In previous posts, I raised the question whether the new IT delivery models would lead to transformation of the CIO function. As dependence moves to outsourced providers, technical skills must be relaced by commercial competence. So will this lead to growing participation by procurement? I have heard just today about two pharma companies where in one, Procurement has been given ownership of all facilities management activity; and in the other, the CPO has been handed the CIO role in addition to his procurement responsibilities. The story in both is that commercial relationship skills are becoming key to business performance … Join me when I discuss this – and other interesting IT vendor management trends – with Bill Huber of TPI – see events listing at http://www.iaccm.com
Much is written about the generational divide and its influence on the workplace. The Procurement Insights blog features an excellent summary by Bill McAneny, setting out the differences. While offering few new insights, it provides an excellent overview and suggests fundamental variations in the way that learning and personal development is achieved by different generations.
There is wide consensus that ‘the great divide’ was caused by the advent of new technologies and the dramatic impact these have had on the way we learn and our access to information. But other factors are also identified, such as the relative numbers of workers in each generational group and the influence on young people of changes in social norms, such as the advent of two-income families.
I must admit to some scepticism about these broad-brush attempts to create generational segments. Such analyses tend to be very US-centric – and even then apply largely to the more privileged members of US society. Outside these ranks, many of the depicted ‘norms’ are unrecognizable. For example, the birth rate analysis or the references to social welfare programs or the depiction of the 1980s as ‘the era when mothers started to go out to work’ have little or no relevance in countries such as India or China, where such a high proportion of today’s knowledge workers reside. Indeed, I question the extent to which this generalized analysis applies even in the US, given the large numbers of recent immigrants within the professional workforce.
Throughout history, every new generation has been dismissive of the rules and methods of the past. Perhaps youth today is more vocal. But maybe it is just that they have new vehicles to express their hopes or frustrations – and a greater readiness on the part of the older generation to listen. Certainly the technology revolution is transforming the workplace and society as a whole. And the fact that today’s youth has grown up with networked technology has conferred some advantages and justifies their impatience. The media delights in stories of instant celebrity and wealth, creating a belief in many that they can achieve rapid success.
There is no question that technology has transformed our ability to obtain information ‘on demand’. This rightly leads us to re-think the form that learning should take. For example, smart youngsters use on-line networks and web searches to obtain instant input. But they still require methods and good business judgment; the networks they use must offer quality and reliability.
At IACCM, we have developed a worldwide community that benefits from networking tools, mentoring and on-demand training and research. We observe major variations in those who grasp these benefits to raise their knowledge and their effectiveness. There are generational differences. It is certainly true that younger people tend to be more open to learning through web-based programs. But cultural differences are probably even more significant. In markets such as China and India, there is a hunger for knowledge and personal advancement. There is also a variation between industries, with sectors such as technology, outsourcing and oil and gas at the forefront of new methods.
In the end, I think the generational analysis is simplistic and unhelpful, certainly in the context of the global market in which we operate today.
Whether right or wrong, there seems to be broad consensus that the risks we face in business today are increasingly hard to predict. There is a sense also that the financial consequences of many risks are potentially very large and difficult to estimate. One result of this appears to be an attempt by buyers to simply allocate the risks of failure to their suppliers through broad-brush application of ‘burdensome’ terms, such as onerous liability and indemnity provisions.
To the extent that trade has globalized (taking us to less familiar and perhaps more vulnerable markets) and also the degree to which ‘interdependencies’ have grown, these feelings of greater risk may be valid. Certainly, organizations (both public and private) today often rely on a wide portfolio of trading partners to enable or deliver their business capabilities. A growing number of relationships are based on the delivery of outputs or outcomes, moving away from the time when most acquisitions were product (or input) based.
Suppliers have of course encouraged this trend towards services and solutions, in order to avoid the commodity pricing trap. But with that move comes increased responsibility for performance – and suppliers are generally not so keen on the increased liabilities this implies.
One area of growing friction is around unlimited liabilities (with consequential loss also sometimes thrown into the mix). As recent lively debates on the IACCM contract management forum have shown, buyers and sellers see this topic very differently (even though within each company it is the same Law department driving this rather schizophrenic debate). It seems to me valid that a supplier should be asked to ‘put their money where their mouth is’. If I promise an outcome – and charge a premium for delivering it – then there should be pain for failure. But how much pain? And at what level of ‘premium’?
