INSEAD, one of the top European business schools, has released its ‘Top Ten Articles’ for the third quarter. Heading the list is ‘A Practical Guide To Innovation’.
Author Professor Robert Goldsmith starts his commentary with: “What does innovation mean? It used to relate mainly to products, and that’s still important. But over the last decade or so, businesses have been putting more and more emphasis on innovating new services and business models as well. In light of this, it’s time companies take another look at how they manage innovation.”
His comments echo several articles on this blog, highlighting the implications of the shift from a product-based world to one where solutions and services dominate. When Goldsmith calls for new ways of managing innovation, he confirms the opportunity for those who are engaged in contracting. If you study his examples, many depend on forming the right alliances or negotiating rights from third parties.
His observations include: “Most of the information about managing innovation available today is siloed, addressing specific issues such as technology or finance. But as the boundaries of innovation expand, more managers will need practical knowledge and tools that transcend these functional silos.”
Once again, the experience of the contracts community in taking cross-functional perspectives and reconciling their differences provides the potential for a key role in the innovation process. But this demands a readiness to move beyond the transactional and to become far more embedded in product development and product lifecycle management.
A few of the most admired contracts groups have made this transition – som eby design, others by accident. But whereas a transactional focus slows the business and makes contracts appear negative, a product lifecycle focus ensures that offerings are brought to market with the right value-add capabilities.
It is true that in theory this efficiency would require less contracts staff. But the reality is that the groups providing value are the groups that find themselves growing. Innovation should be a keyword for anyone in contracts if they want a career.
I was speaking this week with my friend Rene Henschel, who teaches law and economics at the Aarhus School of Business in Denmark. He drew my attention to a UK website which is starting to hold companies to account for their payment practices.
Rene believes that the time has come for regulation to address the creeping disease of prolonged and late payment. Sadly, I have to agree that once again, many corporations are damaging the business environment with their behavior. When a supplier incurs costs and provides goods or services, it is not OK that they have to wait 4 or 6 months to receive payment. And it is even less OK that they have to tie up resources in endless chasing of payment.
Recent input from members, as well as the experiences here at IACCM (we deal with many of the world’s largest companies) have indicated that there really is a problem. Some companies have at least been public in their intent to extend the payment period and then honor their terms. Others are doing it through subterfuge. They find nebulous reasons to reject invoices. They alter addresses without notice. We even had one example recently where they sent a check to the wrong address and then told us they had not issued subsequent payments because the first check had not been cashed!
I suspect this problem with payment periods may have been exaggerated because of outsourcing. I wonder about some of the metrics and financial arrangements that may be driving this behavior. The companies that are top of my list of bad payers are among the elite of the Global 100. I cannot believe their executives really wish them to behave this way.
Many of the companies in the Hall of Shame are in the retail sector. They have powerless customers, so they feel they can afford to upset the businesses that supply them. At least many in the b2b sector are influenced by the fact that many of their suppliers are also their customers.
I am tempted to start a Global Hall Of Shame at IACCM. I don’t want legislation. I am hoping that we can address this problem through pressure on reputation. But is it too late?
Please share your experiences and thoughts.
On CIO TalkRadio, Sanjog Aul is discussing the impact of price on innovation. In a program titled ‘Is Walmarting IT a good idea’, he asks: “IT leaders are getting aggressive about innovating and creating top line growth. So, what about optimizing IT product/services procurement and minimizing costs to the nth degree? This should, in theory, maximize profits, right? But what will we have to give up or compromise on to do this?”
The question of price versus value just won’t go away. Recent research even suggests that different people have different genetic reactions to pricing and value. Hence it may be that a role in Procurement tends to appeal to those who are by nature the skinflints of society, for whom no price is ever quite low enough. At the other end of the scale, there are people for whom there is no limit – they are by nature profligate, even when driven to borrowing to fund their expenditure.
The real problem – as Aul implies with his question – is whether aggressive focus on the price is compatible with the delivery of high value – in this case, innovation. Innately, I think we all understand that there is a connection between price and value. Of course some suppliers are more efficient and may have discovered some unique approach to service delivery, but in general we get what we pay for. If we aim for cheap, we should not complain when support and service are stripped down.
Esssentially, it seems to me that buyers face two options. Either:
- We accept at the outset a higher price for a premium service. If we know we want better support, or guarantees of performance, or regular innovation, we shoud include these in the contract, measure their delivery and be prepared to pay. The advantage of paying up-front is that we know how much this will cost and we can benchmark the options at that time.
