The economist Dambisa Moyo has written a new book, ‘How The West Was Lost’. It suggests that Western supremacy is being eroded by years of flawed economic policy and urges radical steps to prevent the emergence of China, India, Russia and the Middle East as the new economic ‘super-powers’.
In a critique of the book, former UK Chancellor of the Exchequer Nigel Lawson made an insightful observation. He commented that Ms Moyo, in common with many in the United States, sees economics as a ‘war’, in which there are winners and losers. In reality, economic growth is something that can be shared – and indeed, if conflict is to be avoided, it must be shared.
This adversarial, winner- loser thinking has also come to permeate the world of business. Power is used to extract short-term economic gain at the expense of longer-term sustainability. This is nowhere more evident than in many contract negotiations, dominated by extracting the lowest possible price.
In a global context, the tensions created by adversarial economics are obvious. Such an approach limits the ability to cooperate and sets the stage for ultimate ‘revenge’. Those who view themselves as professional negotiators should be at the forefront in advocating approaches that create win-win economic outcomes. To achieve this, we must stop selecting trading partners based on the lowest price and instead focus on compatibility of organizational culture and synergy in long-term goals. It is on those foundations that we can achieve continued growth and superior performance.
Last week, IACCM asked its executive members (heads of Legal, Procurement, Contract & Commercial Management) to share their goals and major initiatives for 2011.
‘Survival’ was the succinct response from one. And while others appear to have more targetted plans, the results to date do not suggest the community is poised to make radical changes in the way it is structured or the value and extent of the services it provides.
Of course, this could be because senior managers are confident that they have already taken the necessary steps to adjust to the today’s challenging business conditions. Or it might be that they feel so overwhelmed by operational demands that they cannot spare time for fundamental change. In which case, they too are probably focused more on survival than on transformation.
Thee is recognition that times are demanding new approaches. For example, 85% see a need to upgrade current functional skills and over 70% plan to re-align resources based on better segmentation of business and market demands. There is widespread recognition that procedures must change and contract templates be updated. But less than 15% see any need to improve their collection and analysis of business or market intelligence; and only 21% have an interest in assessing or benchmarking their current capabilities.
These results imply a much greater focus on improved efficiency rather than increased effectiveness. It appears to be more a reaction to conditions than a readiness to take control and offer leadership. Perhaps that is inevitable. Researchers suggest that only about 5% of any group are ‘innovators’, with perhaps another 15% ready to follow those leaders and be among the first to implement. Which leaves 80% as followers – or would-be ‘survivors’.
Perhaps those statistics apply even when it comes to functional heads. In which case I guess we will continue to see quite substantial shifts over the year ahead, as disappointed corporate executives decide to re-organize the function or appoint new leadership.
To participate in the IACCM survey and compare your plans with those of your peers, visit https://www.surveymonkey.com/s/iaccm2011
Data suggests that many organizations have seen the volume of service and solution contracts more than double over the last 10 years. This surge has placed tremendous pressure on tradtional resources and management systems, many of which have not adjusted to the needs of managing such relationships.
Services and solutions contracts demand far more intelligence and support than traditonal product agreements. That’s because requirements must be better defined, commitments more clearly aligned and outcomes / outputs more actively managed. The probability of performance issues or the need for renegotiation is also higher.
These factors place pressure on resources and create stress on procedures. Very few organizations – buy-side or sell-side – have invested in planned development of their contracting capabilities. Research shows that this has resulted in lengthening cycle times and an increased percentage of contracts resulting in claims and disputes. Of course, in some high-profile cases, there have been enormous failures and a high volume of outsourcing and managed services contracts (estimates suggest up to 70%) do not achieve expected goals – for either party.
A few organizations have mastered this challenge and built the contracting and commercial capablities needed to flourish in an outome-based world. They have restructured to address the complexities of a global economy. They have developed processes and systems that enable flexibility and adaptability in the face of continuous change.
It is around these themes that IACCM has built its 2011 conference series, with its three regional conferences this year focussing on the world of services and outsourcing. It has assembled speakers from many of the companies that are showing leadership in this field and are ready to describe how the global networked economy and the transformation to a service-based model has impacted their operations, their contract standards, their commercial organization and their contribution to business results.
The agenda – and registration details – for the first of these events, to be held in Orlando on March 1st – 3rd, can be seen at www.iaccm.com/americas.
Many of us use the term ‘negotiating’ in a generic form, giving little thought to the variations in approach that are demanded by different circumstances.
In recent days, a couple of excellent examples have come my way and seem worth sharing. The first is from an in-house lawyer, making reference to IACCM’s annual study of the most negotiated terms.
