Writing in the Opinion column in The Times this week, Libby Purves exhorts us ‘to break the rules’.
Her article cites a number of recent instances where ‘bureaucracy’ has either caused or threatened to cause disaster and loss of life. These include disciplinary action against a lifeboat crew for launching their boat and the sad stories of call centers that failed to despatch medical help because the caller could not give the postcode.
Her point, of course, is not that rules are unnecessary, but that petty bureaucrats often misunderstand or misapply them. Her words almost echo those we have been using at IACCM: she talks about people who “get the traning, tick the right multiple-choice boxes and refuse to think there might be another choice, not listed”.
This brings to mind the whole balanced scorecard syndrome. It reminds me of procurement and contracts staff with checklists of standard terms and conditions. It reflects a conversation I had with a General Counsel this week: “Wouldn’t you think that the purpose of a risk register is to induce action?” he asked me. “For many people, they seem to think that they have done their job just by filling in the boxes.”
Let’s not pretend such stories are unknown in our organization. The image of lawyers, contracts and procurement staff as slow, risk averse and unimaginative is not a creation of fiction. It reflects real experiences. Even today, I see the battle raging in many companies between the champions of compliance and the champions of innovation and change – as if these were somehow alternative states, rather than mandatory conditions for business success which must therefore be reconciled.
Why does this happen? Why do some people just apply rules in this mindless way? Sometimes it is simply lack of time or lack of caring. Others it may be down to fear of making decisions or enjoyment of petty power. No matter what the cause, it is the duty of those who care about their image to ensure it does not happen. Any ‘profession’ is tarnished by those practitioners who fail to demonstrate empathy with their clients and lack the intelligence or ability to exercise judgment. They should be trained or they should be removed.
Once again, Libby Purves sums this up in terms that mirror the IACCM message: “Real training lays down a framework of expertise and safety not to prevent initiative, but to free it. If you really know the rules and their purpose, you can judge when to make an exception and break them.”
In today’s business world, where creativity and the ability to adjust to rapid change are such critical elements of corporate and personal competitiveness, this ability to make good judgment is at a premium. Yet all around us is a growing body of rules, both internal and external. These run the risk of creating growing inertia and conflict – but alternatively they offer the opportunity for talented managers to demonstrate their ability to apply judgment and imagination in their application.
And lest you read this and think “this does not apply to me”, let me pose one final challenge.
Bureaucracy is not just about the way we personally behave. For example, many lawyers are great at exercising judgment. But they often believe that they are the only ones with that ability, so they force their surrogates to become bureaucrats by demanding that situations be referred to them. They should instead be thinking about how they could empower others to make better decisions. Forcing people to gain permission for their actions is just another form of bureaucracy. Making yourself into a funnel slows things down and often forces people into the bad decisions that you claim you are trying to avoid.
Hence Purves’ point about training. Our task is to manage the complexity of a rules-based culture by empowering others to make good decisions. In a perfect world, we would in fact make ourselves unnecessary! (But don’t fear, perfection still looks a long way off.)
I have long been an admirer of the quiet, yet effective, way that Procter & Gamble have weathered the challenges of their markets. They seem to be one of those organizations that establishes good practices, but does not become boastful about their success. Perhaps they understand how temporary success can be.
Those charged with contracting and sourcing are among the groups I admire, so I was interested to discover an article in McKinsey Quarterly that recorded an interview with the worldwide head of Global Business Services, Filippo Passerini. Having read it, I believe there is much that members of our community can learn from the approach.
The article focused on the process that P&G had followed to develop the Global Services organization and then to move it from the role of ‘service provider’ to that of ‘strategic partner’. It is a status to which many in our community aspire, but relatively few reach.
So what can we learn from P&G? Passerini set out a number of areas that he believes fundamental to success. Perhaps unsurprisingly in a global organization in the networked age, number one on his list was to establish a common IT platform – to make sure the various groups can talk to each other, share data, ensure seamless process support. It was this that enabled ‘the eleimination of duplication’ – locally based services teams were replaced by global centers that offered 24/7 support.