- We drive to the lowest ‘commoditized’ price and in that case accept that many of the ‘extras’ are not included. In that case, the supplier is going to minimize scope and use change procedures to achieve a fair return. The problem with this approach is that we never really know whether the final cost was competitive.
Today’s measurement systems frequently drive negotiations to the second approach and create contention down the road, as the parties argue over what was in scope, whether the original requirements are being met, whether the extra charges are justified etc. For users of the product or service (such as the CIO), this approach can leave them cursing Procurement because they see only the downstream problems, not the up-front savings.
The real challenge for Procurement is to develop more sophisticated relationship models that enable better assessment of acquisition price versus value over time. This demands improved methods of benchmarking that create a greater balance between input cost and economic outcomes. Questions such as a supplier’s demonstrated ability to meet commitments and deliver innovation must be asked and answered. And if a supplier can show superior performance that will deliver future savings or competitive advantage, then these are attributes worth paying for.
Procurement must rise to this challenge and enable strategic business goals as well as cost optimization. Otherwise, it will continue to face calls for the creation of separate specialist groups – such as IT Procurement, or Outsourcing or Supplier Relationship Management – because it will retain an image of seeking short-term savings at the cost of longer-term value.
Years ago, I remember that I read an article highlighting the behavior of executives versus that of managers. Researchers had observed the working patterns of these groups and discovered that most of those who were destined for executive ranks were ‘networkers’. They tended to spend a high proportion of their time at the margins of their responsibility, interacting with people outside their immediate department.
Successful managers also built relationships outside their department, but spent far less time wandering the corridors and making connections.
These findings were before the internet became pervasive, before networking became in some respects much easier, but also – because it broke down boundaries – more demanding.
Networks are important. Research has shown that networked individuals are more valued and have higher status within teams. Used effectively, they offer rapid routes to information and knowledge. I suspect that today’s aspring executives are mostly avid users of business and social on-line networks. Their use of traditional network meetings also remains strong, but has become more selective.
Networks ought to be especially important to people like contracts managers or procurement professionals, because their work is focused on external relationships. Indeed, there are those who would argue that you cannot be a professional if you do not network.
IACCM is running a survey to test attitudes to networking and later this week will run one of its ‘Ask The Expert’ discussions to review the findings. As we know from previous Expert input (I think especially of Vaughn Hovey from Ohio State), the generational divide on use of on-line networks often causes workplace friction. Newcomers are impatient with the methods employed by many senior professionals; senior professionals express fear over the lack of youthful awareness of confidentiality and intellectual property rights.
Certainly at IACCM we have observed that many professionals make little use of the power that on-line networking offers. It remains alien to them and to the way they work. Old habits die hard, benefits are often hard to grasp, and there are plenty of possible problems that can be cited as reasons not to change. Many still prefer physical meetings – although in reality they often do not attend them, due to pressures of work.
What should we be getting from networks? In what ways can it assist us and what are the drawbacks? These are the types of questions that will be answered in the IACCM program. I am looking forward to it. But of course, a fundamental question will be whether anyone who is not already a networker will actually find the time to listen!
More than a third of contracting professionals have observed a fall in ethical standards as a result of current business conditions.
The IACCM survey on the global economy offered an insight to a question many have been asking – has the financial collapse led to a new sense of values in the business community? Only 4% of respondents reported an improvement.
Sell-side contract negotiators were far more negative about falling standards than their buy-side counterparts. More than 40% of those on the sell-side cited incidents of ethical failure. The commonest issues that they saw as “unethical” were aggressive attempts by buyers to impose new terms in existing agreements and to push for price decreases with no recognition of the possible consequences. The big issue for the supplier arises when there is a failure to recognize the need for any concessions or mutuality.
Payment terms are another of the most commonly mentioned topics – with a high number having experienced unilateral extensions. This is where ‘cheating’ becomes most evident. We have experienced this at IACCM. Rather than formally acknowledging that they are extending the payment period, some of the largest corporations simply take delaying tactics to avoid paying. For example, they issue invoice instructions and then change the payment center and address without notice. When asked where payment has gone, they say that the invoice was sent to the wrong address. By this means, they pretend that they continue to pay within 30 days because they shift their measure to receo=ipt of a ‘correct’ invoice.