“Proving value as in-house counsel and as a law department is a constant grind. Should we negotiate clauses that we’ll never litigate? Do we ever litigate contracts? Or, as we say at my company, do we just “manage the suppliers to death” when they are in breach? To wit: we rarely litigate, but we’ll negotiate firmly because (our customer) expects us to do so in order to protect the prime contract performance or security interests (export control, classified material, FCPA terms, etc.). Sometimes that makes sense, sometimes it does not. Are we “disrupting commerce” by negotiating fiercely on clauses that are never litigated or that provide very low risk margin, under the risk formula: B>P*L (does the Benefit of doing the deal outweigh the Probability times the Loss)? Relationship dynamics are key. We deal with the same customers on prime contracts over and again, and we deal with largely the same pool of subcontractors across several prime contracts. Consistency in dealing should be paramount to sustain those relationships but in a big company, our various lines of business and programs often treat both the customer and supplier vastly different. Adding value may be getting to yes, it may be in mitigating risk, and it may be in getting it just right through balanced risk.”
Adding to this set of challenging questions, IACCM member DC Toedt alerted me to an excellent (and unfortunately anonymous) blog that does a great job distinguishing between ‘a deal, or transaction’ and ‘a relationship’. Here is an extract:
“A transaction is a quick, short-lived exchange. It’s about this deal, these terms. Get a signature, and you’re done. Negotiating relationships is a process with no clear beginning or end. Your goal is to build sufficient understanding, comfort and trust between parties that you can work together now and in the future, under conditions that enable both sides to prosper.
There are other critical differences:
- In a deal, the party you are negotiating with is, to a large extent, your opponent. In a relationship, the other party is your preferred partner.
- Deals are about getting as much of what you want as you can carry away. Relationships are based on fair division and joint burden-sharing.
- In a deal, you hold yourself aloof from the other party: hiding information, guarding your responses, pressing your position. In a relationship, you are more relaxed, open, and natural: sharing information and truly seeking to understand and resolve differences.
- In a deal, you may exaggerate the strength of your position or try to trick the other side into giving in. Successful relationships are based on honesty, reliability, and follow-through.
- Deals are static, inflexible, with exhaustive contracts intended to guarantee that every term and condition will remain “carved in stone” until the transaction is completed. Relationships are also based on fundamental agreements, but they are more accommodating, less rigidly detailed. Because relationships take place over time, change needs to be anticipated and managed constructively rather than ignored because it falls outside of the scope of the initial agreement. Relationships are dynamic, not carved in stone.”
As the blog rightly points out, not all deals require relationships in order to succeed. But often negotiators fail to distinguish their focus and behavior based on whether the desired outcome is a transaction or a relationship – and that goes to the heart of the initial quote from the in-house attorney.
This brings to mind a third quote which came to me several years ago, when researching the differences in approach to negotiation between the East and West. One of those we interviewed made the comment: “Westerners negotiate transactions from which relationships might follow; Easterners negotiate relationships, from which transactions will follow.”
That difference is quite fundamental in the style and approach it induces. In the West, we have tended to let legal risk perspectives cause us to be adversarial and ‘transactional’ in the way we approach our trading partners. Collaboration occurs in spite of the contract, not because of it.
There is no absolute of right and wrong in the way we negotiate, but I hope this blog will give all negotiators pause for thought and to ask themselves the question of how best they deliver the right value and the right outcomes for their business.
The stats helper monkeys at WordPress.com mulled over how this blog did in 2010, and here’s a high level summary of its overall blog health:
The Blog-Health-o-Meter™ reads Wow.
Crunchy numbers
A helper monkey made this abstract painting, inspired by your stats.
About 3 million people visit the Taj Mahal every year. This blog was viewed about 57,000 times in 2010. If it were the Taj Mahal, it would take about 7 days for that many people to see it.
In 2010, there were 190 new posts, growing the total archive of this blog to 376 posts. There were 3 pictures uploaded, taking up a total of 376kb.
The busiest day of the year was March 19th with 795 views. The most popular post that day was Who Owns Contract Management?.
Where did they come from?
The top referring sites in 2010 were iaccm.com, linkedin.com, iaccmlearning.com, supplyexcellence.com, and en.wordpress.com.
Some visitors came searching, mostly for contract manager responsibilities, contracts manager role, ease of doing business, and value / measurements of contract management.
Attractions in 2010
These are the posts and pages that got the most views in 2010.
Who Owns Contract Management? March 2010
The Role Of A Contract Manager August 2008
The Role Of A Contract Manager – Revisited April 2009
Contract & Procurement Metrics January 2010
Contracts & Procurement Experts Beware! August 2010
I recall some years ago, when researching for a presentation, I discovered the origin of the word ‘mystery’. It was a mediaeval term, used to describe the craft guilds and their hidden practices and methods.