He also attacked the traditional functional model -Passerini understood the need to destroy silos. So he was delighted to integrate functions and achieve economies of scale through improved integration. The move here was to create process-based operations – so for example, a single group handling procure-to-pay, rather than the original split between procurement, accounting and finance. Without handovers, conflicting measurements and incentives, complexity could be reduced and cycle times improved.
Passerini did not immediately start a process of outsourcing (though he did move quite rapidly to offshoring to captive centers). He is convinced that cost-based outsourcing will often fail – because the process won’t work. Therefore his philosophy is to get the process right before you outsource (and in the case of Procurement, they actually decided not to outsource at all). The result is that, when outsourcing occured, the provider was delighted to receive the P&G staff – and rapidly used them as a source of competitive advantage.
“‘By outsurcing the the more repetitive commodity work … we could in effect de-commoditiize our shared service business and allow it to focus on innovation and developing new business capabilities”, commented Passerini. This approach has ensured that the relationship with outsourcing providers remains collaborative and strategic. And it has led to the shared services organization not only being highly valued as a source of competitive advantage, but also viewed as a positive career opportunity.
To protect this vaue-add, P&G have separated the resources focused on continuing cost reduction from those focused on innovation. Passerini recognized the danger that ‘a one-sided focus on costs could undermine the building of business capabilities’.
There is so much in this message that is relevant for our community. The approach and model aligns directly with the service delivery model promoted by IACCM. And the challenges that Passerini outlines are precisely those that we find inhibiting progress by many in our community. The benchmarking we offer through the Capability Maturity Model has demonstrated the constraints that many face as a result of inadequate technology solutions and the weaknesses of process, as opposed to transactional, perspectives. This traps many or our members in transactionally-focused groups that are limited in the value they can deliver or demonstrate to the business.
Research by Infor suggests that Supply Chain managers in the UK “spend up to 52 days a year dealing with regulatory compliance”.
Even allowing for the fact that these results may be somewaht exaggerated (Infor provides technology solutions), there is little doubt that compliance monitoring has become a significantly greater task for many of those in supply chain, legal and contract managemet jobs.
Infor’s findings suggest that compliance monitoring comes at the expense of other activities – such as work that will “unlock cost savings, optimise productivity and add all-important value to the business”. And the fact that manySupply professionals feel there is no robust risk management strategy covering supply operations obviously suggests that relief is not at hand.
Since compliance is by nature a rules-based activity, it is manifestly suited to automation. But of course that depends on sufficient analysis and recording, rather than reliance on the awareness and competence of individual managers.
Among the other interesting findings in the Infor research were the following:
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Other major concerns include the need for better supply chain visibility (96 per cent), shrinking margins (90 per cent), introduction of new products (89 per cent) and escalating consumer expectations (89 per cent).
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82 per cent of supply chain managers said they were concerned about reducing their carbon footprints. But 47 per cent stated cost as a barrier to implementing green initiatives and 32 per cent claimed that an inability to measure results hindered progress.
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Three quarters of those polled said that their supply chain’s geographic reach had increased in the last two years. Almost half (43 per cent) claimed that their supply chain now incorporated the UK, Asia-Pacific, the Americas and both Eastern and Western Europe.
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67 per cent said that they were more likely to offshore parts of their supply chain compared with two years ago. While Asia-Pacific would be the offshore hub of choice for 47 per cent, 53 per cent leant towards Eastern Europe as their preferred destination.
(Author’s note: The basic responsibilities listed in this article remain valid today. However, the role has matured and in many organizations is focusing increasingly on areas of greater strategic importance, based on analytics and business enablement. For an update on this article, see also https://commitmentmatters.com/2014/01/28/the-role-of-a-contract-manager-2014-update/)
I note that many people still seem puzzled by the role of a contract manager. It is a frequently asked question and recently generated significant debate on the IACCM website (Contract Management Forum).