Certainly, for IACCM, this has meant a growing number of invoices with ageing of 90 – 180 days. Not only has this damaged cashflow, but it is also costing a significnat amounnt in extra work chasing and ‘correcting’ the onvoice.
Behavior such as this by suppliers is mirrored in concerns over internal behavior, with sales negotiators highlighting the tendency of their colleagues in Sales who, in their desperation to win business, exaggerate capabilities or make commitments that cannot be kept.
Full results of the study will be announced shortly.
In a recent article, The Economist asserted that ‘big is back’ when it comes to the creation of corporate giants. It cites a variety of trends that are resulting in the emergence – and increasing dominance – of corporate giants.
These new or recreated enterprises are different from those of the past. They are nimbler, more entrepreneurial and more focused. The Economist suggests that a key reason why enterprises are back to growth is because they found the process of contracting too complex and too risky. It is easier to own resources than to contract for them.
So does this mean that the demand for contracting and sourcing skills is now on the decline? Are we about to enter an era of insourcing? Not necessarily – though perhaps our community of contract and sourcing specialists should pay attention to this perceived weakness and increase efforts to improve their contracting process and skills.
Firstly, ‘big’ can be seen in several contexts. It may mean a large number of employees, or could be in terms of revenues or assets. The real issue for many companies that want power is their ability to control and commit resources with the right competencies. Some may decide that the complexities of regulation, reputation risk and the difficulty of overseeing the performance of external contractors make reconstructing an integrated enterprise worthwhile. Others are being forced down this path because of the fiancial collapse of key suppliers (often driven to bankruptcy by the behavior of their major customers).
But for many, the benefits of flexibility, access to new ideas, avoiding the challenge of acquisition and divestiture will lead to redoubled efforts to build the right internal skills and processes to manage successful contracted relationships.
The Economist concludes that big and small companies need each other. Big is not necessarily ugly, small is not always beautiful But if their relationships are to succeed, both must become better at contracting and understand how to shape and manage their relationships more effectively.
Managers must ask themselves whether the real problem is that it is impossible to maange non-owned resources; or is the problem really that they lack the skills, systems and knowledge to do it well? Ronald Coase, the Nobel prize-winning economist, had no doubts: he forecast the breakdown of the integrated enterprise more than 70 years ago because of its economic inefficiency. His theories are even more valid today – it is the failure to develop our contracting competencies that is inhibiting their realization.
Far from going out of fashion, contracting needs a renaissance.
The next few weeks are going to see a series of exciting announcements by IACCM, related to the subject of negotiations.
First we will be releasing the results of our first annual survey on The Most Admired Companies For Negotiation. There will always be surprises – and these are welcome, because they cause debate. Amd of course a key purpose of any such assessment is to spark interest and discussion over what characteristics people really value and how some acquire them and others do not.
Just like the popular music charts, our tastes in what we consider good inevitably vary. And they also change over time and depending on circumstances. So I am confident that the winners of the study will be hotly challenged; and smart companies will be eager to learn and to understand ways that they canjoin the ranks of those admired for their negotiation qualities.
They won’t have to wait long to find out. Because in addition to the findings of the initial survey, we will also be releasing the results of an in-depth study conducted in partnership with Huthwaite. This exercise involved extensive interviews (including as it happens with many of the companies that featured on our Most Admired chart) and has enabled analysis of relative performance.
Some of the results from this second study are also sure to raise eyebrows, as we look at the impacts of negotiation excellence (or lack thereof) and contrast the effects of top quartile versus bottom quartile performance.
All in all, the exciting news is that we are at long last starting to gain real insight to the things that lead organizations to excell at contracting and negotiation. And even more importantly, we are starting to quantify the value and benefits of investing in these competencies. They really do make a diffference – and we will shortly be demonstrating how – and how much!
Last winter, many people in Europe were left shivering when Gazprom, the major Russian exporter of natural gas, turned off supplies.
European governments became nervous about their growing dependence on Gazprom and made noises about finding alternatives. Whether or not they do in fact develop new sources, the incident left many shaking thier heads and presuming some Kremlin-inspired show of strength.
In fact, the story is probably much simpler and provides an excellent lesson for anyone involved in cross-cultural negotiation and contracting.