Those craft guilds were the fore-runners of today’s professions. Now, as then, there is a tension between the obvious merits of specialization and the maintenance of high standards of practice, versus the inclination to create barriers to entry and to resist change.
This conflict is especially evident in the legal profession and, by association, it affects many contract and commercial managers. As an article in The Economist points out (‘Offshoring Your Lawyer’), there is widespread belief that lawyers are inefficient and overpaid. In large part, this is because they often fail to distinguish high value work from routine and low value tasks. Respect for the judgment of a good lawyer can be undermined by frustration over the profession’s reluctance to innovate and its insistence that repetitive activities require the intervention of high-paid professionals.
The practice of law definitely demands thoroughness and sound investigative techniques. But so do fields such as medicine, scientific research and engineering. In each of these, there are many lower level (and lower salaried) positions to undertake supporting or peripheral roles. In addition, technology has made major inroads, enabled by a readiness to record experience and define patterns that enable the application of consistent methods to generate rapid results.
Many legal jobs are routine and could be conducted far faster and far more cheaply than they are today. The same applies to contract management. Work could be automated; it could be outsourced; it could be transferred to the client.
At present, the focus for change appears to be on the external law firm, where costs have risen and billing practices are widely regarded as unsustainable. The Economist forecasts a surge in outsourcing and a consequent ‘squeeze’ on the profession, especially in the United States (where the number of lawyers has continued to increase). This will drive many to look at careers in related areas – such as contract and commercial management. Hence we already see a growing inclination by in-house legal groups to assert territorial rights over all contract-related activity.
Lou Gerstner, when he was CEO of IBM, made the observation that ‘contract management is far too important to be left to the lawyers’. He is right. Many lawyers can excel at contract management and some General Counsel are visionary leaders. But contract management is a business discipline, requiring wider knowledge and talents than those taught to the law graduate. It demands judgments that take account of the legal issues, but are not subjugated to them. Mr. Gerstner understood this. He felt that contract management was all about brand image – that is, supporting the brand’s reputation and demonstrating its quality and trustworthiness.
Does all of this really matter? I think it does. As another Economist article (‘The Tyranny Of Choice’) points out, we are increasingly overwhelmed by the volume and variety of products and services at our disposal. Research shows that increased choice creates confusion and delays decisions. This plays into the hands of those who focus on their brand image. “Brands simplify choices. They are a guarantee of quality or consistency in a confusing market, and a badge of trust.”
So as we enter a new year, the need to improve the quality and value of legal and contract management services is pressing. And so is the importance of distinguishing between them and ensuring that each, in its own way, is contributing to external perceptions of trust and quality.
A high proportion of people think that life today is more confusing than it was 10 years ago. An overwhelming majority of contract and commercial staff feel they have to deal with ever-greater complexity. Over 40% lie awake at night trying to resolve problems.
Increased choice appears to lie at the root of these 21st century challenges. “Expectations have been inflated to such an extent that people think the perfect choice exists.” A consequence is growing indecision, confusion and expectation that every acquisition can be customized to our precise needs.
These trends have had substantial impact on trading relationships and those in functions such as Procurement and Contract Management. The management of choice has become a far more important discipline, with growing executive expectations of the benefits to be achieved – and frustration when their aspirations are not met. As a result, we have seen increased pressure on suppliers and heavy investment in the tools and resources to support their selection and management.
Yet has the explosion of choice actually led to improvement? In general, the answer appears to be yes. Overall global wealth has increased at an unparalleled rate, driven by rapid improvements in productivity and reductions in prices. Suppliers have been forced to differentiate through more creative solutions, better quality, higher levels of customer service.
As we enter 2011, far from a reduction in the volume of choice, it appears the trend will gather pace. The continued emergence of new competitors from emerging markets, plus reducing barriers to market entry, suggest that the Procurement and Contracts community will face growing complexity. As we are already seeing, this is likely to be handled through increased segmentation of relationships, with the sale and acquisition of commodities, solutions and strategic products or services demanding major variations in approach and resources. It is this evolution on which we should be focussing our plans for the year ahead.
The airline industry is in the midst of a fascinating transition in its commercial delivery and pricing model. It is worthy of study by all commercial practitioners.
It is not so long ago that the industry had major protection, with many airlines in state hands and virtually all distribution occurring via travel aegncies.
Deregulation combined with new network technologies to undermine that model. But the industry has struggled to establish a new distribution and competitive charging approach. It remains locked in battle with some of the on-line providers (for example, American Airlines lawsuit against Orbitz) and is generating increasing anger over the lack of transparency in pricing (for example, all the bolt-on ‘extras’).