Among Contract Managers themselves, there is widespread belief that the title (and its variants, such as Commercial Manager) masks massive variations in job role, status and responsibilities. Hence it is often felt that external hiring (especially across industries or geographies) will be difficult, if not impossible.
How great are those differences? In fact, our research suggests that the core responsibilities of Contract Managers (and by deduction, Contract Management Departments) are very similar. Drawing from the postings on the IACCM Forum, these might be summarized as follows:
(Please note, while in the interests of clarity these responsibilities are written from the perspective of a contract manager supporting sales (which is where there is a longer history for the role), they are easily converted to a description for Procurement, where the tasks are very similar, but more likely to be restricted to a post-award role.)
Responsibilities include:
o Contracts (various: including formal, short form, and annual contracts)—Drafting, Evaluation, Negotiation and Execution:
· Non Disclosure Agreements, Sales / Purchasing Agreements, Sub-contracts, Consulting Agreements, Licensing Agreements, Master Agreements, review of customer proposed terms and conditions
· Distribution Agreements (resellers, agents, joint marketing etc.)
· Commercial and Public (Federal, State and Local Municipalities) Contracting
o Serve as the point of contact for customers on contractual matters. Act as contractual “middleman” between company employees and customers, ensuring timely review and approval / reconciliation of variations.
o On all standard and nonstandard contracts, provide redlined recommendations and often negotiate directly with customer attorneys or purchasing staff until consensus has been reached
o Maintain contractual records and documentation such as receipt and control of all contract correspondence, customer contact information sheets, contractual changes, status reports and other documents for all projects.
o As needed, provide guidance on contract matters to project managers or other operational staff, including training to new project managers and other employees in contracting practices and procedures.
o Develop and implement procedures for contract management and administration in compliance with company policy. As appropriate, contribute to or influence company policies.
o Monitor compliance by company employees with established procedures. Identify areas of recurrent pressure.
o Work with Risk Management Department / Finance to coordinate contractual insurance requirements.
o Work with Finance to ensure adherence to broader finance and risk requirements such as revenue recognition, pricing and discounting policies,, export controls etc. May include ‘financial engineering’ and understanding / evaluating economic impact of terms and term options.
o Support Product Management / Marketing to ensure company products and services are offered with appropriate, competitive terms and conditions
o Monitor competitive terms. Monitor customer satisfaction with our terms and conditions and contracting practices. Recommend changes.
o Ensure that signed contracts are communicated to all relevant parties to provide contract visibility and awareness, interpretation to support implementation.
o Handle on-going issue and change management
o Monitor transaction compliance (milestones, deliverables, invoicing etc.)
o Oversee Service Level Agreement Compliance
o Ensure contract close-out, extension or renewal.
The emphasis within this list will vary. For example, some groups have little or no responsibility up to the point of contract signature; and others little or no role after signature (though there is a marked trend towards consolidation of pre- and post- responsibilities within the same group). Reporting line also makes a difference, with groups reporting to Legal tending to have a narrower set of tasks (potentially little responsibility for non-legal aspects of the contract or related policies and procedures, especially in terms of any financial accountability). Geography has certainly been a major factor in the past, with few Contract Managers visible in non-Common Law countries. However, this is also changing as business globalizes and contract forms and procedures grow more consistent.
One of the biggest differences between organizations lies in the extent of authority and accountability that Contract Managers have for making contract changes. Another big difference is the extent to which the Contracts organization has solely deal-based responsibility, versus a more strategic role in overall company policy and commercial / contractual strategy. For example, does the function simply implement and protect other people’s rules, or does it advocate change and participate in key policy discussions?
Today’s ‘best practice’ contracts groups are those with a holistic responsibility for the contracting process (pre- and post- award). They are increasingly involved in establishing contracting policies that support market and business strategy – and this is something that cannot readily be done if resources are fragmented. As a Professor of Economics at one of the major UK business schools recently commented: ‘The value of contracts is in the outcomes they produce’. He also observed that today’s contracts are becoming more complex and the risks of failure more severe.
