Right now, 85% of those who work in the contract management / commercial management field see current job prospects as ‘fair to excellent’.
In the midst of such uncertain economic conditions, this is perhaps one of the most surprising findings of the latest IACCM ‘talent survey’ . Overall morale amongst this community remains relatively high, with 75% declaring that they either ‘like’ or ‘love’ their job (down around 5% from historic levels). They especially like the challenging work associated with the role and particularly enjoy negotiation.
So is life a bed of roses for anyone choosing this career path? Well, no – there are some drawbacks. For one thing, many see limited career opportunities. Even allowing for the fact that a relatively high proportion are approaching retirement, around 39% feel ‘squeezed’ in terms of possible advancement. This results in almost 1 in 2 questioning whether they will still be pursuing this role 10 years from now. And for many, it means they see their best hope of progress in leaving their current employer – and with the job market apparently quite buoyant, this is not an unrealistic expectation.
Pay levels are not a big issue for most of this community. The biggest negative when it comes to their current employer is the failure to invest in people – almost 50% cite this as a cause of dissatisfaction. Taking second place in the list is ‘company culture’ – a factor that has shown steady increase over the years and may merit separate investigation.
When it comes to things that contracts and commercial staff dislike about their job, ‘administrative responsibilities’ is the clear winner, with the issues over career path and concerns about clear role and responsibilities vying for second place.
The IACCM talent survey remains open for input and all participants will receive a copy of the final results. The study will offer comprehensive insights to employee perceptions of their role, its value, current and future skills and the factors that keep staff in these roles engaged. The final report will reveal differences between buy-side and sell-side practitioners, as well as variations between major geographic regions. To participate in the study, simply visit https://www.surveymonkey.com/s/TalentSurvey2010
Today I interviewed Terence Teo, General Counsel for the Asia-Pacific region at Edwards, a precision engineering company.
We discussed risk management – and in particular, how companies can improve their ability to take and manage risk. But first I asked Terence whether he observed significant cultural differences in the view of risk. His answer was broadly no, that he found little variation in the way that specific nations see risk today. He observes more variations based on the level of experience than he does on culture. And he commented that most managers and business unit personnel tend to see risk management as ‘a nuisance’, something that ‘holds things up’.
A number of his observations I found especially interesting. For example, we discussed the use of contract terms in managing risk and especially the tendency by powerful multi-nationals to push risk onto their counter-parties. Terence commented that he is seeing an awakening by companies in the Asia-Pacific region, that an increasing number are questioning this approach and asking ‘What is this risk? Do I want to accept it?’
He also mentioned that a growing number of companies in the region are learning from those in the west and have introduced contract standards of their own, often mimicking the terms they receive. “But in some cases, they clearly do not understand the terms they have inserted, when and how they make sense,” he commented.
I particularly liked one of Terence’s ideas about the approach to selling the creation and use of standard terms. He was discussing the push-back that we often receive when we propose the adoption of standards within the business, how many suggest that flexibility and competitiveness will be lost. “I suggest that standard terms are not simply a form of contract, but rather a tool, a checklist, a way of educating that supports more rapid and accurate risk analysis,” Terence suggested.
We also reviewed a number of important market trends – for example, increasing demand for performance bonds, parent guarantees and other forms of security. Terence also confirmed the steady shift away from thinking of the contract as something split between legal terms and business terms. “The tendency to leave scope and service levels to technical staff has changed; contracts staff must ensure (the whole document) makes sense, hangs together. They must engage in structuring and adopt a systems approach throughout the relationship.”
“People tend to run away from risk,” according to Terence. To gain their attentionand support requires ‘a diplomatic approach’. “Talk, explain, use the language they are speaking. Explain issues through case studies based on events within your company. Show people that risk is a universal problem, but that there are solutions.”
In the view of this General Counsel, global variations in the perceptions of risk and the role of the contract are narrowing fast – and in his company at least, there is a strong focus on the role of Legal and contracts staff in providing the types of training that ensure business-wide understanding and consistent approaches to risk management.
