There is broad acceptance that successful, long-term business relationships depend on trust. Increasingly, there is specific evidence that trust also plays a key role within business negotiations, especially if they are to move beyond a positional (price / risk) focus. Recognizing this point is important for any organization that wishes to build more collaborative relationships, where trading partners work together to create value and to achieve innovation.
In a short series of articles, I will highlight recent research that points to the methods through which trust is created, but this first article will focus on the major factors that in recent years have undermined trust and some of the immediate consequences.
Globalization has had a massive influence. The opening of international markets rapidly led to a belief that there were endless supplies of cheap labor and caused buyers to apply constant pressure on prices. Traditional supply relationships were cast aside; local partnerships were discarded in favor of global agreements; long-term suppliers were threatened with replacement if they failed to match low-cost providers. But having destroyed trust in its traditional supply base, organizations did not rebuild it with their new low cost suppliers. Indeed, they often made clear that they had no intention of remaining loyal and took few steps to understand the challenges of building trust across cultures.
Research increasingly demonstrates the challenge of managing in multi-cultural environments. This ranges from social research, exploring multi-cultural housing environments, to organizational research, such as multi-cultural projects. These studies have shown that developing trust and cooperation requires significant investment in understanding, in communications, in developing harmonized goals and reconciling interests. In the absence of that trust, each side remains suspicious of the other and is committed to the relationship only to the extent that their narrow objectives and self-interests are being met.
Lack of trust also becomes evident in the way that the parties perceive risk. Because they have not established the sort of relationship that inspires loyalty or understanding, they rightly see the potential for added risks. In the business world, this has led to increased emphasis on contracts and in particular on the risk allocation terms – confidentiality, non-disclosure, IP rights, liabilities and indemnities. The Legal community in major corporations has promoted ‘one size fits all’ contract and compliance models which, through their cultural insensitivity, have further eroded any sense of trust or goodwill.
As complexity grew, traditional functions and business organization struggled to keep up. Workload, together with concerns about internal knowledge levels, resulted in increased use of third party advisers – sourcing consultants, external law firms etc. But this trend often made the problem worse, because many groups abdicated responsibility to an intermediary with a distinct and typically incompatible set of motivations. Therefore the chances of trust developing between customer and supplier have been further undermined and, far from increasing the chances of successful outcomes, such interventions are more likely to increase the chances of failure.
Another reaction to complexity was to reign back empowerment and to impose compliance standards. Functions like Procurement and Contract Management are frequently measured on their ability to eliminate deviations, especially in contract terms, regardless of whether such standards make economic or business sense. Judgment is actively discouraged in the name of perceived efficiency and a mistaken understanding of risk management.
Today we find that supply risk has become one of the top concerns in large corporations. Massive investments are being made in acquiring the skills and capabilities to manage in global markets. Spend management, CRM, supplier relationship management and risk and compliance applications are just a few of the software tools. Added to these we see rapid growth in ‘interface’ or coordination functions such as project management, contract management, supply management, relationship management etc. Some are recognizing that the extra cost of these added resources may soon outweigh the savings that come from reduced prices.
Trust has been steadily destroyed and many businesses are struggling with how it can be restored, without sacrificing all the benefits that flow from a global economy. That is the question that my next article will address. (Subsequent articles will also detail an extensive reading / reference list of further sources and academic papers.)
Today more than ever, businesses hunger for innovation and creative thinking. Functional leaders often bemoan the absence of such skills within their teams and claim at least that they would like to inject these capabilities into the organization.
My experience leads me to question how sincere many managers are when they say they want more innovators. Creative thinking involves challenging the status-quo and in fact many managers are not comfortable with such challenges. One pre-requisite of innovation and creativity is an environment that welcomes such thinking and encourages its discussion.
I don’t know whether the lack of innovation and creative thinking is because most people have limited capability for it, or whether they lack the environment to encourage it. But whichever is the case, I was interested to discover an article by Evan Woodhead entitled “The Root of Active Learning: Boosting Creative Thinking and Innovative Capacity“. In it, he highlights the four big enemies of innovation and creativity and I repeat them here:
As I look at the contracts, procurement and commercial community, I see these characteristics far too frequently. The reluctance to challenge assumptions and to change habits is endemic. For example, the majority do not want to hear the results of research that suggests they are doing the wrong things. They continue to apply the old, familiar solutions and achieve the old, familiar results. It is a community that exhibits blind confidence in its strengths (for example in managing risks or delivering savings) and uses these to dismiss and ignore its fears (for example that someone will challenge these strengths and prove them to be largely illusory).
