IACCM’s recent study of the top initiatives for 2011 suggests that efficiency and effectiveness are both high priorities.
The study, conducted in December 2010 / January 2011, sought input from senior managers in Legal, Procurement and Contract / Commercial Management. The top initiatives in terms of efficiency are focused on empowerment and improved segmentation (of contracts and support). The underlying projects to enable these improvements are based on improved tools and systems, better templates and model contracts and increased focus on service priorities.
Groups are aiming to increase their effectiveness in part through that same segmentation and service prioritization, and in part through enhancing the skills of current staff.
There are some notable variations between the different functional areas. For example, new or updated risk management techniques are a relatively high priority for those in contract and commercial management supporting Procurement, but of lesser impratance to other groups. Legal sees developing new procedures as an urgent requirement, but has a relatively low focus on automation. Reorganization is on the cards for around 40% of respondents, and there is also strong interest in steps to improve contract outcomes.
Overall, it is clear that most groups face continuing pressure to change, but hope to address this in relatively conventional ways. For example, process reengineering and outsourcing are not high on the agenda, even though workload is increasing and resulting in significnat levels of stress.
The test for many groups will be whether executive management will be satisfied with incremental change or willl demand a rather faster pace of performance improvement.
The full results of the survey will be issued this week and will be available in the IACCM member library.
There is an interesting article on the Shared Services & Outsourcing Network website on the topic of ‘Tips For Successful Shared Services Governance’.
Shared services are, of course, based on internal relationships. However, many of the underlying principles and disciplines are the same as those for an external supplier. So in reading about the things that determine the success of a shared service, it is interesting to reflect the extent to which these also apply for an external relationship.
The article highlights the importance of communication between the provider and the customer. It suggests that few services will succeed unless the provider has engaged not only with senior management, but also with the consumers of the service. It goes on to emphasize the key role of good documentation that sets out the principles of service and then the service or operating levels. To quote: “It is vitally important to see the SLA /OLA as a communications tool, an output of an agreed way of working between the stakeholder parties at an operations level; something that by its clarity helps to prevent conflict and that provides a way to measure service effectiveness. The document that encapsulates all of the above in word and spirit should be seen as a living framework for an evolving and organic relationship of transactions between the stakeholders and providers.”
The highlighting is mine – because it strikes me that these are fundamental principles which apply regardless of internal or external prvision. The article continues by pointing out that the documents are not ‘something to file away or to be used to hit people over the head with when things go wrong!’ They are something that will be amended and adjusted by agreement, as the service evolves and grows and continuous, improvements are made to process effectiveness, leveraging technology and new ways of working so these can be updated and reflected in the document.
None of this should come as a surprise, but I wonder how often most contracts pass the litmus test of these characteristics? For example, many service providers do not even have access to the internal customers or consumers. Instead, they are kept at arm’s length and required to develop proposals and negotiate on the basis set out by an intermediary (perhaps from Procurement, or maybe even a third party adviser). And we all know that many of the SLAs are not written as mutual documents with shared commitment and agreed performance criteria. Instead, they are imposed and immediately become a likely source of dispute or disagreement.
The article concludes by observing that successful service outcomes are achieved when we understand that the core agreements surrounding the service are something that must be done together – so do the contract with each other, not to each other.
None of this is earth-shattering. But I wonder how many of us can honestly say that these principles are consistently used in the negotiation and framing of services contracts in which we are involved?
Electronic signatures appear to be gaining real momentum. After many years of debate (including regular discussion at IACCM conferences), results from leading service providers suggest that the reservations (over issues of enforceability) and inertia (over questions of benefit) are at last disappearing.
Last week, I spoke with Jason Lemkin, CEO of Echosign, who had just reported 2010 year-on-year revenue growth of 120% and almost ‘3,000,000 users e-signing across the globe’. I asked Jason why this upsurge was occurring – was it, for example, primarily seen as another way to cut costs?
The answer was interesting. Jason’s view is that the driver has more to do with web-based technologies maturing than with efficiencies and cost. “Executives are saying ‘We’re doing so much on the web, why can’t we do contract signatures?'” The failure to automate is seen increasingly as not just an irritant, but contrary to the image that businesses want to project. This is reflected in the fact that new Echosign clients are not only tech companies like Google and Facebook, but also more traditional brands such as Aetna and P&G.
“Word and e-mail were great efficiency gains (for the contracting process), but management wants to see next steps. Many have invested in contract lifecycle tools and these have progressed from store and manage, to create agreements, to integration with other systems and processes. E-signing is an obvious advance – and of course, it reinforces the idea of being a company that is easy to do business with, collaborative.” As mobile devices such as the I-Pad gain adoption, the ability to sign ‘on the go’ is important to good business controls.
