Outsourcing, software as a service, mobile devices and now cloud computing … the world of information systems and telecommunications has moved at a dizzying pace. But for those who are charged with negotiating and managing supply relationships, the changes look like they are only just beginning.
When I was last involved in detailed negotiations for technology equipment, it was in a world where customers still regularly signed ‘selection and use criteria’ – that is, suppliers sought to disown responsibility for actual performance beyond the standard specifications. Yet already this attitude of ‘let the buyer beware’ was under challenge and the meaning of expressions such as ‘fitness for purpose’ was a lively debate.
Today, a variety of pressures have forced that discussion into new realms. In seeking to escape the commodity trap, many suppliers switched to offering services, which over time required much more specific performance undertakings and guarantees of outcomes. And it is this which is providing a very real challenge for both buyers and sellers.
In the old world, Procurement was the champion of commoditization. This was seen as a powerful methodology to drive down prices. And it worked – so long as what you wanted was an input. It does not work if what you want is a guaranteed output or outcome.
In that same old world, sales contracting professionals were taught to limit commitments. Their job was to contain risk – to counter-balance the potentially dangerous claims of their colleagues in Sales. This ‘internal contention system’ is also no longer appropriate.
In the past (and in fact mostly still today), contracts negotiators enter into a tribal dance, often involving third party experts who enjoy the lengthy dialogue and extended decision processes. Often these debates focus far more on the consequences of failure (liability, indemnity, get-out provisions etc) than on the real issue – which are how to support success. Risks are contained, not managed. (And if you don’t believe me, just look at IACCM’s annual study of the ‘Most Frequently Negotiated Terms’).
Today, things are changing. CIOs are under far greater pressure to deliver results; they are judged on outcomes because information systems and communications technology lie at the heart of corporate strategy, competitiveness and survival. Their dependence on technology service providers therefore demands far greater commercial skills and far better instruments to select, define and oversee supply relationships.
So how well equipped are customer organizations to address these changes? IACCM recently launched a survey to find out. Early results show that there is a wide awarness of the need for change – but a mixed picture in terms of progress. A brief summary of some of the findings includes:
- Overwhelming agreement (94%) that conditions are changing and that commercial capabilities are becoming more important
- General feeling (75%) that there is an overall need for improvement in current skills
- Most on the buy side see an absence of necessary skills within the CIO organization
- Most on the buy side feel that Procurement offers the skills required by the CIO (although recognizing need for improvement)
- Those on the sell side perceive more commercial skills in the IT department than in Procurement (opposite of buyer’s view)
- Sellers have major concerns over the ability of customers to define requirements
- The big shift in selection criteria relates to on-going delivery and performance capabilities – far less based on point of purchase, far more on commitments and demonstrated capabilities to perform, readiness to ‘partner’ to deliver results
- Clear implication that suppliers must show greater readiness to commit outcomes and demonstrate their ability to deliver on promised performance
- However, buyers must then recognize the need to manage requirements more effectively, to stay engaged and to recognize that ‘partnership’ is a two way process
Overall these findings support the need for increased ‘supplier relationship management’ and the importance of improving the commercial and relationship competence of both buyers and suppliers, to ensure continued adaptability in the face of rapid technological change and partnering to ensure that business results are achieved.
The implications of these findings include the need for buyers to become more objective and holistic in supplier selection; for suppliers to show greater integrity in their sales commitments; for pricing / charging models to place value on supplier quality, the depth of commitments and demonstrated capabilities; and for focus on governance and change procedures based on rigorous assessment but also a commitment to work together in ensuring performance.
You can benefit from access to the full report by participating in the survey. It takes no more than 5 minutes and can be accessed at https://www.surveymonkey.com/s/ITProcurement
Most managers aspire to a senior reporting line. They are sure they deserve it; and of course they see this as a way to gaining respect and power (and probably also money!).
So it is not unusual for me to be asked questions like ‘Where does our function report?’, or ‘Are there examples where we report to the CEO?’ These are asked in the hope of a silver bullet that can assist the case for their own promotion. One such question came to me today – in this case related to Procurement, but it could equally have been from Commercial or Contract Management and the general tenor of my answer would be the same.