So much around us has changed. Global markets and networked teechnologies have thrust the quality and contribution of trading relationships to the forefront of any successful business. It is an area screaming out for innovation and creative thinking. Examples abound. For instance, just yesterday I interviewed Peter Brudenall, a partner at law firm Hunton & Williams, on the subject of agile development and the need for new contract models. IACCM is working with a wide array of companies on the question of ‘contracting excellence’ – what is it, how do you measure it? The Obama administration has initiated work on contract reform in the public sector. A growing number of companies worldwide are focusing on areas such as post-award contract and relationship management.
The list of desired or potential innovations goes on and on. Yet in truth, we find that only a small minority are actually interested in discovering answers that do not fit their existing assumptions, strengths, fears and habits. Creative thinking is frequently suppressed because of the challenge that it might represent.
“The bottoming-out of trade reflects a slowing of the decline in the world economy,” according to a recent article in The Economist. “Destocking may have run its course. Given its responsiveness to output, a lively rebound in trade is not inconceivable. Meanwhile, protectionism has not run riot.”
The article contains some useful data and makes a number of important observations. For example, it points to the relative resilience of trade in services – an area where destocking is not an option. In the year to April, the US cut imports of goods by 34% and exports by 27%, but the figure for services was only 10%.
As the recession started to bite, one fear was that national protectionism would grow. While there have been some moves in that direction (the US and the EU have both increased farm subsidies; several countries have raised tariffs), in general protectionist behavior has been relatively mild. The World Trade Organization has monitored a sharp increase in the number of anti-dumping cases and potential for litigation in other fields appears to be growing. For instance, the US is making increased noise about violations of labor standards as a source of unfair competition. Such litigation could constrain progress on the Doha trade talks, which otherwise show signs of revival.
In the view of the World Bank, “Countries realize that open markets cannot be taken for granted and few of them want to be seen to fall foul of their international commitments”. However, there are still threats around the corner. Recession has been eased by the collective action of several major economies to expand fiscal and monetary policy. This injection through borrowing cannot last – and when it reduces, cuts in spending and employment are bound to follow. At that point, trade barriers may once again prove tempting and become an issue for politicians facing local discontent.
One feature of such protection is of course through ‘buy local’ provisions and to date, such principles have already been attached to the trade stimulus packages in the US and China. These are obviously of greatest effect in areas of public procurement, where cuts in spending are inevitable. In the face of such cuts, reduced competition should of course be the last reaction, because that guarantees reduced services.
Other protections to date have come in the form of sectoral subsidies, of which the most glaring have been in the banking and automotive sectors. In automotive especially, there are some signs of a temptation to protect local jobs at the expense of international production or suppliers.
The overall volume of trade is of course fundamental to the security of those in the world of contracts and procurement. And freedom to establish the most rewarding trading partnerships is key to the competitiveness of our organizations. Therefore we must hope that recovery will occur soon and that it will not be accompanied by protective measures that undercut competition.
Meantime, we should be undertaking a thorough review of our own trading policies and practices, as reflected in our contracting standards and capabilities, to ensure that we are an attractive and efficient trading partner. When the upturn comes, we should be aiming to be the best.
So is Procurement a strategic function, or just carrying out orders?
On the Spend Matters blog, Jason Busch is asking ‘what will it take to turn Detroit purchasing around’. He features an article by John Campi, former CPO at Chrysler, in which poor supplier relations are acknowledged – and blamed on culture and complexity.
John’s points are not unreasonable. He suggests that Japanese competitors have innately more collaborative approaches and that they always involve suppliers from the earliest stages of design. He also highlights ways that they simplify manufacturing and move optionality to the customer interface. But neither of those points is new news – the Japanese approach has been well understood for years. It was always open to the US manufacturers to change their ways.
Essentially, this strikes me as a traditional ‘not my fault’ article. Were the heads of procurement at the major manufacturers really oblivious to the impacts that their company’s behavior was having on supplier performance and loyalty? Since so many of those concerns were aired publicly over recent years, I cannot believe this was the case.
I would make three observations on this story.
1) I could see no evidence that Procurement in the major US auto manufacturers was seriously attemtping to change the behavior of their staff. The complaints from IACCM members never changed; they felt they were battered, bruised and abused by their dealings with the industry.
2) Even internally, there was strong pushback on Procurement behavior. Groups that understood the value of supplier relationships tried to minimize their dealings with the Procurement function.
3) So we can only assume that either a) Procurement behaved as it did because that was the only way they knew how to behave and their leadership failed to address the need for change; or b) the CPO in the major auto companies was in fact powerless to infuence change and had no meaningful input or influence on corporate strategy.
