We have a choice in how we manage our relationships. We can focus on what divides us, and seek to protect ourselves. Or we can work towards reconciling differences, finding ways to work within them towards some shared goals or visions.
That sentiment was the essence of Barack Obama’s speech in Indonesia this week – and it is a critical message for those who seek to negotiate and manage trading relationships. President Obama empahsized the growing interdependency that we all have on harmonious relationships. Of course there will be disagreements, and we must create structures within which to manage those. But if we focus only on the negative, we make the divisions and conflict almost inevitable.
“Gone are the days when seven or eight countries could come together to determine the direction of global markets,” he observed, in another principle that is important for all corporations and negotiators to remember. “Our world has grown smaller and while those forces that connect us have unleashed opportunity, they also empower those who seek to derail progress. One bomb in a marketplace can obliterate the bustle of daily commerce. One whispered rumour can obscure the truth, and set off violence between communities that once lived in peace. In an age of rapid change and colliding cultures, what we share as human beings can be lost.”
Trading relationships are potential sources of growing unity, or of division. The benefits of trade drove the growth of inter-tribal behavior; yet disputes over trade – and relative economic wealth – have also been the source of most human conflict.
For those in the world of contracts and negotiations, we have a choice regarding whether we start with assumptions of bad faith and lack of trust, or whether we seek a path of collaboration and mutual benefit. Many negotiations and trading relationships today appear to follow the former route. Our anonymity, shielded by electronic tools and systems, has doubtless worsened that situation.
If we wish to excel in the value we bring to our business, we must challenge our assumptions and be ready to ‘think the opposite’. A good start is to focus less on what divides us and more on what may potentially unite us – a shared vision, rather than an assumed apocolypse.
I am told that the latest target for Procurement is ‘the elimination of sole source supply agreements’. Apparently the most recent ‘best practice’ thinking is that sole source always equates to higher prices and therefore opportunities for savings – typically around 15%, acording to my source.
This news, if true, represents yet another example of the simplistic – indeed, primitive – thinking that comes from many advisory firms and consultants. It is one more illustration of the confusion between price and cost – and unless Procurement starts to demonstrate understanding of the difference and fight for new value measurements, its relevance to the business will continue to be narrow and marginal.
It is certainly true that sole source suppliers – like long-term incumbents – can take the customer for granted and fail to maximize their value. But in many cases, security brings levels of alignment and trust that result in substantial cost savings, continuous improvement and innovation. If these are absent, it may have little to do with the threat of competition and more to do with the weakness of performance and relationship management.
The US auto industry was a case in point where aggressive use of competition caused relationships and loyalty to be fractured. Recent reports suggest that sole source supply arrangements are re-surfacing in a big way, as part of the rebuilding of the industry. There are many occasions where the price of the commodity is but a fraction of the total cost of the relationship. Cheap prices do not generally result in high value relationships. And poor relationships certainly do result in higher costs.
Sophisticated sourcing groups are smart at economics. Unfortunately they are relatively rare – not least because the measurements used to measure Procurement success remain so narrow. Many times, it is the CFO who is to blame for this. Their refusal to allow a change – or increased balance – in Procurement metrics is damaging the bottom line. An unthinking attack on sole source supply relationships would be yet one more example of failure to understand true costs and the wider business interests.
The most recent World Bank report on ‘Doing Business’ provides a useful complement to IACCM’s market comparisons of international contracting.
The IACCM study (released in September 2011) focused on the relative ease of doing business between countries, whereas the World Bank explores the barriers to internal business set-up and operations. Therefore the characteristics that form the basis for study are somewhat different, but with interesting overlaps. For example, each report covers the issue of contract enforcement and both reference the underlying regulatory environment.
The news from the World Bank is encouraging, in that it reports a steady improvement in the business environment. Governments are recognizing the fundamental importance of enabling business start-up and operation and many have taken steps to simplify and ensure a benign regulatory regime. Among those highlighted are countries such as Kazakhstan, Hungary and Rwanda. Sub-Saharan Africa and South Asia remain the most difficult – and therefore most risky – areas in which to do business.