The problem with unlimited liability is that (at least in some jurisdictions) it may be precisely that – i.e. unlimited. Unlimited liability is not in general insurable, so the value of such a term of course depends on the size and assets of the company bearing the risk of loss. But more broadly, any unthinking attempt to apply such clauses is intellectually lazy and should be avoided.
The legal theory is that a ‘penalty’ clause will act as a negative incentive to perform. There is limited evidence that this works especially well and plenty of evidence to suggest there is a law of diminishing returns. Indeed, some would argue that there is a point at which such terms become counter-productive. In addition, the value of such a clause varies dramatically. For example, when dealing with overseas markets, it will vary in its enforceability and, depending on the jurisdiction of the contract, it will also vary widely in its value and application. Regardless of jurisdiction, the actual realizable value will always depend on the underlying assets of the company providing the undertaking.
How often are such clauses exercized? How frequently are they upheld? What is the economic value realized from them, versus the economic costs of including them (extended negotiation time, strained relationships, more cautious suppliers, less delivery of innovation, higher prices to cover the risk etc.)? Is the party agreeing to the term capable of fulfilling it? When an organization or its lawyers prescribe these onerous terms, to what extent do they consider these wider questions? Far too often, the answer appears to be ‘not enough’; so long as there is compliance, the quality of that compliance doesn’t really matter.
IACCM professionals – buy side and sell side – should not accept such positions. We must insist that the terms we are negotiating make sense, are proportional and that they drive the successful results that caused us to form a contract in the first place.
This week I am attending the Latin American Congress on Contract Management, the first such event in the region.
It is an important milestone for the field of contracts and commercial that more than 100 delegates have been attracted to the event, held in Sao Paolo, Brazil. Coming as they do with no strong preconceptions about the role, it is worth noting that the audience is a balance of sell-side and buy-side personnel, predominantly from South American companies, also with a number of lawyers and business executives eager to learn more.
Many delegates are keen to confirm their understanding of the role of contract management because this is not an established discipline in the region. Indeed, many make the point that executive management does not really understand its purpose or contribution. Yet it is also clear from the lively discussions that the discipline is sorely needed. Latin America – and Brazil in particular – is increasingly exposed to world markets, both as a seller and as a result of massive inward investment. As we discussed the need to use contracting as a way to ensure mutual understanding of goals and to safeguard the delivery of intended benefits, many heads were nodding in agreement. The topic of performance management – and especially the impact of terms and metrics on organizational behavior – also excited extensive interest.
A further sure sign of long-term health is the presence of several sponsors offering contract management software and consulting. I was surprised to discover the availability of locally developed software solutions for the Brazilian market.
IACCM already boasts several hundred members in the region and is equipping them with the contracts and commercial skills and methods to ensure a visible contribution to their business. This event will ensure a new group of ambassadors for the discipline and it will continue as an annual forum that enables sharing of both local and global ‘best practice’.
Last week, I interviewed Mr Geert Peeters, Chief Procurement Officer at Levi Strauss. Geert and I will both be among those presenting at the Procurecon conference in Brussels, November 2nd – 5th.
The theme of our conversation was ‘Challenges and Opportunities for Procurement’ (to access the audio file of our interview, click here). On the surface, after more than 150 years in business and with a leading global brand name, it would seem that the role of procurement should be well defined and predictable. But that proves to be far from the case.
A major challenge for Levi Strauss right now is its dependence on cotton. Traditionally a stable commodity, recent times have seen increasing turmoil. This year, prices have risen some 40%, mostly propelled by the devastating floods in Pakistan. But it turns out that supply disruption is no longer an isolated experience; a couple of years ago, it was the disaster in Haiti and before that, the impact of the tsunami on crops in Sri Lanka. Topics such as climate change are therefore very high on the agenda.
“Sophistication in risk management” has become a critical skill for the Procurement function, according to Geert. Procurement staff have also had to re-think the commercial model for their agreements. Historically, forward buying, hedging and other methods to manage future costs were not considered important. But of course this is just one aspect of managing supply risk. Procurement is also actively involved in work to seek alternative materials and to bring innovation to the industry.
Levi Strauss was a leader in introducing a Code of Conduct for its suppliers back in 1993. This aligned with the company’s philosophy of ‘profits through principle’ and is a component of a rigorous approach to Corporate Social Responsibility – another key area for Procurement involvement. Geert explained the commitment to transparency, citing as an example the fact that all the company’s suppliers are listed on its website.