Once more, I think the real point here is the warning it should be sending out to those in many other companies where Procurement continues to beat up its suppliers. Simply writing about how important Procurement is, about how strategic their role has become, will not alter the truth. A strategic role is something we earn by driving positive change in the business. For Procurement, this means rising above the transactional focus on savings and challenging the behaviors and methods that damage trading relationships and erode the loyalty of suppliers.
If the US auto industry is to survive, someone must become a champion for the supply base and understand economic value in relationships has to be mutual for them to work.
Most people understand the economic benefits that flow from growth in world trade. We may be divided on whether those benefits outweigh the potential costs in terms of social and cultural values, yet few would wish to constrain the availability of innovative products or services.
However, there are many hidden barriers to trade and these generally go unnoticed and without debate. An interesting example was highlighted recently in The Economist, highlighting just how pervasive these blocking actions can be – and it relates to lavatories.
Toto is a Japanese company specializing in bathroom and kitchen ceramics. In Japan, its ‘Neorest’ lavatory is apparently in great demand and elsewhere it is increasingly viewed as a status symbol. Its heated seat, its advanced sound system, its self-cleaning mechanism and built-in bidet make for a luxury experience (according to the Economist reporter). But the advanced features of the Neorest are denied to many because of a range of non-tariff barriers that demand extensive customization for each overseas market.
In Europe, for example, national regulations may demand brass or bronze fixtures, depending on water hardness, or different water pressure ratings. The Neorest also requires an electric outlet – banned in many European bathrooms.
The IACCM export / import regulations Community of Interest last year highlighted the growing array of regulations that inhibit world trade, delay the spread of innovation and raise the costs of international trade. They also observed the absence of any international body that effectively challenges these protectionist measures. Many have been on ths statute books for decades and reflect outdated values or protect aainst phantom issues. Yet because we do not know about them – or the effect they are having – they are rarely challenged.
We all know that a blocked lavatory is undesirable. What other blocks already exist, or may result from current pressures for more regulation? The business community depends on growing and healthy international trade. We shoudl be far more vigilant in pushing for the elimination of barriers to progress.
An IACCM member recently asked about the Association’s role in thought leadership. He cited our work on developing a Capability Maturity Model for contracting, but wondered in what other areas IACCM is showing leadership.
When the Association was founded ten years ago, there was limited recognition of contracting as a source of value. To the extent that there was focus on contracts, it was typically either about risk avoidance or administrative in nature. Most ‘experts’ were isolated individuals who had acquired extensive on-the-job experience, without the benefit of formal training. Some companies had developed pre-award expertise in bid and negotiation management and this sometimes included responsibilities for the contract, but there was no uniform understanding of the role, there was no underlying ‘body of knowledge’, there was no structured training and in general, there was no evident career path.
IACCM’s mission was to assist in the development of contract and commercial capabilities. The need for this development was a product of two powerful forces – globalization and the steady move from product sales towards solutions and services – which together made trading relationships more important and more complex. The founder corporations understood the need to build more consistent, market-responsive contracting capabilities – finding a balance between risk and opportunity.
In those ten years, IACCM has made enormous strides and many corporations and organizations have been able to take advantage of our work. ‘Thought leadership’ is an interesting concept when the space to be filled is largely a void. But IACCM has developed a range of tools and ideas that are today in common use, for example:
- Defined skills and knowledge for buy side and sell side contracting and commercial management
- A structured body of knowledge and on-line training programs
- Research and benchmarks that offer insights to current policy and practice and lead to ‘best practice’reports on a wide range of topics
Today, as I consider this question of thought leadership, I can point to the extent to which the IACCM community is succeeding:
- in driving recognition of the importance of commercial and contracting competence;
- the extent to which we have defined a more strategic positioning for commercial / contracts value;
- the methods for measurement of results;
- our advocacy of new attitudes to the purpose and topics for negotiation;
- clear linkages between contracting and the relationship lifecycle;
- the development of standards.
Any thought-leadership organization depends on the quality of those participating, their commitment to continuous improvement and their dedication to research and collaboration. Overall, as I look back on our first ten years, I am not complacent – we have a long way still to go. But I can also see how far we have come, with virtually no resources, to placing our contracts and commercial community into a new position of leadership – both in thought and action.
The importance of pricing strategy is highlighted in an article in Industry Week. It suggests many companies fail to strike the right local / global balance and therefore miss profit opportunities.
I always welcome articles on pricing because I think there are far too few of them. But in most cases, I feel they miss the fundamental opportunity that comes from better alignment of price with terms and conditions.