Technology lies at the heart of many improvements. “New technology underpins regulatory best practice around the world,” said Janamitra Devan, Vice President for Financial and Private Sector Development for the World Bank Group. “Technology makes compliance easier, less costly, and more transparent.” This has included the way that court cases are filed and handled, as well as the automation of business registration, export-import procedures and tax collection.
Top of the list in terms of ‘ease of doing business’ are Singapore, Hong Kong, New Zealand, UK and the United States. This reflects the findings of the IACCM research, although for international trade specifically, the IACCM list gave pride of place to Canada (7th in the World Bank report), with Australia and the Netherlands also faring well.
Today I participated at an event organized by Huthwaite, a leading provider of negotiations training. The theme of the conference was ‘Winning With Procurement’ and its objective was to assist Sales organizations to better understand Procurement and how to work with them, rather than against them.
Huthwaite presented the findings of research that confirmed the largely negative view in which Procurement is held by Sales. The perception of a rules and process-driven organization, focused on cost to the exclusion of value, was a dominant theme, not convincingly dismissed by the presentations of several senior Procurement leaders. Their protestations of growing professionalsim and commercial judgment often appeared to reflect aspiration, rather than the day-to-day interactions experienced by most in the room.
However, the session raised broader questions about Sales behavior and the extent to which commercial teams are taking actions to better equip Sales. For example, competition is not just about terms and conditions, it is also about having the data to back them up. We market value – but do we quantify it? Do we commit to it? Do our commercial terms inspire confidence in our ability to deliver – or undermine it? Do we strive to enable Sales to answer questions and display knowledge – or do we constrain them and thereby frustrate the customer?
A clear message from the event was that Sales must stop avoiding Procurement – such behavior seruiously threatens win rates. But to engage effectively, Sales must understand and support the Procurement agenda. As with all stakeholders, you can fight them or you can make them your ally. To become an ally, it is essential that you respect and respond to their agenda – make them look good. So if we want Procurement to understand value (rather than simply make judgments based on commodity cost), we must provide hard data to support the value proposition. If we cannot quantify our ‘added value’ relative to alternative suppliers, how is the customer supposed to do so?
A common theme of the Procurement presentations was the feeling that many Sales presentations are flaky and lacking substance. Contracts and commercial must increasingly work with their Sales teams to ensure substance and to support meaningful commitments.
There were useful pointers on many other subjects, including an attempt to answer the question ‘Is it worth bidding?’ Survey results show that if you have no pre-existing executive contact and are not being offered access, you are wasting your time. So don’t bid without access; demand it as a condition of participating. If it is denied, don’t bid.
Another important lesson is that successful sellers involve procurement early and understand their needs and how they can assist them. While this is in part a responsibility of Sales, it is noteable that high-performing contracts and commercial groups are increasingly taking a lead in these activities, to ensure they are also engaged earlier and provide more direct business value in understanding and responding to customer needs, establishing the framework for a successful Sales negotiation.
My day was once more filled with a wide variety of interesting discussions, covering industries such as technology, aerospace and engineering, and countries as varied as UK, China, Canada, US and Singapore. In all cases, the growing importance of contract and commercial competence was evident – and the fact that this must be through a more integrated strategic plan, rather than relying on case-by-case application of resources.
During one of my calls, there was lively discussion about the extent of cut-backs in staff and resources. This related especially to the extent of such cuts in customer organizations and the negative effect this has on contract performance.
The feeling among the suppliers on the call was that successful execution increasingly depends on their willingness to fill the gaps in the client organization. This demands that they apply extra resources and take on additional costs – otherwise, there is an increased chance that contracts will fail.
This is an interesting perspective and is certainly true in many industries, especially the public sector. And as one participant observed, it is particularly onerous when customers simultaneously press for price reductions.