While Procurement has been the primary driver for many contract applications, the advance in e-signature software has been promoted more by the sell-side of the business. They are of course anxious to close business faster, to reduce the risk of second thoughts. And internal control functions welcome the increased tracking that electronic signatures offer, ensuring compliance with audit rules.
I asked Jason about the jurisdictional barriers since, in my experience, a major inhibitor to e-signing has been the concern by law departments over enforceability. From his answer, it is clear that many still require master agreements to be physically signed (with clauses enabling e-signature thereafter); this is reflected in the rapid growth of e-signing for post-award documents (amendments, renewals etc.).
“The market has been driven by US and UK multi-nationals to support their international contracting. We launched a global version, multi-language. It is certainly true that there is country variability in enforcement, but 95% of the issues can be resolved through choice of law,” obserrved Jason.
Perhaps one of the most significant comments to come from our discussion was the parting sentence.”Once your contract process is on the web, expectations of speed, collaboration and visibility grow – and that impacts on the wider expectations the business has from contracts and legal staff”.
Once again, the groups that flourish are those that are leading change, rather than being seen as reluctant or opponents.
Close to 50% of sales teams see their contracts / legal function as ‘overly risk-averse’ and ‘impeding their potential deals’. That is a key finding from IACCM’s current survey on the state of sales contracting, in which Sales also complain about ‘slow responsiveness to their needs’.
Given this data, it is not surprising that under 7% see the contracts organization as a source of competitive advantage, or facilitating external relationships. In fact, 87% see the function’s primary role as risk management and mitigation – but in the context of compliance and control, rather than partnering to ensure that business is won.
A reasonable judgment? Probably not, but it is a perception and of course, perceptions matter. They drive behaviour – such as the ‘unrealistic expectations of turn-around time’ that is an accusation levelled at Sales by their colleagues in contracts and legal. But the biggest issue is that Sales apparently often fail to set realistic expectations with their prospective customers.
These findings are just a few of the topics covered in the IACCM survey, which looks in depth at the current state of sales contracting and legal support. The study will highlight the main inhibitors to improved performance and suggest ways that these can best be addressed. And it will of course explore the many examples of good practice that are evident in the responses received, which overall suggest that there is trend to greater collaboration and openness between the support functions and their colleagues in Sales.
The survey has already attracted input by more than 200 organizations and it remains open until early February. To participate (and receive a copy of the final report), visit https://www.surveymonkey.com/s/StateofSalesContractManagement
Many contracts, commercial and legal groups struggle with the challenge of ‘user ineptitiude’ They complain about the lack of understanding and ‘irresponsible’ behavior that is common within business units and Sales organizations.
For some, that translates to a need for stronger controls and more resources. For others, there is an understanding that the best way forward is to improve the quality of information, knowledge and decision-making – but how? Providing regular training classess is not only time-absorbing, but of questionable effect. Developing an intranet is another approach – but while it is useful in some smaller or relatively simple businesses, it can be challenging in a large and complex business. For example, the time it takes for a user to navigate and find the information relevant to their specific need is often too long – so they still pick up the phone or use ‘system inadequacies’ as an excuse for doing their own thing.
This background has resulted in occcasional dialogue on the IACCM website, where members ask about ‘good practices’ when it comes to building an intranet site for their practitioner and user community. Therefore I was interested to see an article on Rees Morrison’s Law Department Management blog touching on this subject and highlighting how today’s intranet can customize content delivery to the needs of individual users, ensuring far simpler navigation and massively improved useability. A useful read for anyone who really cares about the effectiveness and efficiency of their service delivery. See it at http://www.lawdepartmentmanagementblog.com/law_department_management/2011/01/personalize-the-intranet-site-each-client-sees-so-that-they-learn-and-can-handle-more-on-their-own.html
Recently I was party to yet another tirade about the effect of third-part advisers on the quality and outcome of business relationships. On this occasion, the participants in the conversation came from both Procurement and Sales contracting, yet they were united in their criticism.
“When we see that the client has a weak procurement team and is relying instead on the advisory firm, we generally do not bid,” commented the General Counsel of one major outsourcing and managed services company. “It’s the micro-management that is so destructive’” observed a Chief Procurement Officer. “They really do not seem to understand the importance of a relationship in the performance of a long-term deal.”
The next day, their concerns were echoed in this year’s EquaTerra ‘Legal Pulse’ survey, showing that deals are becoming more complex, more contentious and more frequently making use of third-party law firms.
It is of course easy to make scapegoats in any complex business environment. And in the end, advisory firms are the servant of their client; it is not their fault if the client fails to give proper direction or maintain adequate control. Yet the advisory firm is selling its services based on its supposed expertise – and that means it should be subject to the same disciplines as any other service provider.