In most companies, prices are established without adequate reference to overall contract terms. This results not only in margin erosion, but also in failure to understand the potential for greater – and distinctive – market segmentation.
The Industry Week article falls into the standard trap. It discusses pricing in terms of country versus global strategies. Yet it misses the point that geography is increasingly less relevant as a basis for segmentation. Towards the end, the author acknowledges “The right level of harmonization will depend on the individual business. For example, a manufacturing company that sells primarily to customers that source globally (e.g. semiconductor manufacturers) needs a high degree of pricing consistency globally, and should therefore be highly centralized with limited local variability. A more regionally-oriented customer base is best served with a less centralized approach, where global processes and tools are harmonized in one model, but also allow local variations.”
The truth is that many businesses today need to cope with far more sophistacted segmentations and they need to find ways to defend price variability within geographic territories. The best way of doing this is by distinctive terms and conditions, reflecting variations in commitment levels, in the allocation of risk and in offering structure. Indeed, the methods and timing of charging will be one of those sources of difference.
Performing on terms and conditions has a major impact on costs, often greater than those associated with the core product. The key to successful pricing (and profit optimization) is to undertake more effective market needs analysis, cutting across traditional segmentation. The problem in most companies is that segmentation is driven more by their organizational model and profit accountability than it is by the customer view or needs. Geographies, business units, product divisions are often the drivers of data that is constrained by their vision and visibility. And these constraints then eliminate alternative strategies.
The sort of questions we should ask include:
- How important is our product to different customer groups; what is its strategic significance?
- How might this impact the levels of responsibility / accountability they would like us to offer?
- What impact might this have on their valuation of accompanying services?
- What implications might these variations have to alternative charging models (eg one-time versus over time; fixed price versus variable or outcome based)?
In a simple example, I recall two contracts for the same data storage system. One system was to manage real-time data for a major stock exchange; the other was for financial reporting within a large international corporation. Both were important, yet represented very different levels of strategic significance. By offering standard product prices (based on their traditional market segmentation), the supplier found itself in tough negotiations with both customers. One was demanding onerous risk terms, far beyond the standard offering; the other was pushing for discounts because it saw limited value in the standard terms. Pricing strategies were driven by product divisions that were in turn measured on geographic performance; such parameters had little relevance to the realities of the market.
Yesterday I hosted a webcast in which Professor Rob Handfield and Vel Dhinagaravel, CEO of Beroe Inc., offered a compelling insight to supply risk and its management. It strikes me that substantive improvements in this important area will occur only when suppliers and customers start to collaborate and build mutuality into their relationships. In this blog I will outline why – and how.
Rob and Vel did a great job highlighting the range of risks and explaining why the financial crisis has brought the topic of supply risk to the top of many organization’s agendas. But they also pointed out the inadequacy of most existing approaches to its management. For example, most companies:
- Lack visibility beyond a few key suppliers
- Do not have access to early warning information
- Rely upon historic data in making supplier selection
A recent study by Aon and State of Flux revealed that only 15% of companies were confident in their knowledge of supplier exposures. But as I listened to Rob and Vel describing the enormity of the task, this finding came as no surprise; indeed, I rather doubt that any company can be fully confident about the quality of its supply risk management.
One major issue is the need for continuous data gathering. While Procurement may often do a good job at initial supplier validation, it is daunting to continue this process on an on-going basis throughout the relationship. For example, suppliers are constantly winning and losing new customers; they are constantly switching their own sources of supply; they are constantly investing or divesting in new product or service lines.
What seems to be forgotten in all of these discussions is the fact that customers are also suppliers. No organization buys things just for fun – they do it to create the capability to deliver goods or services. Reliable suppliers therefore have a vested interest in providing their customers with the data needed to enable risk assessment. Similarly, smart suppliers also want to know how risky their customers are. Failure in a key customer – as shown by the automotive sector – is one of the main reasons for supplier collapse.
If you are not a key supplier or a key customer (in other words, you are readily replaceable) then of course these concerns do not apply – and you must accept that information flows, just like price negotiations, will be relatively one-sided.
Even in those more important relationships, today’s contracting processes tend to be relatively unilateral. While both sides will undertake some form of financial check, the onus otherwise tends to be on the supplier to provide data on insurance, security, disaster recovery, management of pandemics etc. etc. Yet in fact, the data flows must increasingly become mutual; supply partnerships demand that both parties demonstrate their health and their ability to continue meeting obligations.
So in the contract negotiations of the future, I would like to see the development of mutual checklists of information that will be supplied proactively and on an on-going basis. It will be held in confidence and become part of the regular review process between the parties. The goal will be to avoid surprises and enable the reduction of disruptions to either side.
