the insistence of business units that they must have dedicated and named individuals to provide services. The fact that this drove inefficiency, higher cost and frequently resulted in less skilled service provision seemed to count for nothing. There was a belief that a dedicated interface (ideally physically located with ther teams) would result in better understanding of needs and more commitment to delivery.
This same mentality often pervades the use of the Sales function and its interface to customers. When acting as a coordinator of needs and resources, there is great logic to dedicated Sales resource (though the frequency with which sales personnel are rotated often begs questions over how much they really understand the customer). However, there are many in Sales who tend to keep the organizations at arm’s length – they protect their position and perceived value by limiting direct contact.
And regardless of whether or not individual sales representatives have the right motivation, the truth is that organizations are not good at building relationships at a business level. For example, most contracts define a range of interfaces and contact points for notices, for change management etc. Yet work by groups like Integrity Interactive has shown that in a majority of cases, these are out of date – addresses, phone numbers, e-mails are simply wrong.
So the real challenge, in my opinion, is for us to move beyond relationships that depend on individual executives and sales representatives (and are thereefore unduly subject to behind the scenes and ‘cozy’ agreements) and to move everything into the spotlight of proper interfaces and governance. There are many options on how this can be achieved (groups like Integrity Interactive are specialists). It also demands a wider range of interfaces – for example, between contract managers in the respective companies – so that when the world changes they can rapidly and intelligently discuss how to adjust the existing agreements, as well as providing the ‘independent oversight’ that legislators increasingly view as fundamental to improved corporate goverance.
With modern technologies, we really do not face the stark choice of cozy and unethical versus arm’s length and adversarial. What we should be doing is ensuring personal relationships are balanced by robust and sustained organizational relationships. And embedding these principles into our contracting would be a great place to start.
What exactly is the future of Procurement?
I believe this to be one of the big questions right now. For years we have heard that Procurement is becoming ‘strategic’ and that CPOs are ‘at the top table’. Yet the very fact that this is still so often stated reveals how far it is from the truth. In most companies, Procurement remains highly tactical and its role is largely about achieving low cost, reliable sources of supply. Its performance metrics reflect this.
These are important tasks – and arguably have become more so with the advent of outsourcing and the move towards solutions and services. But it is precisely these trends that raise fundamental questions over the role of Procurement. Acquiring and managing solutions and services requires very different approaches from the acquisition of products and supplies, and traditional Procurement functions are largely struggling to adapt.
It is becoming steadily more clear that concepts such as commoditization frequently damage business results. It is also the case that modern technologies can replace traditional purchasing roles and empower business units to undertake many tasks without the need for dedicated ‘professionals’. Yet many groups seem trapped in these activities and unable to break into the higher value areas that demand focused attention.
The areas that are strategic and have become critical relate to more complex make / buy decisions based on analysis of costs over time (e.g. insource versus outsource; offshore versus nearshore etc); more sophisticated negotiation and risk management techniques; and on-going contract and relationship management, including especially the management of change.
These are areas in which many Procurement groups are struggling to gain traction. In some cases it is a failure of leadership, or because of an absence of necessary skills, and in others it is simply that executives do not trust Procurement to do the job or do not want to risk diverting them from traditional cost-cutting. As a result, there is often fragmentation of roles – for example, specialist groups spring up to handle IT contracting, or outsourcing, or sub-contracts; others are developed to handle post-award contract management and Supplier Relationship Management. While some of these specialists come from the ranks of traditional procurement, many do not. And frequently there seems to be a real lack of cooperation and respect between these groups – indeed, they behave as rivals.
The overall picture is therefore one of real uncertainty. Threatened by technology in the performance of its traditional role and threatened by new, specialist groups in the roles of the future, is Procurement in fact in danger of being squeezed into steady and continuing decline?
IACCM’s recent study of the global economy revealed growing concern about the impacts of the recession on business ethics. In particular, many commented on the extent to which sales representatives were over-committing or overstating capabilities.
A report by CSO Insights on sales compensation and performance management offers useful perspectives on why this may be happening. Based on input by more than 1,000 companies, the research reveals growing pressure on sales teams from higher quotas – in many cases up by almost 40%. As a result, the percentage who make quota has fallen – down by more than 10% in the last year, to just over 50%. When combined with delayed deals and longer sales cycles caused by the recession, it is not surprising if many sales people feel a sense of desperation.
There are many problems associated with over-commitment. Most obviously, it undermines trust – both by customers and by those who support sales. This tends to make negotiations far harder and causes both sides to push for protective terms.