Here is the question I was asked: “Organizationally, where should a Chief Procurement Officer be placed in the organizational chart? Show this role be a direct report to the CEO to raise influence? Procurement in many organizations are cost centers and not profit centers, since we don’t spend the money (the Business Unit does) we lack influence. By being a cost center how do you grow influence and thus push change through an organization for new ideas, new strategies and thus savings. In some organizations the Business Units have the ability to “opt out” of Procurement initiatives, ie Strategic Sourcing, Category management/change management, etc. How do you work these issues?”
Of course most people would like to report to the CEO – and most never will. That group of direct reports will be reserved to a range of officers that is relatively unlikely to include Procurement. But that does not mean lack of influence or lack of access – we determine those by ensuring our relevance to the executive agenda.
Success in raising the procurement profile will not come from either pleading or waiting to be noticed. It will come from a demonstration of leadership in delivering value. That means giving thought to the executive agenda, and working out how and where to contribute in ways that go beyond the traditional expectations. I know many procurement executives who ‘pitch’ for greater power or an expanded role – and don’t get it because they (their department) have not demonstrated any distinctive competence, they have not earned trust.
Clearly a Procurement role that is focused on negotiated savings and overseeing compliance is unlikely to be held in great esteem. It is a chasing game, an audit role. When execs see you, it is usually because of bad news, because something went wrong. The original question also betrays a problem – the comment that the business units hold the budget and therefore have the influence. That is to some extent true – but Procurement in most companies seems to do its utmost to alienate suppliers and drive them into the arms of the business unit. Yet that is not inevitable – and gaining influence depends on being seen as a source of support or power, not a group that everyone wants to avoid.
How do internal customers and external suppliers see you today? As a source of support, assistance and high value access and information? Or as an administrator, an auditor, a barrier to getting things done? We must be ready to undertake honest appraisals – and then to set a vision for what we want to become, how we want our image to be seen.
Gaining greater status will depend on doing things differently, bringing innovation, new solutions, avoiding problems rather than clearing up after them. Of course your current tasks matter; but how many of them depend on you to do them? Can you take active steps to empower and enable the business to do more for itself, and then monitor results? As a result, can you divert resources to areas where you will achieve visible and measurable improvement – for example, improve up-front requirement definition; gain in-depth insights to supplier performance; monitor and identify sources or needs for non-compliance and therefore opportunities for change; spot areas where rules, practices, processes are outdated or are causing delays and remove or improve them; truly focus on risk management (not risk allocation) and also evaluate the financial impacts of risk alternatives; look at some of the new ways to gather market information so that procurement becomes an adviser to management, rather than to itself; look at ways you are aligning with product or service management groups and see to what extent you might be driving greater market advantage through shifts in procurement. And as part of this, be rigorous in identifying service expansion or improvement initiatives (for example, post-award contract management, supplier relationship management) and the new or improved skills that will be needed to enable performance.
As you know, executives want value-based cost reduction; they care desperately about reputation risk; they want the business to become better at eliminating rules and bureaucracy; winning markets, managing risk. These are all areas where procurement can visibly improve its performance and contribution without having to change reporting line. But if it does these things, it will certainly shift status – and potentially have that top-table seat.
A CPO and senior management team within procurement can embark on this journey through a planned approach that includes a shift in their emphasis, the types of questions they ask, the data they collect, the conversations they have inside and outside the department, the areas in which they invest in skills, either through training or hiring policies. They can impact behaviors with the right internal and external appraisal criteria, score cards etc.
In the end, our influence will depend on the type and nature of information we bring to top management. This reflects our knowledge, our scope of interest and our capabilities. I spoke with one CPO recently who has been successful. He monitors the number of times that he – or members of his team – meet with the CEO. And he also monitors the reason they are there. In the beginning, 4 out of 5 meetings were due to ‘issues’ – supplier problems, escalations, internal exposures. Procurement was associated with ‘problems’. Today, 3 out of 5 visits are associated with some form of innovation or improvement initiative, either sparked by Procurement or because the CEO wants them involved. The number of visits today is almost double the number of visits 2 years ago.
I thought that this was an interesting story – and an interesting way to measure our ‘journey’. I wonder how frequent, and for what purpose, your CPO is meeting with your CEO today? Are you seen as part of problems, or the solution to problems?
Kevin Mitchell, Chairman of the Business Travel Coalition, is campaigning about the pricing practices of the major airlines. He is riled about all those ‘hidden charges’ and the unpredictability of what you will finish up paying when you book an airline seat. He would like us to sign a petition to go to the US administration – you can find out more a this link.