I asked Geert how they ensure flow-down of their ethical standards to sub-contractors. “We have collaborative policing of the Code of Conduct”, he explained. And he went on to describe how the Code is now being extended to the cotton fields themselves – clearly a demanding task, given their remoteness and the difficulties over access to many of them.
Like many others, the Procurement group at Levi Strauss has recognized the growing difference between direct materials and services contracting, with the latter demanding ‘a more commercial approach, because value really matters’. They are also cautious in their use of technology, especially in managing the supplier interface. Geert believes his team must still build physical relationships and be visible to the supply base, while using technology to simplify and assist communication and knowledge transfer.
On the subject of knowledge, Geert also highlighted the growing importance of learning across industries. Historically, there was a tendency to see the procurement problems and opportunities as somewhat industry specific, but today there are many benefits from cross-learning. Key issues such as climate change, social responsibility, the use of technology and risk management ‘best practice’ are topics that affect any global business and good ideas can come from anywhere. That, he assured me, is why he finds venues like Procurecon so helpful!
The recent report by Sir Philip Green on the state of UK public procurement has revealed consistent waste and value leakage in the acquisition process. Yet in fact, this is not new news and there is extensive support available to remedy the problems. The issues are also not unique to the UK; as the complexity and volume of public sector procurements has grown, the organisation and procedures to manage them has lagged far behind – and in many cases, the investment in new procurement practices and external consultants have directly undermined success and value for money.
There is a carefully researched set of defined practices that organisations need to follow if they are to be successful at managing their supply contracts and relationships. Therefore, perhaps the biggest surprise about Sir Philip Green’s findings on the inefficiencies of UK public procurement is that they are a surprise.
Even allowing for the disingenuous claims of a newly elected government anxious to castigate its predecessor, it has been evident for quite some time that public sector agencies are in general not good at managing contracts or suppliers. Quite simply, the most basic analysis shows that they lack most of the necessary ‘best practice’ capabilities and behaviours. Indeed, this has been pointed out by publications such as The Economist (August 2009) and repeatedly by the UK’s National Audit Office, often in conjunction with the Office for Government Commerce (OGC). Many top suppliers have also been forthcoming in their criticisms, had anyone been inclined to listen.
As the volume and complexity of public procurements has grown, the weaknesses in contracting and commercial management have become steadily more evident. This is a problem also faced by the private sector, which has been similarly exposed by the challenges of managing ever bigger projects, with increased responsibility for ensuring successful outcomes, often stretching across highly interdependent international supply networks. The big difference is that the private sector is mostly taking steps to raise its competency by investing heavily in skills and resources to shape and manage these contracts. Government, in general, has not; it sought to escape the problem by pushing responsibility for success onto consultants and suppliers, engaging in increasingly adversarial negotiations and ill-considered approaches to the allocation of risk.
In recent years, millions of pounds (and other currencies, depending on location!) have been poured into procurement training and staffing, along with expensive acquisitions of minimally useful software tools. But there has been little or no consideration given to the competence needed to frame and manage these acquisitions with appropriate forms of commercial arrangement and relationship governance. It is as if we have spent a fortune buying an expensive new boiler and constantly refilling it with oil, but have ignored the need (and the entreaties of our suppliers) to connect the pipes to a plumbing system.
Best practices in this emerging field of contract and commercial management are available. Indeed, ironically, the UK’s recently renamed OGC has been at the heart of many of them. Of all government agencies around the world (with the possible exception of Australia), OGC did more to develop and document methods and to work with organisations like the International Association for Contract & Commercial Management (IACCM) to understand and validate leading-edge ideas. Its efforts were largely wasted because it lacked authority to impose any central structure on the jealously guarded independence of Government departments. This culture of independence also means that pockets of contracting and project excellence within certain departments have been largely ignored and their successes not replicated. Public sector staff who fill contract or commercial management roles are frequently isolated, starved of training or growth opportunities and lacking significant authority or status.
I am far from confident that the situation is better elsewhere. In the US, for example, the Obama initiaitives to improve contract management appear to heva been diverted onto the ‘control and compliance’ agenda that is actually a key piece of the original problem.
There are solutions at hand. Doubtless this sudden exposure will lead to the emergence of a whole new set of overnight ‘experts’ anxious to offer high-price consulting and organisational design services. But there is also true expertise, in the form of IACCM, its membership and a growing body of international academics who grasp the fundamental importance of contracting and commercial competency to forge successful trading relationships in a complex, interconnected and interdependent world. The fruits of their work and research are accessible through a variety of studies, training programs and publications of which the UK Government (and others) can immediately take full advantage.