The full recording of the interview with Terence Teo can be accessed in the IACCM member library at www.iaccm.com
Another recent IACCM message board posting that caught my interest was a question regarding new market entry. It came from someone in our fast-growing Indian membership base, who was concerned about his company’s struggle to gain traction in new markets.
My past experience leads me to believe that a remarkable number of companies – in particular small and medium enterprises – attempt to expand their operations on a purely opportunistic basis. That is, they chase bids, rather than plan and manage their market entry. In such cases, it is hard to know whether they are better off winning or losing the bid – because if they win, they suddenly discover the implications in ters of resources and support.
In reality, however, they rarely win and instead they absorb a lot of time and money in abortive efforts. And this is where a strong Commercial department should be showing its value. Commercial Management must be about more than facilitating individual bids and deals; it must also provide coherent insights to market manageent and business development.
My answer to the question was brief and did little more than touch on some of the options that could be considered. The questioner was especially concerned abou the attitude and support of local sub-contractors for major EPC contracts, hence my comments reflect areas of that concern.
“From your question, it sounds as if there may not be a coherent business development strategy. New market entry is never easy or cheap. It mostly depends on building local credibility, which is in part by having strong reference sales. Frequently, companies do this by:
a) seeking opportunities to win business with the subsidiaries or sister companies of existing clients (i,e, situations where they have an established record and credibility).
b) a readiness to establish presence through acting as a sub-contractor or through joint bids. For example, have you sought opportunities to partner in this way with some of the local companies? This offers strong opportunities to build your name and reputation – to a point where local suppliers / contractors may start approaching you for business opportunities.
c) what are the typical terms under which suppliers / contractors in that country operate today? Can you offer better terms, so that those companies not only want to partner with you, but also want you to win? Very often, they will have some influence and contacts. You should be incenting them to actively support your bid.”
The purpose of this post is three-fold. First, as contracts or commercial professionals who care about company performance, risk and profitability, we owe it to management to call out when we see wasted and expensive efforts that have little chance of market success. We must not allow our traditional deal-based focus to blind us to the bigger pricture.Second, we must ensure our comments are accompanied by advice on how to do things better – make sure we are not simply seen as obstructive or negative. And third, what additional thoughts do you have regarding potential approaches to market entry in a situation such as that outlined by the original questioner?
(see this post at https://www.iaccm.com/members/network/coi/?coiid=1§ion=forum&post=2087&java)
For centuries, professional development has depended on associations and other membership bodies that delivered a range of physical services. These included regular network meetings and classroom training, with internships or apprenticeships, perhaps supplemented by some forms of distance learning through ‘correspondence courses’.
The latest member satisfaction survey from IACCM provides fascinating insights into how rapidly this is changing (see summary results below). In particular, the findings reflect the dramatic influence of networked technologies. LinkedIn is now viewed as a more effective source of support than traditional professional associations; the demand has swung very rapidly from a desire for physical training to e-learning.
These trends have doubtless been driven in part by cost-cutting. People simplay can’t get budget to attend external classes and they cannot justify the massive cost differential from on-demand, web-based courses. Similarly, with time under so much pressure, the inclination to attend local member (or ‘chapter’) meetings is eroding. Also, the value of that local networking has declined as many trading relationships today are not local.
This data does much to explain why IACCM’s mix of global membership, high-value networking (without the intrusion of spam and endless advertisements), low cost, web-based research, advisory services and learning products, plus an integrated on-line library, is proving so powerful. It is reflected in membership growth of more than 30% in 2010 year to date and revenue growth of 28%. The Association’s goal has been to stay ahead of the on-line competition; it has been our beleif that the world for professional associations would shift dramatically and they would be forced increasingly to compete with the business and social networks offered through services like LinkedIn, Plaxo and even Facebook. Thus it is proving – and it suggests our strategy of staying ahead of those networking sites has been correct. The recent launch of IACCM’s new website has placed even more ‘clear blue water’ between the Association and its competitors.
But it is a tough world and the need for continuous change and service improvement will not diminish. Just as the professionals themselves face constant pressure to raise their skills and value, so wil those who seek to provide them with the services that support those skills.