Too often, companies have had no one providing the oversight for achieving those outcomes or managing that complexity and risk – and that is why the role of Contract Manager is emerging as a critical competency in today’s organizations. It is also why Contract Managers themselves need to start focusing less on what makes them different, and more on recognizing that there is a common and consistent core of activities that underlie their role and professionalism.
For more information and research on contract and commercial management, or to explore training and certification, visit www.iaccm.com – the home of the not-for-profit organization that represents the field of contract management globally.
(See also an April 2009 update to this article – The Role Of A Contract Manager – Revisited)
I was never a great fan of legislation as a way to drive corporate performance. In the same spirit, I prefer contracts wihout massive penalty and liability clauses. I like to believe that organizations are driven by a desire to do the right thing and to maintain a positive market image. But I must admit that the US airline industry has managed to change my mind.
My nine year old son may – or may not – be somewhere over the Atlantic right now on a Delta flight that was due to leave New York some 6 hours ago. During that time, the airline kept an over-sold flight captive in an airless room. They refused to give information; they refused to provide any sort of refreshment (even water); and of course they use ‘security’as a weapon to prevent any sort of complaint.
When it comes to customer commitment, the majority of US airlines have none. All of us can recount stories like this (my most recent was with Continental just 2 weeks ago, when I suffered a 26 hour delay through avoidable incompetence; my wife’s was a week ago on US Airways, when she gave up and drove to another airport, 7 hours away).
I acknowledge it is a complex industry. But the incompetence and hostility that major US carriers show to their customers is more in line with Soviet-era behavior. It simply should not be accepted in the country that sees itself as the face of capitalism, the home of the consumer.
In previous blogs, (see, ‘Are Rules Destroying Value?‘) I called for increased debate on legislation and rules versus voluntary and ethical codes and i highlighted the negative impact that regulation can have on the market, introducing distortions and complexity (for example, export / import regulation). But it appears there may be times when indutry must be held accountable. While European airlines are far from perfect, it does seem to me that the ‘bill of rights’ that the EU introduced, enforcing compensation for passengers, has had a significant and positive impact. Introduced against the protests of the industry, it appears to have brought a new level of discipline and concern. It seems – unfortunately – to confirm the point that organizations respond only if there are direct and meaningful consequences for their actions (or inaction).
It would be nice to believe that companies want to do well just because they care. But the truth is that, over time, they need some pressure to strive for excellence. The airline industry is protected; the competition is limited. And that has allowed the major US carriers to sink to a point of the lowest common denominator. So either they need an injection of competition (open the market to foreign ownership) or they need some form of compulsion – such as obligatory compensation to their customers.
Let’s start with a simple premise.
Most negotiation occurs because the parties have an intrinsic interest in reaching a mutually acceptable agreement. In other words, most negotiations are not simply a pretence or a cover for quite different intentions.
Based on that premise, ‘good negotiators’ are those who can reconcile the interests of the respective parties to develop the framework for a successful relationship.
Looking at the current state of the world economy, it is clear that skilled negotiators will be in high demand. Trust is in short supply and the forces that undermine opportunities for agreement are having a field day. Politicians and regulators are adding to the stockpile of ‘positional’ issues that interfere with negotiated agreements, As if their rules and posturing were not enough, many deal-makers are also battling thier own staff groups, where the forces of control are in the ascendancy. And finally, many negotiators find themselves having a very one-sided negotiation – the other side offers not a negotiator, but a talking head.
More and more I hear complaints by IACCM Members that it is increasingly tough to establish ‘good faith’ negotiations, that they regularly face Procurement or Sales personnel who have no empowerment and simply recite the company rule book. And that rule book is frequently one-sided and unreasonable as a base for a successful relationship. This short-sighted behavior frustrates deals, but even in cases where a contract emerges, it offers no basis for trust or commitment. These are relationships that typically fail to deliver.
At a time of such uncertainty, when economic and political decisions have added to the supply chain and cultural issues that challenge negotiators, it is imperative that companies empower their representatives. Successful negotiated deals do not emerge from polarized positions. They take creativity and imagination, flexibility and vision.