Gazprom pipelines run through a variety of former Soviet states, such as Ukraine. Gazprom are also major suppliers to those states. The incidents in Europe appear to have been inspired by two disputes with Ukraine – one relating to their contract with Gazprom and the other because it was alleged that they were stealing gas en route to Europe. So the simple answer – in the mind of Gazprom executives – was to turn off supplies. The obligations under their European contracts were deemed irrelevant if a third poarty was somehow cheating them.
For anyone brought up in most Western cultures, and accustomed to a world of contracts governed by the rule of law, such behavior seems remarkable. The idea that an obligation could be breached in this way is itself shocking; but the fact that any company could simply turn off critical supplies to innocent consumers and businesses in the dead of winter also gave a strong ethical slant to the story. Surely such an inept display by a company seeking to expand its operations across Europe must have been politically inspired? What right-minded business executive would authorize such action, with all the resulting damage to trust and to reputation?
I spent last weekend in Kiev, capital of Ukraine, and gained insight to the answer. I stayed with friends and when I first arrived, they told me that they hoped I wouldn’t mind, but there was no hot water in their apartment. The service management company had turned it off.
My friends live in a block of private apartments – a large block, with perhaps 100 units. All services – waste disposal, heating, water etc. – are overseen by a private management company. Each resident pays a monthly fee – except that one or two have failed to pay for several months. So the service company announced that it was stopping the supply of hot water to the entire block until they paid.
The residents do not appear to find this action unreasonable or surprising. They heat pans of water; they shower at friends’ houses; they wait patiently in the hope that one day service will be restored. There is a collective resignation and responsibility.
The people in these apartments are highly educated, mostly professionals. But even the young students, brought up in the post-Communist era, are resigned to a world where individuals have no real power or rights, where high-level corruption is endemic and where your future depends primarily on who you know, rather than what you know. This feeling of powerlessness means you cannot view concepts like ethics or fairness in the same way – there is no timely or meaningful recourse and ‘the court of public opinion’ is simply resigned to an unequal world where the masses have little influence.
The optimist in me says that this will change and that international trade will be a major factor in shifting attitudes among the business and political leadership. In the end, most people want to be liked and respected, so growing integration and cross-border trading relationships are key to progress and more common standards.
However, in the interim, any negotiator or contract manager must understand that cultural values and expectations differ dramatically. If we work with partners in new markets, we must not assume that they share our view of norms or procedures. Whatever we write in the contract, however diligent our management, it is culture that will drive behavior – so be sure that it is part of your risk analysis.
Are we recovering? That is the question that seems to be on every commentator’s lips right now. And while the consensus appears to be that there are indeed a number of ‘green shoots’, there are also many warnings over the fragility of improvement and of continuing pain in areas like rising unemployment.
And then, of course, there is the question of how governments will re-balance the books, what adjustments and cuts will be needed to spending plans or what increases there will be in taxation. Many industries – especially defense, but also in areas such as IT services – wait with baited breath to discover the fate of major projects.
Those in the world of contracting are at the forefront of these issues. We observe the shifts in demand, reflected in the focus of our work. For example, in times of growth our resources are deployed primarily on structuring and negotiating new deals and relationships. At a time of recession, the focus shifts to re-negotiation or taking action on failing contracts.
Until recently, there was no doubt that most IACCM members were engaged in tactical actions to reduce costs and to push for – or resist – re-negotiation of existing agreements. Volume reductions, schedule delays, adjustments to service levels were high on the agenda. And these were inevitably accompanied (often overwhelmed) by demands for price cuts.
It was interesting to observe the buy-side focus on driving down input costs (while at the same time expressing fears about the financial stability of the supply base); and watching sell-side negotiators fighting hard to resist price reductions. Once again, this illustrated the extent of the disconnect between Procurement and Sales Contracting in many organizations. Since driving out cost appeared to be a universal occupation for buyers, then surely there was at least some lee-way for price cuts on their sales? Yet I found very few companies where this conversation and flow of information was taking place.
Similarly, the connections between accounts payable and accounts receivable often appear weak. As a result, key information about the health of suppliers and customers coud not readily be shared, even though many trading relationships cover several dimensions.
It would be nice if I could report that one ‘lesson learned’ during this recession was an understanding of the benefit that could flow from greater collaboration and better information within corporations – in particular between the sell-side and buy-side of operations. But it is clear that in general this is not the case, that there is little sharing of data or strategy between the customer and supplier negotiators and deal-makers.