The summary findings from the recent IACCM survey were:
- Only 2.3% responded that IACCM is not meeting their needs in an effective way
- IACCM was rated 30% more effective than its competition. LinkedIn was placed second, with ‘other professional associations’ in third.
- Most frequently members chose IACCM because of a personal referral
- The most important and the most valuable events are Ask the expert calls (score 3.8 out of 5)
- The most important and the most valuable research is the top terms survey (score 4 out of 5), closely followed by benchmarking study (3.9 out of 5) and talent survey (3.7 out of 5)
- The most important and the most valuable professional development resource is the learning modules (4.2 out of 5)
- The most important and the most valuable general resource is the library (4 out of 5)
- No service scored below 2.8 out of 5. Lowest ranked were new members calls and vendor-related services
- For low ranked services the majority, typically around 70%, have not actually tried the service (in many cases because it is not personally relevant).
- There is a continuing – and substantial – decline in the perceived value of physical training programs.
- The areas of greatest demand for additional services are on-line training and mini conferences. This is a switch from previous years, when more local member meetings and more physical training classes topped the list.
- 95% responded that they would recommend IACCM to a friend
On the Contracting Intelligence blog, Jon Hansen writes an interesting article regarding Procurement’s relationship with Finance and the trend towards what it terms ‘more collaborative negotiation’ styles.
I must take issue with the findings it reports regarding contract negotiation. I perceive the problem that the article highlights regarding Procurement’s relationship with Finance permeating many of its other relationships, including those with suppliers. This can sometimes lead to delusional perceptions …. For example, IACCM asked Procurement professionals whether one consequence of the recession had been closer cooperation with their suppliers. Well over 70% said yes. When we asked suppliers whether they perceived greater cooperation from their customers, less than 10% agreed.
The article cites academic research on Purchasing negotiation which appears to reflect this self-image, rather than being accompanied by any objective view of actual behavior. It falls into the trap of seeing ‘collaboration’ as a unilateral process. Most bullies view their behavior as reasonable; their victims would generally see things differently.
Also, the debate fails to consider the fact that the vast majority of negotiations today are virtual, often driven by electronic tools and systems. Once more, the academics’ article betrays its detachment from the real world when it talks about negotiating parties meeting ‘at the table’ etc. Remote negotiation creates real divides and stresses, irrespective of the generation conducting the negotiation. The evidence suggests that such remoteness (driven by cost cutting and travel restrictions) enables far more aggressive behavior and of course undermines the principles of trust and openness that are fundamental to ‘collaborative’ relationships.
I wrote a blog about these issues following a meeting last week with around 120 sales executives, where several Procurement leaders presented. One or two of those Procurement heads were brutally honest – for example, the head of procurement at Aer Lingus told them ‘you are all commodity suppliers’ and warned them that ‘collaboration’ is not part of the Procurement agenda. Those words certainly reflected the day-to-day experiences of those in the room.
I think we do a disservice to our colleagues in Procurement if we perpetuate the myth that currrent negotiating behaviors (internal and external) are seen by others as ‘collaborative’. One key reason for this is the continued focus on PPV as the basis for measuring ‘success’ and this is compounded by the fact that most Procurement groups do not have extensive authority to negotiate substantive terms. And who is it that most commonly prevents Procurement from escaping this narrow trap? Why, it is of course the CFO ….!
Increasingly volatile markets and growing supplier dependency have combined to make contract exit strategies far more relevant and important than they were in the past.
The drivers for contract exit may be planned or unplanned. They range from factors such as financial distress or reputational risk, through to changes in market conditions or disinvestment.
Contracts have always had termination provisions, typically allowing early exit for non-performance and increasingly perhaps including some form of ‘termination for convenience’. The extent to which specific consequences of termination were spelt out has tended to vary, but again our contracts are likely to have specific obligations or survival clauses. But are these still adequate and should companies have more thorough approaches to their exit planning?