Rules-based negotiators will increasingly find themselves marginalized .. as individuals and as companies. The time to train and develop a skilled core of professional negotiators is now – and the need is urgent, because most organizations show limited talent in this area, especially in their buy-side operations.
The debate over the desirability of rules and regulations will never go away. Humanity has long struggled to determine the ‘right’ balance – and clearly different cultures have different perceptions of what that should be.
But this debate – and the effect of the answers – should be a very active topic for discussion by the contracts, sourcing and legal community. These groups are typically charged not only with creating many of the rules in their organization, but also with their enforcement.
Not surprisingly, many see ‘the rules’ as important and valuable. There is a natural inclination to want more of them – since that is surely the route to greater power and more resources and to ensure control over the ignorance or poor judgment of others. That is the quintessential ‘police force’ mentality – and as the challenges of modern policing reveal, it is not especially effective and becomes a slippery slope of ever-greater constraints on freedom.
There is a counter view to that position, which is that rules should be minimal and that adherence to acceptable ‘codes of conduct’ should wherever possible be voluntary. Proponents of this position argue that a rules-based culture inhibits innovation and creativity; it becomes innately risk-averse. By reducing freedoms, we force people to choose either to comply or to leave. And of course it is those that leave who are typically the value-generators, the entrepreneurs, the people with personal drive and ambition.
The challenges facing political decision-makers are therefore reflected in the corporate world. Indeed, many of the new rules that our community is being called upon to enforce are today being driven from outside the company.
Contracts experts, lawyers, procurement professionals are in a unique position to observe the effects of more rules and tighter controls. And because these groups are seen as having an innate interest in supporting them, a voice raised in opposition would have significant impact.
The time has come to start raising those questions. It is clear that governments in the free world are steadily undermining freedoms, not just to protect their citizens, but increasingly to protect vested interest groups that have seen an opportunity to drive new regulation. Those rules may be protecting our jobs – at least short term; but longer term, they are destroying competitiveness and will lead to major economic shifts of power.
IACCM has announced that it will increasingly monitor the areas where external regulation damages world trade and jobs (export / import controls is a current example). It has also called on its members to monitor the way that internal rules are having similar effects on their company’s competitiveness. Together, we must start to campaign for (and describe) an environment that maintains intelligent balance between regulation, trust and education – and structure our contracts and associated policies and practices accordingly.
Many professionals in legal, procurement or contracts groups know only too well those repetitive problems that just won’t go away. In fact, much of our work involves protecting against the risks that those ‘problems’ would otherwise generate.
But sometimes it is good to sit back and wonder whether it is true that there really is no other solution, or that the alternatives would prove unacceptable.
The ‘green’ revolution is daily throwing up examples that suggest the problems may often be in our minds rather than in reality. A recent example appeared in The Economist, which described an initiative by UK retailer Marks & Spencer to build a new, environmentally-friendly factory in Sri Lanka.
The “eco-factory” began as a branding experiment, but turned into an economic success. No air conditioning; natural light; hydro-and solar-power; a turf roof. Energy costs alone are 40% lower than comparable ‘traditional factories. And the goods it produces – ‘ethical’ lingerie – are no more expensive than their eco-unfriendly competitors.
Behind this story there was imagination – a group pf people who challenged assumptions and found practical – and superior – answers. It would be interesting to know the make-up of the team that developed this concept and oversaw its realization.
So what about some of our ‘insoluble’ or ‘risky’ problems, such as those terms and conditions that always demand negotiation and to which ‘there is no alternative’?
Are we the barrier to innovation?
Throughout history, human affairs have been governed by rules. They change and evolve with shifting needs and the emergence of new issues and challenges.
Today, we seem beset by increasingly vague and unreasonable regulations. It seems almost anyone – governments, suppliers – feels entitled to impose rules that protect some particular interest – and they feel no obligation to consider whether it is reasonable or enforceable. That is your problem.