Kevin is not alone in his growing interest in pricing. At the corporate level, there is increasing understanding that we need to be more thoughtful – and more creative – about pricing and charging models. Not all of these initiatives are about subterfuge. In many cases, they relate to the need for greater creativity in response to market uncertainties and spending cuts. This was a point made recently by the President of Fujitsu, discussing the challenges of winning public sector business over the next few years. Buying organizations are also showing more interest in developing better internal guidelines and procedures about which price or charge mechanism to choose, and when.
Pricing affects behaviors and also depends on behaviors. For example, the old method of volume or revenue discounting is becoming steadily more discredited because volatile market conditions plus the speed of technological change often render ‘commitments’ utterly meaningless. Many suppliers were badly burnt by the speed and scale of the recession. Some customers also suffered from their inability to cut back or renegotiate. Discounting is also one of the surest routes to ‘commoditization’ of a product or service.
Recent years have seen the steady growth of use-based or performance pricing, yet many buyers remain suspicious of these alternatives. Research shows they typically lead to greater innovation and continuous improvement, yielding lower costs for the customer.
On one level, Kevin Mitchell’s campaign and the dilemma of corporate price and charge models seem miles apart. Yet in many ways they are closely linked. Price – rather than value – still tends to drive many buying decisions. Few organizations have developed sophisticated analytical methods to assess the relative value of supplier A versus supplier B. I have written previously on this topic – for example in highlighting the challenge of effectively pricing risk. Until they do develop better methods, many supply competitions will remain based on comparison of ‘sticker prices’ for supposedly like-for-like services.
Such competition encourages the type of trickery that Kevin deplores. Yet sadly, the buyers in many cases have only themselves to blame; their fixation on ‘commoditization’ has driven suppliers to create the lowest possible base price and then find all sorts of excuses for add-ons. These may be capacity based, or may be for extra ‘services’ which are often unavoidable and necessary (for example, Ryanair’s proposal to charge for use of the lavatory). Suppliers are also missing opportunities to change their value proposition, since many treat ‘prices’ and ‘terms and conditions’ as separate areas of the business and fail to grasp their connection in delivering economic value.
BP today issued its internal report into the Deepwater Horizon accident. It emphasizes that this analysis did not include input from external sources and it is therefore only one element of the wider investigation into what went wrong – and what must be done to reduce the chances of similar events in the future.
The challenge with all risk management is of course to anticipate, rather than react. No management wants to be caught out by the same mistake twice; no management wants to be shown to have failed to learn from the mistakes of others. There will be many eyes on this report, using it as a way to test internal systems and procedures and to reduce the probability of similar occurrences.
So what did the BP investigators find? ‘A complex and interlinked series of mechanical failures, human judgments, engineering design and operational implementation and team interfaces came together to allow the initiation and escalation of the accident. Multiple companies, work teams and circumstances were involved over time.’
The key recommendations from this report include a need to rethink contractor oversight and awareness, risk assessment, well monitoring and control practices, plus integrity testing practices. So while there are clearly engineering issues involved, the governance of contract relationships is identified as a critical issue. This reflects findings from other industries, which show that our constant development into areas of ever-increasing complexity demand new instruments for their management.
The deabte on this particular incident will continue for many years. But it appears already to reinforce the point that contract structures, terms and oversight provisions need to be substantially revised to cope with the increeasing complexity and risk of today’s trading relationships. That demands new skills and new levels of empowerment. Senior management must start to take greater interest and stop abdicating or avoiding responsibility for an effective contracting process. BP is not alone in this regard; indeed, our evidence suggests that its contracting practices are better than those of many companies. But the report suggests that they weere not good enough to deal with the complex environment in which Deepwater Hoizon operated. And it implies those failings were not only due to BP, but also to the behaviors and performance of key suppliers.
Once again, I cite the observations of Professor Leslie Willcocks, who last year commented that ‘contracting’ is one of the three core competencies required by companies to be successful in 21st century markets. Hopefully, we can all learn form this incident and apply renewed focus to the quality of contract and commercial management.
A couple of times in recent weeks I have heard from organizations that their internal employee surveys have shown that contracts staff feel ‘isolated’. This reflects other survey evidence regarding the sense of being ‘under-valued’ and comes especially (but not solely) from those in a post-award contracting role.