However, I suspect that this challenging environment will not be going away any time soon. So forward-thinking contracts and commercial groups will be working on developing more efficient contract management and governance techniques, both to protect margins and to ensure they are a more attractive and reliable supplier. Good contract and relationship management is not only about more people; it must increasingly be enabled through more consistent methods, supported by replicable process and underlying tools and systems.
This is an excellent example of the need for more strategic thinking in commercial and contract management and the extent to which competence in these areas will increasingly represent a source of sustained competitive advantage.
The UK government has committed to wide-ranging cuts in public expenditure. Inevitably, this has meant delay, cut-backs and – in many cases – termination of projects.
The government has also called on major suppliers to identify savings and to reduce existing charges. One of these suppliers – Serco, a multi-billion £ ‘international services company’ – decided to pass the pain to its contractors.
In itself, none of this is surprising – until you discover that Serco wrote to supplers seeking retro-active application of savings. It ‘suggested’ that its suppliers should refund an amount equal to 2.5% of their 2010 invoices. Should they decide not to ‘volunteer’ this payment, Serco words implied that they would be unlikely to benefit from future business.
In the face of universal hostility, Serco felt compelled to withdraw its demands. The company succeeded in gaining the wrath of Government (its major customer), opprobrium in the press, the disbelief (and I am sure eroded loyalty) of suppliers and a drop of almost 5% in its share price. Quite an achievement, especiallywhen set against the $20 – 50m gain that I presume it might have achieved if all suppliers had paid up.
It is great to see bullying behavior appropriately rewarded. Serco’s unfortunate CFO appears to be responsible for this remarkable own-goal – at least, his name was on the letter. Once again, we have an example where the prospect of short-term financial gain appears to have trumped commercial judgment. I would love to know what position Procurement took during the discussions of this particular initiative. Hopefully they fought for the interests of their supply base and highlighted the reputation risks inherent to such action. But all too often, that is not the case. The fixation on cost-cutting and savings can come to cloud wider analysis and judgment.
Overall, this story offers another excellent risk management case study. I used it at an international conference of senior procurement executives today, outlining the basic facts without revealing their results. No one pervceived that Serco’s action was wrong.
“Was your contracting process defined, or did it evolve by default?”
That is the question asked by Craig Silliman, General Counsel at Verizon Business, in today’s webinar that was jointly hosted by IACCM and Ariba.
This week has been marked by growing evidence of Legal interest and leadership in getting to grips with contract management. For some, it seems to be the pressure of workload that results from an inefficient and undefined process. For others, it may be the result of audit and regulatory concerns. But whatever the driver, this is the third blog this week highlighting leadership by in-house counsel.
I welcome this development because, as Craig and co-panellists Chris Davies from Fujitsu and Debby Leap from HAVI emphasized, progress can only occur if there is leadership. This does not inevitably come from Legal, but the General Counsel often has greater incentives to drive improvement than other executives. Yet as Craig pointed out, this is often perverse, since in reality the major benefits of contracting efficiency are observed in financial results.
The panel members represented different functions – Sourcing, Commercial Management and Legal – yet each agreed that successful contract process reengineering must start with an understanding of the company-wide benefits to be achieved – for example, greater speed, reduced workload, improved controls and faster response to changing business and market needs. The problems created by inefficient and fragmented contracting are primarily resolved through process definition; this inevitably leads to the conclusion that automation is required in order to secure and safeguard the benefits.
“Without an effective and inclusive process, contract decisions are often surrounded by apparent risk and uncertainty,” observed Craig Silliman. ” And when there is uncertainty, it is always easier to say ‘no'”. In today’s environment of rapid and unpredictable change, many of the old rules and procedures rapidly become redundant, yet without a clear process or methods to gather business and market intelligence, the need for change is obscured. The contracting process becomes rooted in protecting policies and principles of the past.
In summarizing the conversation, I observed that ownership, process and automation are game-changing steps and can enable us to respond to the challenge created by today’s global complexity. Since this was recently highlighted by CEO’s as the number one issue for management, it further confirms the increasing urgency of transformation – and the strategic significance that contract management has in 21st century business.
If you have not already started on the journey to reengineering, now is the time to begin!