A lesson that has been learned is the extent to which the worldwide IACCM member community can offer insights to the state of the global economy. With an on-line mailing list of more than 25,000 spread over almost 120 countries, IACCM is uniquely positioned to take the pulse of trading conditions. So we are running a short survey to understand whether recovery is indeed under way (see https://www.etouches.com/Globaleconomy).
One question we are asking – also on the lips of some commentators – is what impact the recession is having on ethical standards. When financial services collapsed, many said that the world would never be the same again, that values would be for ever changed and ‘materialism’ was on the decline. Some forecasters suggested that this would reflect in more ethical corporate behavior, in areas such as terms and conditions. So what is the truth? Our study aims to find out and to launch a more substantial investigation into the question of whether the world and its values have changed.
So in a few days, we will offer our insights to whether and where recovery is occuring – and the extent to which the experience of recession has impacted ethical principles in the world of business.
At its simplest ‘professionalism’ is just another word for ‘specialism’. Yet over the centuries, certain groups of specialists joined together and became relatively more powerful and in most cases, more wealthy. This was because their particular skills and knowledge were highly valued.
Professionalization carries with it a number of characteristics. Some of these remain unchanged, but there are others that alter as a result of shifts in social values and business organization.
Fundamentals of being ‘a profssional’ include the need to be part of a recognised ‘profession’. Lawyers are certainly OK on this basis; those in Procurement have some of the hallmarks; but contract and commercial managers definitely do not.
To be a ‘profession’, there must be clarity over what it is that people within it do – what sort of output or outcome they are responsible for. Underlying this activity is a well-defined body of knowledge, with a rigorous requirement for individuals to learn and develop mastery. They must demonstrate their competence through some form of test or examination, before they are authorized to operate with professional name and credentials.
These elements became embedded in societies centuries ago and certainly governed the mediaeval craft guilds. More recently, certain professions (typically those of higher value) also developed ethical and moral principles, which obliged their members to operate to certain codes of practice. While these regulated personal behavior, they also promoted the idea that the profession was dedicated to the greater good of society and that individual professionals should act with a strong social conscience.
Leading professions (those that have survived and flourished) also understood the need for continuous improvement. They sought to manage change, but they did not deny its existence. Hence they were commited to research and also required their members to undertake continuous development through on-going training.
Hence professions have offered strengths through their regulation of quality and practice in key areas of social and business activity. They attract candidates and ensure they meet and observe certain standards. But they also have weaknesses. Professions are restrictive and therefore limit the extent of change. True innovation will be challenging to many members of the profession, so they are slow and reluctant to adapt. They can also prevent the admission of ‘outsiders’, who may in fact bring new sources of value, but are perecived as being in some way ‘inferior’ and threaten the dominance (and material wealth) of the existing members.
Today, we see ‘quasi-professions’, such as business graduates from top business schools, demonstrating some of the characteristics of a profession, as they start to sign up to codes of practice. We also see greater sharing of professional knowledge, as academia promotes more generalist programs and develops ‘executive education’. Networked technologies and the demand for greater speed and efficiency are forcing many professionals to accept the need to empower others – they cannot any longer hoard their knowledge, but must enable good decisions, including an understanding of when a situation truly requires their specialist involvement. Increasingly, they must also step outside their professional ranks and combine their knowledge with that of experts from other groups, to build new processes or capabilities.
So out of all these factors and considerations, every member of the contracts, legal and procurement community has something to consider and learn as we adjust to 21st century business and organizational structures, and the expectations of a more demanding society. But some have more to do and to learn than others.
Those in the contracts / commercial field are truly at the beginning of the journey. There is growing recognition that their competency is needed and the replies to my recent blogs on ‘the role of a contract manager’ show a high degree of consensus on what this should be. Through IACCM, we are making headway on the body of knowledge and a worldwide certification standard. But many practitioners still operate as ‘talented individuals’, rather than contributing to setting standards and defining an entry and career path. For most, there is no clear and universal mission statement or description of social and business benefit. There is no commitment to continuous improvement through embedded research. There is no academic discipline to sustain and to train those of the future. Therefore, right now, there is no profession.
Professions and specialisms are changing in the netwoked world. But it is clear that they will remain important instruments of progress for society and for individuals. Those who occupy the fields of contracting and commercial management have many of the ingredients for success available to them. It is interesting how hard it can be to persuade them to grasp these opportunities and to take the steps needed to build their own future.
Commitment Matters 