I suspect that the broad sentiment regarding value is because many staff in these positions still tend to be viewed as somewhat administrative. But for others, it can be a problem that increasingly they work remotely from their colleagues, either largely working from home or perhaps within a larger account or project team which has no other contracts professionals.
These two issues – value and isolation – are certainly linked. Indeed, anyone who feels isolated tends to become defensive; and isolation clearly results in reduced skills and value over time. Research has pointed to the fact that people who are well connected (in terms of their professional links) are held in far higher esteem – because it gives them access to more information and unique insights. Genetic research has also shown that people who are cut off from their mentors or sources of innovation steadily lose the ability to perform.
So these sentiments matter and represent a serious challenge to those who manage contracts personnel. It demands steps to ensure greater connectivity, more sources of inspiration and the chance to network for new ideas and fresh solutions. For many, physical meetings are no longer an option in these days of constrained travel budgets. The occasional team webinar or conference call often fails to do the trick. Indeed, I was reminded recently how it can make people feel even more isolated. I was told about a regular team call, where those in HQ would gather in the Vice-President’s office and join the call together – leaving those on the outside even more conscious of their lack of influence and input. Not surprising;ly, most of the conversation was dominated by those in the conference room. Those on the outside were disengaged.
Senior managers must think about ways to keep their people connected. They can do that by emphasizing its importance – and reflecting that importance in their actions. So conference calls, webinars, virtual working groups and project teams, the use of message boards and coomunities of practice are all ways to enable connections, but only if they are managed in a disciplined way and gain the visible attention of management. Participation also needs to be required – for example, it should feature high on personal appraisals. Staff should be rewarded or acknowledged for delivering new insights to their colleagues. For example, there are so many external sources of information that few organizations leverage in any effective way. IACCM has weekly expert interviews; it runs dozens of relevant research surveys; it offers webinars, news updates, this blog ….. how often are team members encouraged to follow these sources and then perhaps give periodic feedback or reports on what they discovered?
Ironically, the volume of information at our disposal and the ease with which it can be accessed are unprecedented. Yet we know from the data at IACCM that many contracts staff take little advantage of this. A networked world has offered new opportunities for ‘inclusiveness’; but it has also left many people feeling isolated. Addressing this issue demands new approaches and new thinking by management and also by any individual professional who wants to progress and to ensure their personal development.
There is a vigorous debate underway on one of the IACCM LinkedIn sites. It is on the topic of the word ‘effort’ as used in contracts and the effects of terms such as ‘reasonable’ or ‘best’.
With over thirty comments now made, it is clearly a debate that will progress for quite some time. Those commenting are rightly highlighting how the interpretation or significance of such terms varies under different legal systems …..
It is debates of this type that raise questions in many minds about the entire contracting process. To the independent observer, such discussions seem archaic and irrelevant, just another way to waste time in the deal-making process. But more than that, it seems to represent some level of underlying dishonesty in the way that contracts are formed and managed. And in a sense that is true. As highlighted in a recent blog (and exchanges with Jon Hansen on Procurement Insights), the contract is often an exercise in pinning down the truth. For the buyer, they want to maximize the extent of the commitment because they fear the supplier will start wriggling the moment the contract is signed. For the supplier, the aim is to avoid too firm a commitment in case they find it too hard or too costly to perform.
I understand and respect the great history of the law and how individual national approaches have evolved over many centuries. I understand that they are rooted in cherished cultural traditions and that each practitioner genuinely believes that their system of law is best. But a key purpose of ‘law’ is to create clarity in human interactions; it is to assist in the definition and understanding of outcomes that can be seen to be fair and equitable. The law is fundamental to trust. Therefore, obscurity and stealth should not be core to this process.
In today’s global business environment, there are so many areas for potential misunderstanding and few potential mechanisms for their avoidance. That is the role that ‘the contract’ and contracting experts should be attempting to fill. To do so, they must step outside their traditional national methods and instruments and be open to the use of alternatives – or indeed develop and promote those alternatives.
That is why we must become far more open to the use of clear and precise language (not words that depend upon a lawyer from within a specific system debating endlessly with a lawyer from another system). We must think about better defining the methods for governance and accountability. We must look more at arbitration and mediation as the source for claim and dispute resolution.