Interestingly, the biggest single reason identified by sales as the cause of losing business is ‘the competitors price and terms’. This was highlighted by 79.6% of those responding. Product superiority comes a distant 4th, with just 22% citing it as a cause. So again, our community may well be at the forefront when it comes to observing overcommitment – and perhaps we should also be at the forefront when it comes to driving change.
If this is something that Procurement, Sales Contracting and Legal care about, what can we do to fix it? The CSO Insights report is blunt about the problem. “Companies elicit the behaviors they reward”, it states, commenting that “Compensation plans typically track three or fewer metrics”. Not surprisingly, those metrics have no connection with ethics or terms and conditions.
Sales compensation schemes are generally believed to be relatively effective in driving sales behavior, but they cause focus on new accounts, new products, farming existing customers and cross or up-selling. Utilizing the established sales process comes 8th on the list of behaviors – with just 22% adherence. Sales also show little interest in sharing practices or accurate forecasting, because while these are declared priorities, they are not rewarded as practices.
Many complain about the narrow metrics of Procurement groups, focused strongly on driving price reductions and claiming notional ‘savings’. This is the direct counterpart of revenue-driven sales activity. Far too often, neither side is directly interested or motivated by outcomes, beyond getting a contract signed. While this continues, the contract inevitably becomes a battleground for honesty and protection – and meaningful collaboration (internal or external) is a victim.
In an ideal world, those involved in negotiating and managing contracts would push for more balanced and appropriate performance incentives and metrics. Certainly this is an area where we should seek to exercise greater influence. But at a more immediate and practical level, we should also consider ways that we can facilitate better deals with more appropriate terms and processes.
For example, one key pressure for sales groups is the amount of time they spend overcoming internal barriers to higher productivity. In many organizations, up to 25% of sales time is spent on contract-related issues. Perhaps if we tackled those inhibitors and freed up more sales time, they could afford to be more honest. And second, if indeed price and terms is the most important reason for losing against competition, what are we doing to address that concern and ensure the terms we offer equip us to win. Indeed, how often do we even know what terms our competitors are offering?
So before we cast too many stones at our colleagues in sales, it is perhaps time to examine whether we are truly doing all we can to assist their success – and the prosperity of our company.
The recent award of the Nobel Prize for Economics to Elinor Ostrom and Oliver Williamson should be a source of excitement and pride to those in the world of contract management. It endorses the critical importance of good contracting in the delivery of business value – and confirms the need for professionals to focus more on finance and economics.
Both of this year’s winners drew their inspiration from the work of Ronald Coase, oft-cited by IACCM for his contribution to understanding the economics of trading relationships. Williamson in particular has continued that work, by seeking to understand when it makes sense for companies to in-source versus outsource.
Professor Coase established that economic logic would suggest that companies should be less efficient than markets – and therefore purchasing goods and services would cost less than providing them through internal resources. However, this theory depended on the costs associated with determining the market price and engaging an external supplier. At the time he was writing (in the 1930s) these costs could be prohibitively high.
The growth of networked technologies changed the cost equation. Searching and transacting has become much simpler and quicker, leading to two massive changes in recent years. One of these is the dramatic growth of outsourcing (and the resulting break-up of traditional enterprise organization); the other is the drive towards ‘commoditization’ and the endless search for lowest cost sources of supply, regardless of geography.
Professor Williamson’s work has sought to define the limits of this new efficiency and he has confirmed that the savings from a ‘spot trade’ mentality are steadily lost when transactions become more complex and when they depend on the parties forming a meaningful relationship. These findings are important for several reasons:
- We must become better at recognizing when it is more efficient to use an external contracted relationship than to do something internally.
- We must understand the limits of ‘auction’ behaviour and the extent to which a focus on the market price may obscure the true cost of acquisition.
- As The Economist recently observed (Reality Bites, October 17th), “writing and enforcing contracts which take every possible eventuality into consideration (is) difficult, or even impossible”.
Contracts (and therefore the jobs of those who create and manage them) exist to bring discipline to trading relationships. Smart contracting understands the nature and the scope of the contract required and also its limits in defining and managing the required relationship. For our job to bring value, we must be adroit at shaping the relationship with an appropriate form of contract and then applying the right resources to its management, to deal with the level of uncertainty.
Most importantly, this Nobel award confirms the fundamental economic importance of contracting decisions and the need for contracts professionals to focus primarily on economic value and only then on the containment of business and legal risk. If we ignore the economic imperative, we will frequently end up in the wrong relationship.