So what exactly do advisory firms sell? Of course they say that their experience across multiple deals has resulted in unique insights – and that is certainly true. But insights to what? It would seem often that a key value proposition is that they are better at extracting supplier concessions than the customer’s own staff would be. Those concessions are generally related to price (so they claim to save money) and to the allocation of risk (‘we will cause the supplier greater pain when they fail’). They may also claim to have superior insights to the metrics and scorecards needed to measure and monitor performance – and they highlight how important this is, given the frequency of failure or disappointment (and then of course may offer on-going services to deal with the complexity of the scorecards they advocate).
But do these attributes actually result in better deals? For example, what the advisers do not tell us is precisely what percentage of the opportunities they manage result in superior outcomes. And this, after all, is what the client should be looking for. Achieving lower charges for poor service or higher payouts for failure should not be the goal of their procurement.
So if advisory firms truly are ‘experts’, should they not be guaranteeing the quality of their services by committing to – and being rewarded on – the outcome? Where are the KPIs and scorecards for their activity? If these are the methods required to secure good performance from other suppliers, why do they not also apply to the outsourced advisory services?
There is plenty of data to suggest that most complex services deals fail to live up to expectations. Indeed, it is this that often lies at the heart of the advisers’ and analysts’ marketing. Yet since they now capture such a large slice of the market, might it not be that the levels of failure are in some ways directly related to the nature of the services they provide? Are we in a vicious circle here, where the higher the rate of failure, the more the advisers grow, and the more the advisers grow, the higher the rate of failure?
Third party intermediaries can bring tremendous value to any relationship, so long as their role is clear, its scope is defined, and it is mutually understood by all parties. Of particular importance, however, is that the client is clear about the goals, that the service is monitored and its success is measured and rewarded in a way that is consistent with the desired outcomes of the project or activity. That is the piece that seems to be missing – and as a result, we are in a world where the more the failures, the higher the rewards.
“Negotiations are becoming more adversarial”. That was the consensus view at an executive dinner hosted by IACCM in London. Heads of Procurement, General Counsels and Commercial Directors reported increasingly dogmatic behavior and ‘unreasonable’ demands.
At times of great uncertainty, conflict increases. Relationships come under pressure as confidence in the future declines.
One of the problems we face is that the tools and methods we are using to form and manage relationships are no longer approprriate to the needs of the market. Adversarial negotiations and battles over contract terms are an inevitable symptom of this mismatch. We can keep trying to address the symptoms (more resources, desperate attemtps at accommodatrion etc.) or we can use those experiences as part of the diagnostic. Contracts and negotiations can be leading-edge, or trailing-edge.
Commercial strategies face a period of dramatic change. The networked world, and the global economy it has created, operate at unprecedented speed and volatility. Traditional relationships have been undermined, but we still try to use many of the tools that were applicable in that old world of more stable, more predictable conditions. The perceived need for ever-lower prices is in conflict with the actual need for increased quality and relaibaility. The desire to have flexibility is at odds with expectations about the allocation of risk. The demand for short-term savings is inconsistent with the requirement for long-term successful outcomes. And it is these inconsistencies that become evident in the negotiation and the resulting contract terms. We are frequently attempting to reconcile the irreconcilable – and that is frustrating for both sides. It is easier to blame the counter-party than it is to recognize the fundamental incompatibility of our goals.
The real point we must address is the consequences of uncertainty. We need to recognize the fact that supply and demand are increasingly volatile; and that our business goals and long-term capabilities are often unclear or unknown. Even when we know what we want, we are often unsure about how it will be achieved. This environment creates a heightened level of risk. They are risks that are exacerbated by today’s contracting practices, which are traditionally driven by long-term agreements with committed volumes or outcomes, in return for heavily discounted prices and ‘penalties’ for non-performance.
In an uncertain world, it is clear that such contract models do not work. Customers want all sorts of termination rights and they want the ability to flex their requirements, yet at the same time they want their suppliers to be fully committed to meeting whatever demands they may have. They see ‘collaboration’ as a one-way street – I demand, you collaborate.
But suppliers are also often their own worst enemy, sending out a sales force that is motivated by quick wins and shallow commitments. For all the talk of ‘relationship selling’, most sales organizations remain motivated by commissions based on contracted revenue. They have limited interest in exploring true business needs or undertaking an honest evlauation of outcomes.
Therefore both sides – buyers and sellers – tend to enter negotiations with unreasonable expectations that are driven by historic trading and commercial models. Small wonder, then, that there is increased adversarialism.
In the next few days, I will address the question of what form the contracting and commercial models of the future should take. I think the changes are relatively clear and that there are already some excellent examples emerging. Through their advocacy and adoption, the contracts and commercial community can offer an exceptional value to their business.
Whether you call it agility or flexibility, the volatility of today’s market conditions is exposing the inadequcy of tradtional control systems. And that includes the way we negotiate and manage contracts.