The contracts and commercial community has a very real, professional interest in the success of world trade. We should be keenly pursuing new ways to ensure its health, rather than getting lost in debates about the specific meaning of individual words within the various legal systems of the world. That does not make us important; eventually, it will simply make us irrelevant.
The impacts of the networked world have been signifcant for most of the world’s population, but perhaps more so for those in the world of contracts and procurement than many others. And for all of us, the maority of those impacts are not yet fully apparent.
This morning I heard a brief radio interview with two authors who have written about the efffect of the networked world on the way that people think. One of them was claiming that the human brain is rapidly becoming ‘rewired’, genetically adapted to the massive flows of information and the ease with which communication is undertaken. He asserts that the emerging generations are ‘no longer capable of deep thought’ and that this will have a long-term and negative impact on innovation.
The other interviewee agreed that we are faced with very real challenges in dealing with the volume and speed of information made accessible by globally networked technologies. But in his view, this means we just need to do things differently. We must adapt to our new circumstances and sort the good from the bad. For example, he cited positive aspects such as the greater ease with which people can now collaborate and the dramatically reduced time and costs of undertaking research. On the other hand, he recognized that the pressure to make decisions faster, to generate results more quickly and to adapt rapidly to the streams of new information that hit us is not just demanding, but can overwhelm our analytical capabilities.
How does this relate to the activities of a procurement or commercial group, making new market or acquisition decisions, or contemplating major bids or contracts, or perhaps undertaking investments in new process or organization? In the old world, we tended to spend a long time gathering information. It took time to research and it was often costly to obtain good data (e.g. we needed consultants, research firms and analysts to gather data for us, at significant expense). Once we had the data, we would progress to analysis and decision-making; we would develop a plan and launch into our project or initiaitve, based upon an appropriate funding or investment plan.
Today, there is a rapidly declining need to turn to traditional market researchers or analysts. Much data is free; and if we want validation or new research, it is far smarter to turn to web-based networks or analysts such as IACCM or others that I have mentioned in previous blogs, which charge a fraction of traditional fees and offer a wider perspective. But it is not just the sources of information that are changing; it is the impact of information flows and access on the way that problems are addressed. For example, the interview suggested that ‘we needd to break big concepts into smaller concepts, big problems into smaller problems’.
This thinking aligns directly with the trend we are seeing in ‘best practice’ contracting. Rather than trying to define long-term, fixed solutions, we are instead needing to develop relationship structures that are far more agile and adaptable to changing circumstances, capabilities and needs. That means much greater use of staged forms of contracting, with more gateway reviews or planned break-points. These approaches in turn demand improved methods to contain development costs – which can best be done through greater use of the networked tools that are themselves underlying the revolution in our thinking.
In truth, the world has always had more ‘gatherers’ than it has had ‘deep thinkers’. That is unlikely to change. But we are certainly at a point where leaders in our community must give active thought to the way we should deliver our services and model our tools and instruments to achieve greatest effect and benefit.
‘You don’t get what you deserve, you get what you negotiate’ is the title of a blog by Jon Hansen, in which he challenges the ‘adversarial state of mind … that for so many years has hindered the buyer and supplier relationship …. negatively impacting an organization’s ability to sustain positive results”.
Jon castigates much of the negotiation training delivered by Karrass and others who encourage the ‘win-lose’ mentality. I agree with his comments. There are still many who see the negotiation itself, rather than the outcome it inspires, as the objective. This transactional, commodity-based thinking certainly does not fit well with many of the relationships required by business today.
Within the article, Jon also addresses the question of ‘lying’ and the sense among many that this is not only acceptable, but normal. He suggests such attitudes destroy trust and maintain the cynicism associated with many negotiators, especially those in Procurement.
While broadly agreeing with the point that unprincipled negotiation will lead to disappointing results, I regret that I do not entirely share Jon’s perspectives on the question of lying. Sadly, this is not so much to do with the negotiators in sales or procurement – it comes from the top. For example, in its recent paper ‘A Conspiracy of Optimism’, the International Center For Complex Project Management identified the ‘conspiracy’ that leads executives on both sides of the table to ‘lie’ to their trading partners and to create a combined version of ‘the truth’ that leads to mutual delusion over what they can achieve, by when and for how much. Indeed, how truthful are any of us when we are seeking to impress someone with whom we want a deal or a relationship?