On the Emptoris blog, Kevin Potts reports on a presentation given by IACCM Corporate Member Cisco.
As I have highlighted previously, Cisco is without question a leader in contract management. It has taken steps to ensure clarity of process ownership and devised a collaborative management system, which together ensure continuous innovation and improved efficiency. This has been undertaken with leadership from the Law Department – echoing the points raised in my blog from the European Corporate Counsel Exchange (‘Contract Integrity On the Front Line’ – October 26th). General Counsel Mark Chandler has emphasized his ambtion to ensure that Legal and Commercial resources (buy and sell) are ‘a gateway, not a gatekeeper’.
As Steve Harmon, Senior Director of Legal Services at Cisco, set out in his presentation (on which Kevin reports), this could not have been done without automation. It is the bedrock for policy and process improvement and enables the agility that is so critical to business competitiveness today. I recommend that all those who care about their contribution to the business should read this report – http://emptorisinc.blogspot.com/2010/10/how-is-contract-management-software.html
Far too many service and solution contracts have performance problems, making them low margin and / or a source of dispute. As businesses increasingly move from product-based to service-based offerings, ‘Contract execution is critical’.
This was the view expressed during a roundtable discussion at this week’s Corporate Counsel Exchange in The Hague. There was wide consensus across an international group of senior attorneys that the challenges and the needs of contracting have changed. The big issues are most frequently about execution and performance, and there is an evident disconnect between the sales / acquisition process and post-award implementation and management. They characterized this in three ways:
- Businesses have moved increasingly from the sale or acquisition of products to the sale or acquisition of services, but many top managers have not understood the implications of this.
- Communicating the terms and the implications of the contract to those who must either agree or implement and manage has become challenging.
- There are specific issues created by mismatched incentives / measurements – in particular Sales compensation and Procurement savings.
Most lawyers feel that they – or professional contracts staff – are often involved too late to influence the statement of requirements or definition of scope – yet increasingly these have become the major source of dispute. As a result, the roundtable participants felt that most agreements are ‘fit for purpose’ from a purely legal perspective, but are much less confident that they meet the commercial needs or interests of the parties. One sign of this is frequent disappointment with outcomes (buyers) and with profitability (sellers).
One attorney highlighted a recent change in his business, where sales commissions are now withheld for 100 days after contract signature and only released if implementation is progressing smoothly. But he also described the difficulties there have been in persuading top management of the need for change in the business. Executive decisions continue to be driven by short-term considerations, such as quarterly numbers, which do not fit well with the needs of long term, service-based contracts.
The session mirrored a number of the themes that have been highlighted in this blog and from research by IACCM. It also confirmed that progress in addressing the issues on which contracting integrity depends is painfully slow. But there are signs of movement, with examples including changes in commission schemes and a shift in the role and measurements of Procurement. But perhaps most encouraging is the growing interest by senior lawyers and their understanding that contract management is very significant to business performance. In the words of one Assistant General Counsel from a major oil firm: “Contract management is an area of great opportunity for Legal”. Perhaps their championing of the cause will at last provide the break-through in senior management understanding that contracts and the contracting process really do matter.
Long cited as a major source of patent infringement, it may seem ironic to some that China is poised to become the world’s largest registrant of new patents. According to The Economist (October 16th – 22nd), the Chinese government and major employers have been offering a variety of incentives to encourage innovation through patent registration.
While concluding that the program is in some respects successful, The Economist highlights that there are two classes of patent – ‘invention patents’ and ‘utility-model patents’. The former represent true innovation; the latter are associated more with process. It is the utility-model variety that has flourished. It requires far lower scrutiny and there are suggestions that such rights can simply be bought.
Overall, the trend is interesting. First, adopting a widely accepted patent system is likely to increase pressure from within China for broader compliance with IP rights. Second, what will happen when Chinese patent owners seek to exercise their rights against foreign companies, especially if they take action in courts outside China? A few years from now, it may be the US and European nations that are being accused of failure to honor IP rights!
Commitment Matters 