Most contracts today are negotiated on the assumption of a fairly predictable set of trade-off principles. Essentially, the buyer is ready to commit to a certain volume or level of spend in return for the seller’s commitment to a price or discount and to invest in the resources required to meet its obligations. This trading model is then supplemented by a negotiation over the allocation of risk in the event of failure.
But trading conditions today are undermining these principles. Long-term commitments are becoming too risky. Needs change, markets change, competition changes, prices are volatile, new technologies emerge …. so buyers increasingly seek levels of flexibility that make their ‘long-term’ commitments of little value. They want guarantees of future innovation, or future price reductions; they want termination options; they want flexibility to make changes to volumes of spend levels. In the end, they want the benefits associated with making a commitment, but without actually committing anything of substance.
Their position is understandable, but of course it cannot be sustained. Sellers cannot plan their business based on such high levels of uncertainty. They definitely cannot afford to offer deep discounts or low start-up prices when their potential to recover costs is so uncertain.
So today’s agility demands new approaches to the way we contract. ‘Agile contracts’ also demand agile budgets and agile costing systems. Relationships become more important, to enable joint planning and operational oversight and perhaps to provide some security of supply. Underlying contracts become even more transactional and shorter-term in nature.
A consequence of this is that input prices will rise. However, operational costs should fall. That is because organizations and trading relationships must adjust to support agility – that is, speed and ease of change. Today’s inflexible systems and relationships require massive amounts of resource; the agile model will be far more collaborative and therefore far more efficient. Essentially, we need to design a control system for a speedboat instead of an aircraft carrier.
These changes are evident in the extent of contract renegotiation that we see today. It is clear that the underlying principles of many contracts simply do not work. This is true whether we are looking at long-term product supply (we are already seeing the demise of commodity price commitments) or at services agreements (such as outsourcing or managed services). Yet many contracts groups continue to use the old models and the old assumptions at a time when they should be showing leadership and creativity in designing new approaches to the formation and management of trading relationships and transactions.
Demonstrating value is one of the watchwords for business support functions today. The pressure is on to show that performance is strong – and improving.
For most in functions such as Legal, Contract & Commercial Management and Procurement, that is a tough demand. If they have any meaningful measurements of functional performance, they are typically quite narrow, they are of questionable validity and they lack external comparitors. That is why it is so important for us to establish a portfolio of standard measurements that can be used to demonstrate our efficiency and effectiveness, and the contribution we make to the efficiency and effectiveness of others.
Although many seek measurements data, few appear to like the implications of gathering the information. But IACCM is persisting in its efforts to steer the community towards more consistent discipline and to itself be able to provide valid benchmark standards. In the third phase of its comprehensive benchmark study (to which more than 700 companies have so far contributed input), IACCM is collecting aide range of performance data that will be made available in summary form to all participants.
The survey can be accessed at https://www.surveymonkey.com/s/PerformanceMeasurements
Yesterday I listened to a program about the aid industry and its declining effectiveness. It struck me that there are some worrying parallels in the field of professional development, especially for groups such as procurement and contract management that lack a robust history of professionalism.
The problems with the aid industry appear to be that today’s networked world has reduced the barriers to entry. Essentially, almost anyone can set themselves up as a coordinator or provider, establish a network of donors or contributors or supporters, and then deliver ‘services’ of some sort, without any external oversight or standards of governance.
Reduced barriers to entry result in fragmentation and proliferation. Not only is this confusing (for both the potential supporters and the recipients), but it tends to drive down service levels. In part this is because upstart providers may lack necessary skills and long-term commitment; but also it is because established providers become distracted by the new competition.
In the business world, competition is generally a good thing and forces continuous improvement. The dynamics in areas such as aid or professional associations are rather different. They are generally non-profit foundations for a good reason. That is because they need objectivity and they need to focus on their core purpose – which is to benefit users of their service, not a set of stockholders. In this environment, competition can have the effect of diverting resources away from service delivery and into more questionable areas of value – such as an army of fund raisers, or marketing and promotion.
In the world of professional development, we see the fragmentation in the form of proliferating quasi-associations. Many are for-profit, set up by individuals, consultants, conference companies, publishers etc. as a way to make money or to support sales of their goods or services. Others are less formal and may be nothing more than a LinkedIn or Facebook group. On one level, it seems good that the professional community has so much choice, but ultimately it will perhaps operate to their detriment.
For groups like contract management and procurement, there are no universal standards of practice. Unlike fields such as medicine, engineering and the law, there is no firmly established professional ethic or body of knowledge. And without this, they can never achieve sustainable professional status. Fragmentation clearly works against establishing such standards and ultimately proves inefficient and confusing for the practitioner community.
Commitment Matters 