These executives are also the ones who then set the measurements or oversee the organization that will negotiate and deliver on their stated goals and objectives. And they do not set measurements that reward truth; in fact, the ways they reward people clearly encourage the marginalization of truth – for example, sales commissions based on forecast revenue or volume of deals closed; Procurement bonuses based on estimated savings. How often do organizations even go back and track how close those forecasts were to the truth? It is actually too difficult within current systems – and there are too many factors that may have led to the alteration – so it is easier to keep things the way they are.
There is of course some difference between ‘omission’ (failing to divulge the complete picture) versus ‘commission’ (deliberately misstating the truth). However, mature organizations understand that these challenges exist and it is therefore entirely legitimate – and necessary – to validate and verify what you are being told. We do that through a wide range of mechanisms, including market research, references, interviews, requiring certified records etc. We try to ‘hold feet to the fire’ through contractual warranties and respresentations. If we are smart, we also include review, change and governance procedures that enable verification and update.
In the end, it is the overall quality of contracting and contract management that creates effective ‘due diligence’. Negotiation is just one phase in this activity and any organization that relies solely on the effectiveness of its negotiators is indeed foolish – and will reap the consequences by performing poorly over time. After all, once the lying begins, it spreads – and we only have to look at the big corporate governance failures over the years to recognize that is true. Indeed, at one of my past employers, the internal audit function would monitor the company newspaper to see which Sales teams had won the biggest awards – and would investigate accordingly.
We hear so many calls for ‘leadership skills’ these days. I am not quite sure how we are supposed to produce infinite leaders, nor what the consequences would be if we succeeded. It seems to me there would be a real danger of complete anarchy.
In fact, I worked in one company early in my career that I would say had an abundance of leaders. Many of its management staff went on to fill very senior roles in other companies and others became successful entrepreneurs. One consequence of all this leadership talent was that many managers believed they knew better than their colleagues and senior executives. So every mandate from on high was altered on its way down. The company was British Leyland. It does not exist any more.
But on the wider question of what distinguishes a leader from a manager, I like the distinction made by Jeffrey Fox in his book ‘How to be a Fierce Competitor: What Winning Companies and Great Managers Do In Tough Times‘. Fox asserts that the biggest difference between leaders and managers is ‘the tolerance for ambiguity’. Now that is really interesting, because recent research findings have shown that one of the key challenges for contract management today is …. ambiguity. It is the uncertainty over precise requirements, or the difficulty of anticipating the nature and scale of change. Of course, contracts can be designed to deal with this – but it seems the people who negotiate and manage them cannot in general cope with such uncertainty or imprecision. That has been identified as one of the major reasons why contracts fail – and presumably leads to the conclusion that most contracts, commercial and legal experts are not natural leaders.
‘Leaders make decisions, big decisions, mid-crisis decisions, without certainty of the outcome,’ says Fox. Managers, on the other hand, ‘may have the best MBA education possible, but they measure metrics, analyze, maintain the status quo ….’. But in the end, do they decide? Are they empowered to decide? Does a leader in fact need ’empowerment’?
Executive management keeps calling out for more leadership. Yet at the same time they keep piling on more performance metrics. Is that because they just don’t see leaders emerging, or because in their hearts they don’t really want them to emerge? Whatever the answer, the challenge of dealing with increasing ambiguity in our contracts and commercial judgments will not go away. So we will have plenty of chances as a community and as individuals to decide what we want to be – leader or manager.
The news that US economic recovery is faltering comes at the same time as data showing that the biggest US corporations are wealthier than ever and have unparalleled cash reserves. This inequality of distribution is mirrored at a personal level, where income disparities continue to increase. The wealthiest 1% of US households now receive a higher share of total income than the combined total for the bottom 40% (which means that in the last 30 years it has roughly doubled its ratio). But the US is not alone; in China, it is estimated that the top 1% now controls more than 60% of total wealth. And of course, when we look at other markets such as India or Russia, there is further evidence of increasingly dramatic disparities between rich and poor.
In one sense, it has always been this way – the privileged elite and ‘the rest’. But it appears that the extremes are becoming far greater, not less – in fact the reverse of what we might expect in a supposedly democratic, increasingly egalitarian society. Indeed, it is concerns such as these that have led to the growing debate about the size of executive compensation packages and their apparent disparity not only to performance, but also relative to all the workers who make it possible. So why is this happening – and what impact is it having on the chances of economic recovery?