For those companies that do not wish to manage such volumes of data, there are external alternatives, such as the types of service offered by Integrity Interactive, as well as the much wider market analysis offered by Beroe Inc. I will shortly be interviewing executives from Integrity Interactive to explore how their offerings will develop.
Given the importance and the complexity of managing trading relationships in today’s volatile markets, I believe that we will rapidly see much greater balance and maturity in the ways that organizations oversee their continuing alignment. Achieving this efficiently and effectively depends on a readiness by both sides to provide information proactively and to manage risk collaboratively.
Compared with the job losses experienced by many groups in the current recession, the contracts and commercial community appears to be faring quite well. Research by IACCM suggests less than 0.8% of its members have lost their jobs, though of course many others have seen salary impacts, loss of career growth opportunities and reduction in pensions and benefit entitlements.
The market for new jobs has shrunk, but not disappeared. Contract Management is viewed as an increasingly important discipline and there is clear evidence of up-skilling. New contracts groups are being formed and many employers appear willing to fund training and development. Again, IACCM data suggests that organizations are strongly focused on value for money, rather than simple cuts – and for an organization like IACCM, this has resulted in increased demand of more than 40% for its training and skills development services.
But there is no denying that jobs are relatively hard to find – and employers are becoming far more selective. This includes a clear trend to check candidate credentials. They value people who are members of IACCM; they value those with IACCM professional accreditation even more; but they are now assiduous in checking candidate claims.
Candidates evidently understand that professional credentials matter (that is why IACCM is seeing continued membership growth throughout the recession). But beware of making false claims. Twice this week when contacted by employers seeking to validate IACCM membership, we have found their potential employees were not (and never had been) IACCM members. And on another occasion, a member claiming Certified status had never sought to become accredited.
I suspect none of them got the job!
Recently I received the following question:
We are looking to apply contract management software to support the full enterprise (procurement, sell-side, operational contracts etc). As we build this vision, we want to identify the benefits and synergies of this approach over standalone system approaches. Are there examples of a similar approach and /or any insight to the benefits achieved?
I sent this question ot IACCM’s Community of Interest for automation. Many replied, expressing their interest in the answers received. It was clear that this is a point of discussion in many organizations. Indeed, although there is clearly a growing understanding of the potential value of contract management automation, the topic still seems fraught with indecision.
Most of the detailed replies came from consultants or providers. They show enthusiasm for the concept of an enterprise-wide solution, but suggest limited traction at this point. Several corporates replied, declaring their intent to roll out cross-enterprise, but indicating that this was work in progress, or had been stalled. Our research suggests that many companies feel in principle that there should be one solution – but are skeptical about whether it can be achieved. It would appear cross-enterprise contract management automation is at present mostly restricted to organizations that are relatively small and / or single geography and / or in industries with high levels of standardization.
After so many years (many of us recall the multi-billion dollar market predicted by Gartner back in 2003), contract management software is still struggling to develop a large and sustainable market. Certainly there were teething difficulties – the struggle to integrate with MS Word, the difficulties of handling ‘the other side’s paper’ – but these have largely been overcome. Yet still many seem unconvinced.
The reasons vary. Certainly one major challenge is the cross-functional nature of a robust solution. Even if the focus is just on buy-side or sell-side contracts, it impacts a wide array of process and policy owners – Legal, Finance, business units, Operations – and often there is no executive sponsor ready to force adoption. This is why many implementations start small and hope to expand; but often they seem to get stuck – or even worse, several competing solutions are adopted.
Another factor is resistance by the IT group. They are increasingly reluctant to accept non-core applications (as they see them) and push for answers that align with other application strategies. That is why the ERP suppliers have often succeeded in derailing acquisition plans, by suggesting that they will ‘imminently’ offer a viable CM module. Recently, this trend has played into the hands of Ariba and other spend management solutions, with their CM offering acting as an extension to the installed application.
Finally, relatively few organizations have yet grasped the significance of the contracting lifecycle. It remains a fragmented process in many corporations, despite the damage this does to trading relationship outcomes. Until executives grasp the importance of building a coherent business process to support contracting capability, it is unlikely that they will drive adoption of a quality technology solution. As a result, we will continue to see a range of tactical implementations and half-hearted answers to operational needs.
Unfortunately for the technology developers, they are often a solution for a problem that many companies do not realize they have. That realization is dawning; the impacts of poor contracting on financial results, corporate reputation, the quality of risk management are becoming more evident. Hopefully those who persevere will soon start to see some more sustainable rewards.
Commitment Matters 