Companies in Asia traditionally have not had contract management functions. Indeed, in many cases there was not even a law department. The same applied to certain areas of Finance, such as Treasury. Now, lacking the constraints of reorganizing, some of these companies are adopting technologies that enable them to leapfrog their Western competitors.
Despite the fact that contract management and legal have no estabished history in most parts of Asia, the situation is changing fast as encounters with Western customers and suppliers show the benefits to be gained from contracting and commercial competence. The fact that there is no entrneched organization to overcome means that Asian companies can adopt ‘best practice’ without a need for painful reengineering of existing processes. An article in GT News descibes a similar pattern being followed in the area of Treasury and highlights its implications for Western companies and their employees.
“The growth of Asia as a financial power, driven by China’s extraordinary economic engine, has been on the mind of western corporates and banks alike for a number of years now, in terms of both the challenges and opportunities it produces. One thing is for sure, there is a vibrant and fiercely competitive corporate culture rapidly emerging in the region.
One example of how this competition is manifesting itself is in technology ‘leapfrogging’ – enabling treasury departments in Asia to gain an edge over their western counterparts. Leapfrogging refers to the fact that, by and large, corporates in Asia are unencumbered by legacy systems within their treasury and can implement a brand new cutting-edge system from scratch – ‘leaping’ them to the front of the efficiency line ahead of western corporates, who can take years removing legacy systems, preventing them accessing the best technology available. This can inevitably lead to a lack of competitiveness compared with their Asian peers. Faced with this situation, it could be easier for western treasurers to look east for their next career opportunity.”
Job hunters aside, this warning should act as a wake-up call to all those who have either resisted the inroads of new process and technology, or have failed to push through on rapid implementation. At IACCM, we know there is a similar trend beginning in Legal and Contract Management functions because these companies are talking with us about best practice – and more importantly, are then hastening to implement it.
An IACCM member from Finland recently asked for my thoughts on service quality and performance. I thought the question might be of wider interest – and by writing my thoughts, I hope others will be encouraged to offer their comments as well.
First, I am assuming the initiator of the question is asking about the interconnection between service quality and performance as they relate to inter-company contracts (since the question could equally apply to the role of performance measures in driving internal service quality). Focussing on the former, there are various aspects of this on which we have been collecting data or commenting in recent times.
- Research by Wharton Business School, looking at the Rolls-Royce performance based offerings (and comparing them with traditional cost plus or hourly rate offerings) found a significant advantage was obtained over time in terms of lower costs and greater innovation.
- Other research – I believe in the construction industry in particular – suggests there is no advantage in performance based contracting. However, I suspect the life-span of the respective arrangements might account for this, together with the frequency of change and aggressive focus on cost that are typical of the construction industry.
- The Gulf incident brings a further perspective. It has been suggested that performance management was not to blame, but post-event analysis suggests there may have been a failure to recognize the behaviors that specific performance measures induce. For example, a measure to continually reduce cost may lead to cutbacks that damage quality or safety (for example, fewer or less qualified resources, cut backs on maintenance etc); similarly, strong pressure on availability levels may cause personnel to err on the side of risk rather than caution (for example, if alerting the customer to a safety issue might result in unscheduled maintenance).
We are seeing a growing recognition that performance measures must always be designed to support the full set of value criteria that are important to an organization and then tested against each other to see whether they represent balance. It may also be significant to think about the nature and duration of the relationship being formed and whether it is sufficient for performance based measures to work. In particular, can the holistic performance criteria be used to affect payment schedules, so that issues such as quality become part of the reward structure?
This same point applies to the supplier selection process. If the quality of performance over time is important, then the weighting or evaluation criteria must reflect this. Often, we encounter weightings that are far too limited (eg simply based on price and availability), or where the final criteria are ‘adjusted’ to fit the supplier that internal pressures say must win, rather than the one that should win. If the selection process lacks quality, it should be no surprise if supplier performance shows similar failings.