My expertise is not in training. Indeed, I must confess that I generally tried to avoid training courses because I found ‘real work’ more interesting. During the course of that ‘real work’, I discovered many fascinating things and people – and I learnt a lot.
Yesterday’s Financial Times carried a supplement on business education. Under a headline ‘Applicants flock to the global village’, it explained that demand for multi-continent Executive MBAs has increased during the current recession – against a backdrop of falling demand for all other EMBA programs. In interviews, candidates highlighted the importance of learning across cultural and political boundaries. They also described the tremendous value of seeing questions from other perspectives – and how this not only challenges their own views, but often leads to different and better answers.
I was delighted to read this, because it endorsed my view that so much of my learning has come from being open to outside influences and recognizing that good ideas and innovative thoughts come from anywhere, without regard to geographic boundaries. And of course, this is one of the underlying philosophies for IACCM, which has created a true ‘global village’ for those in the world of contracts and relationship management. Through its website, members can network with their peers and counterparts around the world. They can dwell in ‘communities of interest’, to discuss topics of mutual concern. And they can enrol in Global Managed Learning – interactive web-based programs of training that include participation with multi-cultural students from around the world.
Over the years, I have realized that I did not like traditional education and training because it was something that was ‘done to me’. What I did enjoy was participative programming that enabled me to engage with other students with different and distinctive experiences and viewpoints. So I can understand why these multi-continent MBAs would be interesting. And I can see why participants can gain so much from IACCM Managed Learning. Of course, an EMBA combines virtual and physical classes, whereas the IACCM program is entirely virtual. But the IACCM experience costs just 0.75% (yes, I do mean less than one percent) of the price of the average EMBA – so I guess when it comes to practicality and value, it is not surprising that we too are seeing such strong growth!
It was heartening when earlier this year President Obama acknowledged the key role of contract management in delivering successful acquisition and project outcomes. As apart of that acknowledgement, he announced a contract reform initiative.
Now, the indications of where that reform may be headed are deeply worrying. They appear to be headed in completely the wrong direction.
- I am told that the word ‘relationship’ has been almost banned by those leading this work. They take the view that a large part of the problem has been that ‘relationships are too cosy’ between Federal acquisition staff and suppliers. That may be true and it is certainly legitimate to question the way that relationships have been formed and run. But it is fundamentallly wrong to beleive that relationships do not matter and that they should be fully arm’s length. What is needed is good relationship segmentation adn the implementation of approrpiiate contracts and contract management techniques. Cutting communication and limiting information flows is fundamentally the wrong way to go; what is needed is rigor and discipline in the way they are managed.
- I am also told that the new mantra is to go with fixed price contracts and let suppliers suffer if they fail to deliver. The idea is to pass yet more risk to the supplier. Once again, history should tell those behind such an idea that it simply does not work. Critical projects require competent, collaborative management, not adversarial relationships. The real answer here is to introduce improved economic governance through high quality contract management. Maybe the real problem is a lack of the necessary skills.
- A key goal is to save money, though part of this is of course to ensure that projects succeed. As IACCM research has shown (eg the joint study with Rand Corporation in 2008) risk averse public procurement policies and rigid approaches to contracting cost Government (and the taxpayer) dear. The study revealed that such approaches lead to price escalations of 28%. That represents a massive potential for saving – and a much more intelligent approach to its realization.
- It is said that the Obama initiative has been translated into ‘no more outsourcing’ – and in fact reversing some exisiting initiatives. Again, not a smart move. The Government should be looking at ways to consolidate services and to break down the separations between government departments. The fact that existing contract processes have not always been appropriately skilled to manage outsourced relationships is more likely the real problem. Bringing things back in house will not fix the problem and is likely to add further to costs.
- Apparently the Government will hire thousands more contract managers. Unless they think again about the role of these staff and the training they need to flourish in a 21st century economy, this too is unlikely to bring relief to the problems.
I hope that the stories I am hearing are not true. But if the above ideas are even being considered, it is time to think again. Our world has changed. Contracting must be used as a tool to drive quality outcomes. Contracting can only be effective if it supports required relationships. Those relationships must deliver economic benefit to both sides and must be based on a reasonable sharing of risk. And supporting this new world, there must be appropriately skilled individuals who understand ethics, who have imagination, who are ready to innovate and who recognize the critical role of information flows and proactive risk management.
Commitment Matters 