These were questions that a group of IACCM members sought to answer during a conference call last week. The conversation included practitioners from a number of large global corporations, as well as some experienced consultants and law firm partners. The group agreed that the consequences of exit – whether voluntary or involuntary – have become far more significant today, due to the heightened dependence on key suppliers (for example, in areas such as core software, IT systems and outsourced relationships). However, most felt that exit activities still tend to be handled on an ad-hoc basis, rather than through a well-defined or consistent process.
There appeared to be four major challenges facing those who would like to improve the quality and consistency of exit planning:
- It takes time – and the business is unlikely to accept delays in getting to contract caused by planning on how to exit
- It is not practical to consider every eventuality
- Rights of exit carry a cost; suppliers need to gain recovery so early exit can have severe financial implications
- In many cases, the business concludes that exit is not practical and allows contracts to run their course or undertakes specific renegotiation
However, these obstacles do not eliminate the desirability of having some form of exit plan in place. Various suggestions were made about ways to develop and manage this:
- Checklists based on past experience should be developed
- Checklists or plans can also be documented based on ‘reverse engineering’ the original transition plan
- Include plans – and their update – into the annual planning process, including option analysis
- Review existing contract models; where exit rights may be important, consider this within the original contract structure (eg asset ownership, software license ownership) as well as within relevant terms (eg data management, escrow provisions, obligations to assist transfer)
- Incorporate exit planning into the risk management and review process. For example, the relative risk associated with a particular product or service should be guiding supplier selection – not only in terms of their reliability, but also the level of future negotiability.
- Proactively negotiating a new and more detailed termination agreement once the actual situation is known – rather than solely relying on the more hypothetical and more general provisions of exit arrangements negotiated in the original agreement
In general, suppliers are not averse to discussing exit plans and their readiness to do this – together with the quality and integrity of the process they follow – could be a significant factor in supplier selection. However, a level of specificity may be difficult to achieve because there are too many hypotheticals – what’s the basis of termination, what’s the relationship like, how full or how partial the termination is, whether services are going to one new supplier (external or in-house) or many new suppliers.
Some interesting points to consider when thinking about exit plans included the need to recognize that many terminations are not absolute; they may cover only part of the relationship, or they may result in a phased wind-down of service. In many cases, it may be possible to transition the supplier to a different project, thereby alleviating resistance and financial implications. Factors such as these significantly affect the nature of any negotiation at the time of an exit. In addition, the consequences of exit can vary between industries and geographies; as an example, it was suggested that in Europe, employees normally transfer back in the event of the customer terminating an outsourced service, whereas that is less commonly the case in other geographies. Another influence that was discussed was the impact of a mutually agreed exit, versus a contentious exit; in the latter case, the plan should allow for the need to switch the relationship management and performance teams, since they will rarely have positive views of each other and cooperation (which will be crucial to smooth transition) is unlikely to be achieved.
Overall, there was agreement that companies should seek to record and document lessons learned; that it is wise to have more in-depth planning for key strategic relationships; that these plans should be reviewed and updated on at least an annual basis; that exit planning should be an inherent element of risk management and mitigation; and that checklists of key points to consider are valuable and can potentially be applied across a wide range of contract relationships.
(My thanks to Richard Hawtin, partner at Baker & McKenzie, for his valuable contributions to the original discussion and this summary)
The IACCM Message Board generates many interesting questions and replies. One that recently caught my eye – being a perennial question – related to the goals and objectives for contracts / commercial staff.
The original query asked: “I am looking to reset the objectives of my senior commercial team members. They are the main commercial points of contact for £30m-£60m consultancy businesses and have small teams (3-8 employees) reporting to them. I would be interested to know what objectives have been put in place by IACCM members for similar type roles and responsibilites.” A subsequent clarification confirmed the scope of role of the group – pricing, negotiation, post-award oversight / change, partnering agreements / marketing agreements and working with the supply management team to undertake required sub-contracting.
It may seem surprising, but I often find that groups design their goals and objectives in isolation from the declared corporate goals or strategies. We are so focused on our internal view of our role and value that we fail to relate it to the outside world – in particular, the perspectives of what matters to our executives. As a result, we struggle to directly relate our work and output to the things they care about.