Finally, the relevant organizations need to be honest in their appraisal of their own and each other’s cooperative instincts and to structure their approaches to performance and quality accordingly. I believe that performance based and quality success come from situations where there is a well-established and fully supported commitment to communication and governance. It is the procedure and adherence to it that will support quality. However, a good supplier will find ways to ensure they have the feedback needed to ensure on-going high quality and user satisfaction, because they want to retain their customer and gain future business. They will do this in spite of a poor procurement process, but enthusiasm will be undermined if the customer continuously engages in behaviors that ultimately make their business unprofitable or simply unpleasant as an organization to do business with. Suppliers do ‘fire’ customers, or simply let the business whither away. (Indeed, having the courage to fire a customer is sometimes the surest way to rebuild the relationship).
There are various articles related to these topics in past editions of IACCM’s Contracting Excellence magazine (available on the web site). There are also several blogs that I have written in recent months that expand on some of the points above.
Another aspect on which I write regularly is the internal connection between performance measures and service quality. I believe strongly that companies should look at how they allocate internal accountability for the quality of their internal policies, practices and procedures. It is the failure to have clear points of ownership that frequently leads to the failure of service quality. Again, my blogs often return to this topic (see for example https://tcummins.wordpress.com/2010/10/04/the-costs-of-poor-contract-management/)
Other blogs that might interest you include:
https://tcummins.wordpress.com/2009/12/01/perspectives-on-contracting-today/
https://tcummins.wordpress.com/2010/09/08/contracts-risk-deepwater-horizon/
https://tcummins.wordpress.com/2009/11/13/risk-management-behavior-is-key/
“The need for skills and information to maintain a competitive advantage has never been higher. Professionals today are under an enormous amount of pressure to keep up with the latest developments in their industry as well as document, report, audit, and share information in ways they’ve never had to before.
In an environment with an aging workforce combined with attrition resulting from downsizing, a ‘knowledge vacuum’ is being created as people with irreplaceable knowledge literally walk out companies’ doors. Leading companies recognize that developing successful products requires creative people with in-depth knowledge, and that they must actively acquire and share best practices throughout the organization.
Part of the challenge is to transform the ‘Not Invented Here’ Syndrome. No longer can companies afford to have information silos which result in costly duplicate, redundant, or unnecessary efforts.”
This summary could well have been written by one of our members from the world of contract management or sourcing. In fact, it refers to the field of engineering. But it could also have come from many other functions, all of which seem to be struggling with similar questions, challenges and disruptive forces.
So the good news is that we are not alone. On the other hand, it also means that other groups within the business are trying to work out their new positions within the heirarchy, trying to ‘stake their claim’ to the higher ground. So the debate for those in the commercial and contracts world – as well as procurement and to some extent legal – has a degree of urgency. And not just the debate, but of course also the action.
It is a time for courage and leadership. Within this blog, and through the work at IACCM, we have sought to lay out the opportunities and the change agenda. It is up to the professional community itself – and individuals within it – to decide on whether to take action.
“Some of the most successful resolutions (to negotiation) have been when there is nothing left to hide. Openness clearly leads to more value, yet often it requires a crisis to make it happen.”
This statement came from a discussion I was having today with the Vice-President for Commercial Management at a major outsourcing provider. Many in our community – buy and sell – bemoan the absence of open communication and recognize the impact this has on negotiated results. But recognition of the problem does not lead to change …
The executive with whom I was having this discussion described how his function is moving from a role of ‘reactionary customer protection’ to ‘proactive business winning’. This is an increasingly common trend, but like many others, it is unclear how that transition will be made.
The IACCM studies of ‘the most admired companies’ offer a range of insights. Perhaps the key issue is the quality of teamwork in both parties. Not only must the internal planning procedures be collaborative, but the business-to-business communications are fundamental to building trust. Flexiblity is not the most valued attribute in negotiation; it is the quality of communication. That means ensuring the right people with the right information are engaged at the right time, to enable open discussion and joint problem-solving.
In many organizations, there are several factors that work against this. One is the tendency (identified in the recent research by the International Center for Complex Project Management) for executive sponsors to engage in a ‘conspiracy of optimism’ – expecting results that cannot be achieved, at unrealistic prices and in unachievable timeframes. In principle, early engagement of the contracts personnel might reduce those risks – but in reality, contract management, legal and procurement staff are often involved too late. At that point, the contract becomes an instrument of protection, rather than a tool to assist realization of the opportunity.
Far too many opportunites are missed because negotiations become driven by protection, rather than open discussion of how the parties will mutually address the risks and create a relationship committed to success. This is not inevitable, but it is far too frequent and it requires organizations to re-think the way they assemble, empower and manage their negotiation teams and planning.
Commitment Matters 