There ae complaints that the airlines are trying to restrict price shopping and comparison. These may be valid – but on the other hand, which other industry sector facilitates such comparisons through a common distribution network? And it can certainly be argued that one of the industry’s problems is its inability to charge economic fares.
At the same time, residual regulation continues to limit competition and prevents the elimination of uncompetitive providers or the next level of industry consolidation. It is taking too long to establish truly global, integrated providers.
It is a complex industry and a a great case study for anyone in the commercial world. What do you think should happen to pricing and distribution methods, to ensure a high quality and competitive service for the traveler?
A few years ago, I wrote a definition of Commercial Management for Wikipedia. It was:
‘Commercial management is a term used to describe the non-technical business disciplines within a company or organization, particularly the administration of revenue and expenses to generate a financial return. Commercial management within an organization is applied at both policy and transactional levels. Commercial policies relate to the rules or practices that define how business will be conducted and the standard terms under which external relationships will be formed and governed. Many of these policies are reflected in the terms of any contract in which the organization engages. At a transactional level, commercial management is applied through the oversight of trading relationships to ensure their compliance with business goals or policies and to understand or manage the financial and risk implications of any variations.’
As this definition makes clear, the primary purpose of commercial management is to ensure healthy financial returns. The contract is a mechanism through which these returns are enabled and safeguarded.
There is growing evidence that the academic world has grasped this connection. But in business and the public sector, integrated commercial and contract skills remain rare. Capability is typically spread across multiple areas of the business, with no clear point of coordination or accountability for results. In those organizations where there is a dedicated contract or commercial resource, it is often focused either on overseeing broad compliance with the policies and practices mandated by others, or it manages transactional exceptions. The examples where commercial management teams are truly engaged with the strategic development of the business are relatively rare.
In a simple world of relatively consistent rules and long-term trading relationships, this absence of dedicated commercial skill would not much matter. But our world is not simple; it challenges us with speed, diversity, innovation and unpredictable events. Therefore the ability to view opportunities and relationships through the prism of a cross-functional lens has become essential. Organizations that treat contracting as an administrative sub-element of procurement, project management, legal or finance fail to grasp the risks and the opportunities presented by today’s market conditions.
There is a growing wealth of academic and business texts that reinforce not only the importance of commercial and contract competence, but also set out the framework for methodologies and techniques. As we enter 2011, the ingredients and the recipe for success are ready. What we now lack is a robust community and leadership that is prepared to promote its own cause and demonstrate to executive management its readiness to provide the cross-functional glue that represents commercial excellence.
My parents always taught me that if there is nothing to hide, then there is no need for secrecy.
And in fact, the great thing about the Wikileaks grand exposee of the United States is that … there really isn’t much to hide! No great conspiracy. No sustantive double-talk. In fact, it seems the US – and in particular its foreign policy – is run by a fairly high-principled set of people.
It is therefore somewhat ironic that so many US citizens would like the Wikileaks founder to be caught and punished. For what? For showing that their country is one they should be proud of? Are they perhaps disappointed that there is no double-talk and double-dealing by their top politicians? Should Mr Assange be jailed because he has confirmed that most of the resst of the world does not live up to similar high standards of honesty and integrity?
But there is a broader message in all of this – and one that is especially pertinent to the contracts, legal and procurement community. Each day, we are working across the borders between companies and organizations. Each day, we are in a position where we have to make judgments over the honesty and integrity of others – sometimes our internal colleagues, who may be motivated by personal gain, and sometimes our external partners, who may be misrepresenting or overstating their needs or their capabilities.
Our task would be far easier if there was greater openness and transparency of data and information. And in truth, Wikileaks is just an early indicator of our future because the dissemination of information is increasingly hard to control. Think about the impacts of social networking, or the growing ‘data integration’ services that consolidate global information about organizations and companies. Secrets are more and more difficult to keep. And in general, that is a good thing, because most secrets involve duplicity, dishonesty or bad faith.
The contracts community is in many ways the front line for reputation management and judgment. As professionals, I hope that we are always making true and honest commitments; and I imagine we expect that from those with whom we choose to trade. So the advent of new tools and methods to confirm the inegrity of our trading partners is something that we should master and welcome.
In the end, there is a certain irony that the country that arguably leads on openness and honesty is the one that Mr Assange has targettted for exposure. Where is Wikileaks China, Russia or Iran? The US should emerge from Wikileaks with a great sense of pride. Far from seeking to punish Mr Assange, the US public should thank him.
The real question each of us should now be asking is whether our country, or the organization we work for, could withstand similar scrutiny?
Commitment Matters 