A recent edition of Harvard Business Week alerted me to the work of Paul Lawrence and in particular a recent book, Driven to Lead: Good, Bad and Misguided Leadership. In this, he makes the statement, “Humans have evolved a leadership brain. Good leaders are people with a conscience who respect and reward all the four drives of other stakeholders [the drive to acquire, to defend, to bond, and to comprehend], even as they respect and reward their own drives.”
Of course, not everyone may accept that these are in fact the characteristics of a good leader. Throughout history, people have shown a strong propensity to follow leaders who represent their own narrow interests or moral codes, regardless of wider social or human impact. The imperatives that cause them to do so may be economic, but can also be driven by issues of security or distorted moral values.
However, we would in general probably agree that leaders who promote and demonstrate fairness and respect for others are more desirable than those who do not – and certainly are more likely to preside over a peaceful and harmonious society. Lawrence’s work is interesting to those in the world of contracts and commercial management because he looks at this question from the perspective of global trade – and in particular, the impacts of outsourcing.
Applying classical trading and economic theory to today’s global business environment, Lawrence concludes that win-win exchanges occur ‘when both trading partners are either (1) industrialized nations with modern impulse/check/balance governments, no excessive unemployment, and reasonably effective control of corporate abuses or (2) less-developed nations roughly equal in power and with some control of corporate abuses.’
However, he goes on to demonstrate that much of today’s international trade does not meet these conditions. Colonialization – both physical or economic – is one form of such trade and generally leads to abuse of the weaker or less knowledgeable party, unless there are very strong governance procedures in place. Outsourcing is another approach that comes under scrutiny and Lawrence’s research leads him to say: ‘Transnational outsourcing, as when a U.S. auto company builds a parts plant in Mexico, has come into prominence only in the past few decades. Cutting costs is fair enough, unless it is done by paying less-than-living wages, creating unsafe working conditions, or causing environmental damage which would be prohibited in the United States. But because most American corporations are currently designed and mandated to fulfill ‘the drive to acquire’ exclusively, both top management and shareholders might object to incurring any costs in Mexico beyond those that are legally required, so transnational outsourcing is frequently a win-lose exchange between nations which are unequal either in their power or in their willingness to enforce basic standards of human rights, worker safety, and environmental impact. Another golden opportunity for people without a conscience.’
The evidence certainly suggests that today’s trade flows and contractual frameworks are indeed adding to the disparity of wealth distribution. But even if true, does this really matter? Economist Benjamin Friedman has researched the question of rising and relative living standards and he concludes, “Broadly distributed economic growth creates the private attitudes and public institutions that foster, not undermine, a society’s moral qualities…. Any nation, even one with incomes as high as America’s, will find the basic character of its society at risk if it allows its citizens’ living standards to stagnate…. At the outset of the twenty-first century, America’s problem is not unemployment. It is the slow pace of advance in the living standards of the majority of the nation’s citizens.” And of course, this ‘slow pace of advance’ is now preventing any consumer or domestic demand-led economic recovery. As big corporations and wealthy individuals hoard wealth to protect their narrow interests, the chances of economic upturn for the majority are reduced.
So if we want a world at peace – and people who live at peace with themselves – then these questions really do matter. Of course, in the end it is not international trade or outsourcing that are the guilty parties – they are just a symptom of the true underlying problem, and that is the greed that drives far too many of our leaders, propelled and validated by the social admiration for wealth and celebrity, rather than more sustainable and worthy human values. Even those who then become philanthropic with their wealth perhaps miss the fundamental point about the inequity of a process that gave them such riches in the first place; or the humility that might lead them to question their right to determine ‘worthy causes’.
Lawrence is not in any sense against world trade or globalization. He ends with the comment: ‘Globalization need not work this way. Its benefits can be steered to all nations and to all levels in each nation in a more equitable manner. But a free-market, laissez-faire process will not do this automatically. It will require governmental regulatory action with guidelines and incentives that can best be established at the world level.’
As you negotiate your next contract, are there moral questions you should be asking? As a community, should we care about the wider social impacts of our actions, or should we simply accept the crumbs that are thrown our way as a reward and rely on someone else to worry about moral and ethical principles? For example, we could rely upon our leaders to give this matter their attention, in between working out how to acquire more money!
Commitment Matters 