I am talking about topics that range from corporate governance, through bribery and corruption, through export and import controls, to issues like software or license compliance. In recent months, I have heard story after story from business people who have no idea how they can ensure compliance with the rules being imposed upon them. In a story today, a US corporation that legitimately provided program access to its German subsidiary found itself in breach of export regulations because a Romanian employee (based in Germany) used the system.
We cannot do much about government regulations, excpet campaign against those that are clearly against the public interest (and IACCM will increasingly do that). But those who negotiate contracts must start pushing back on unreasonable obligations to monitor use. If they wish to protect their assets, suppliers have a duty to build protection into them or into the way they are distributed. It is not right to simply pass the burden of oversight to a customer, except in respect of fraudulent or deliberate misuse.
It is not only a question of reasonableness (though that is also an issue). The point is more that the organization subject to these rules is somehow meant to oversee their enforcement. In a digital world, that is incredibly difficult to achieve.
An IACCM member posted a question on a subject that has been bothering me for some time (and which we included as a discussion item at the most recent IACCM conference). It relates to the area of Codes of Conduct and the extent to which these may represent ‘enforceable’ promises. Or put another way, how do Codes and Contracts interrelate?
This particular question relates to the Codes produced by buyers of goods or services; but of course we are also seeing Codes produced by providers as they seek to reassure or set expectations for their customers.
The question was this:
“I am interested in knowing whether any Purchaser has had a supplier sue or threaten to sue for breach by the Purchaser (including uneven application of the Supplier conduct rules) of obligations on the Purchaser contained in the Supplier Code of Conduct.
There was a California class action case in which employees of Wal-Mart suppliers (offshore) sued Wal-Mart for failing to remove other suppliers who breached the code. It failed of course because employees of a supplier have no privity of contract with Wal-Mart, BUT had the suppliers commenced the action, it would likely have succeeded.
I am not focussed on the class action – just on a Supplier who has agreed to a code of conduct as a term of an RFx or a term of its supply agreement and who then sues its Purchaser for breaching its obligations uner the code. Sometimes codes of conduct have very high aspirational standards (like “highest ethical standards”, no “apparent conflict of interest”, no concealment of relevant criteria”) that conflict with sound commercial practice. So there’s an opening here for a Supplier to sue for Purchaser’s breach of the code, if the code is part of the contract, or on collateral warranty if the code is a separate document.”
The issue of ‘codes’ is of great interest to me (and IACCM). For example, to what extent do these supplement or even supercede contracts? Will Corporate Codes be used to replace the need for contract terms in many areas, and in particular used to address the inconsistencies of law between different jurisdictions? And if so, will the result be that they become a source of litiagation, or will ‘the jury’ be public opinion, when companies are called out for failing to match their promises?
We have to remember that Codes are typically used as a marketing technique (setting out capabilities or responsibilities). Contracts (in good companies) may also do this. But more often they are used by each side to limit their capabilities or responsibilities. Codes are about trust; contracts (frequently) are not. So there is a fundamental conflict of philosophy; yet to prosper in the global economy, companies must establish trust in their brand – to attract the best customers and the best suppliers and distribution partners. So Codes seem likely to proliferate ….
My enquiries suggest that in most companies, the group responsible for producing the Codes has little or no relationship to the group producing the contracts. I understand why this may be the case, but it doesn’t seem very smart. The two areeas must bereconciled, or there is a very real risk that they simply cancel each other out (and what does that do for generating either trust or good risk management?).
The question cites the example of Walmart. In the end, Walmart responded to public pressure (reputaion risk) much more than legal pressure. And perhaps that is the way of the future.
If the use of Codes increases, I guess it is only a matter of time before they more frequently get introduced in litigation. What we have yet to see is the extent to which courts are prepared to take thm into account in reaching judgment. Presumably key questions will be the extent to which reliance was palced upon them, whether companies explicitly or by implication include them in their contractual undertakings, the sophistication and history of the other party etc.
And the pattern here is also likely to vary depending on the jurisdiction and its relative readiness to incorporate supplementary materials into its judgments.
Commitment Matters 