As an example, I went to the website of the company from which this question emerged and made the following comments:
“The key point is to ensure alignment with declared company goals and strategies. The commercial team should be able to point at ways it is directly contributing to executive priorities.
For example, most commercial groups tend to focus on ways they will contribute to profitability and risk management. But these, while critical, can be rather nebulous. We need to translate them into specific aspects of contribution. In reading your company’s business goals and strategies (from your website), a number of characteristics jump out at me as things you might include:
– key words are ‘trusted’, ‘global’, ‘integrity’, ‘teamwork” and ‘care’: what aspects of commercial behavior and performance might demonstrate these qualities? I would see teamwork and integrity as items of specific responsibility for commercial; I would suggest that demonstrated understanding of global markets and trading terms might be another for major contribution.
– strategic attributes: the list includes excellence, safety, responsiveness, listening, openness and continuous improvement. Most of these characteristics are fundamental to the way that contracts are negotiated and the governance procedures within them.
So you might want to brainstorm the types of specific objective that would demonstrate how commercial is delivering against these characteristics. That could include things like reduced cycle times; increased / sustained satisfaction of user groups with the commercial process; reduction in claims / disputes; evidence of continuous improvement in updated commerial policies, practices, procedures and terms.
I hope these ideas are helpful. Often a brainstorm around the desired characteristics and ‘what can we do to contribute to them’ may yield some good collective ideas – with resulting buy-in. I’ll be happy to discuss with you, if that would assist.”
I know that many others have struggled with this problem of objectives and I hope a few may contribute their ideas to this important topic.
(IACCM recently published an updated series of benchmarking results which include the most commonly used performance measures.)
Most intelligent business people long ago stopped believing that ‘Once you sign a contract, you should put it in the drawer’. Yet for many, contracts remain primarily a record of a specific deal, transaction or relationship and, while they may be used to inform, communicate and govern business activity, it is rare to find them perceived as critical assets.
Yet assets they certainly are – and effective analysis reveals an invaluable source of strategic information.
Yesterday I moderated a webinar for Pramata, which describes itself as ‘the contracts intelligence company’. The session featured Tom Carretta, Associate General Counsel at FICO (perhaps better known under its former name of Fair Isaac Corporation). The reason that the session so excited me was because it represented a rare example of the portfolio-based view of contracting that we have long promoted at IACCM. Tom was clear and to the point. By thinking about contracts as sources of corporate data, the law department at FICO has been able to transform its image and become core to strategic business decisions.
As in many companies, FICO long ago invested in a basic contracts repository and document management system. But while this ensured that contracts no longer went missing, it did little to enable in-depth research or understanding of the company’s commitments, contracting trends, client or portfolio analysis. Through their work with Pramata, FICO now has powerful analytical tools. They can review the variations or history within a particular account. They can see the varying patters of commitment, risk or financial performance of different industries, sectors or business units.
Why does this matter? For a whole host of reasons, many of which Tom described and explained. Senior management and account management can now undertake analysis of major customer history; the finance organization can observe varying patterns of discounting or price negotiation; operations can review commitment trends and patterns of ‘deviation’ from standard obligations; Legal is able to review industry risk profiles and testify to regulatory or contractual compliance. All of this data supports in-depth diagnostics – for example, the need to change or update product or service offerings; potential benefits to be achieved through improved sales training or local empowerment; potentially even decisions to invest or disinvest in specifc industries or geographies, based on their economic or risk performance.
Tom described the pressure that Legal were under to use established ERP solutions for contract management. But fortunately, with the support of other executives, they realized that such systems might bring control, but would never offer meaningful business insights that would turn contracts from instruments of control to strategic business assets. Nor can ERP systems readily allow ‘customer intimacy’ in the way that a more flexible, ‘contract intelligence’ system offers.
At FICO, contracts – and those who oversee them – are no longer viewed as a ‘necessary evil’, but instead have become an integral tool to business management and the realization of market value. I commend Tom’s presentation to all who care about their contribution to business performance.
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.
Commitment Matters 