Recession, supply constraints, sub-optimized relationships – whatever the forces that lie behind it, more and more organizations are talking about ‘collaboration’ or ‘partnering’ or ‘customer / supplier of choice’ as ways to improve business performance. But realizing such relationships is proving tough to achieve. There are some obvious reasons for this – but maybe there is a hidden factor that actually makes it impossible.
This week, I was at a meeting of IACCM members in Houston, Texas. We were discussing the many pressures and opportunities in front of those in Procurement, Contract Management and Legal. And of course, much of the conversation revolved around the question of how we could improve the quality and results from trading relationships. There is a lot of talk about the need to enhance performance management and relationship management, as well as growing understanding that somehow negotiations (and RFx procedures) must become less constrained / adversarial.
So of course, conversation naturally turns to concepts like ‘trust’ and ‘collaboration’ – words that are increasingly on executive lips as well. And we started to outline some ways that these attributes might be encouraged or achieved.
That was the moment that a critical question came from the back. “Why do you think that we can start building trust and collaboration when we have executives who destroy such principles?” (I do injustice to the exact words, but this addresses the principle). Our questioner (who is French) was making the point that the Anglo-Saxon model of business management has increasingly become suffused by lack of loyalty, lack of trust and an aura of greed and personal progress at the expense of corporate values or principles. So how can you reconcile this attitude -and the resulting detachment that many employees feel – with attempts to create ‘trust’ and ‘collaboration’ between organizations?
It’s a great question and in many respects goes to the heart of some of my recent comments on globalization. Collaboration requires levels of compromise and a readiness to sometimes forgo short term opportunity for longer-term gain. It also requires trust (if I forgo a benefit now, can I trust that you will do the same at some point in the future?). So where are the incentives for such behavior? Since markets demand short-term results and the speed of change makes future needs hard to predict, is there in fact any hope that organizations will invest in forming and nurturing longer-term relationships? Or like employees, are all things now dispensable?
What are your thoughts on this?
Confidentiality agreements and NDAs seem to have proliferated in recent years, doubtless another manifestation of our information society. This has led to growing focus on ‘best practice’ (IACCM in fact has a Wiki on this subject with some model terms).
In response to a question he received, drafting expert Ken Adams has now weighed in on this subject and his blog has attracted a range of extra comment. So for anyone interested in the niceties of confidentiality agreements – and in particular the question of whether there should be a specified term – you should visit http://adamsdrafting.com/system/2008/05/21/duration-confidentiality-agreements/. It offers some useful hints and tips for those who find themselves negotiating such agreements.
While protecting information is of course important, it is in my opinion sad that many legal groups seem to have moved to a fail-safe position of requiring such agreements with virtually anyone with whome the company speaks. In many cases, this has proven not only an expensive process to manage, but also adds significant delay to business operations and is an example of the lazy thinking that brings the contracts community into disrepute. Our research has also shown that most companies have no centralized – and commonly accessible – repository, so the business people themselves have no knowledge of whether such documents exist or what terms should apply – rendering much of the effort a waste of time.
If we are indeed fated to be in a world where discourse can occur only under specific rules, companies should at least follow the example of corporations such as Cisco and Intel, which have fully automated the process (including electronic signatures) and can now execute Confidentiality Agreemetns and NDAs in a matter of hours, rather than the multiple days that remains common to most.
Anyone can tell you that outsourcing contracts are complex. They are also typically very long. And if the press is to be believed, frequently not very effective.
I have observed two interesting – and apparently contradictory – trends in recent months. One is the fact that customers are increasingly developing their skills and capabilities in both negotiating and managing outsourced relationships to adopt a less confrontational and legally-driven style. And at the same time, within the supplier community, the grip of the lawyers is increasing.
So what is going on?
On the buy side, led by some of the top advisory firms such as TPI. Alsbridge and Equaterra, there is growing understanding that confrontation and risk allocation lead suppliers to a culture of margin recovery and blame. To succeed, outsourced relationships must be built on a collaborative foundation and this requires a much more holistic approach to negotiation and post-award governance.
But on the supply-side, there has been a noticeable tightening of control, with the erosion of many business-minded contracts and commercial groups. For example, at both IBM Corporation and Siemens Business Services the contracts and negotiations staff have recently been absorbed into Legal, with substantial job losses. EDS has never shifted from its legally-dominated approach and, while the trends at Accenture remain unclear, they have also typically had Legal lead the negotiation.
My speculation is that this trend is a reaction to the push for ‘commoditization’ of outsourced services. With margins under pressure, we may see growing risk aversion and increased tightening of contract terms. Most suppliers may become even tougher in their post-award change management procedures, seeking to maintain and increase margins throughout the relationship lifecycle.
It promises to be a painful period of adjustment. And it will be interesting to see what contracting model emerges from the new HP / EDS consolidation. Given the importance of contracting in both winning and executing deals, the newly amalgamated group has an opportunity to put some clear blue water between its approach and that of its competitors. Whether it will spot the opportunity, only time will tell ….
I spent time this week at the TPI conference in Chicago. The event attracted record numbers, illustrating the company’s continued growth.
In the opening session, TPI exceutives outlined some current industry statistics – for example, in 2007 there were 487 commercial outsourcing deals awarded in the US, worth a total $80.4bn. There are currently 2,902 active contracts and TPI recorded 113 providers who in 2007 won at least one award.
The provider market continues to grow – perhaps surprisingly, given the struggle that many face in maintaining acceptable margins. This has resulted in major shifts in market share – for example, over the last two years, the share of deals won by ‘the big 6’ is reported to have dropped from 45% to 21%. European providers have seen small growth, as have the Indian ‘majors’, but the real switch has been to ‘other’ – up from 38% to 54%.
With such volatility and price pressure, quality seems bound to suffer. And certainly the challenges of achieving innovation and value-add were high among delegate concerns. TPI has often been criticized for its ‘aggressive’ negotiations and the extent to which these sour the atmosphere for execution. But the evidence at this event was quite the opposite; I heard consistent appeals from TPI speakers for buyers to think and work more collaboratively. Indeed, the fact that I had been invited to speak (in two sessions) demonstrated to me their seriousness in trying to change the atmosphere of many outsourcing engagements.
While there is no doubt that some buyers, and their selected advisors, continue to use aggressive, risk averse approaches and focus on ‘commoditization’, the stories I heard suggest that many providers are guilty of similar behavior. And those that behave well in negotiation often change their spots when it comes to on-going contract management, their focus turning to margin recovery rather than relationship-building.
The industry is strong in terms of revenue, and it seems clear to me that there are real opportunities for providers who take a new and more principled approach to establish competitive advantage. It is up to them to show that they can shift their marketing to demonstrate how trust and collaboration will generate superior outcomes. To do this, they must also show their ability to offer agreements and governance structures that really do provide a platform for innovation and added value.
IACCM research has unearthed some fascinating data regarding the impact of contract review policies at many major corporations – and shows that they have generated increased workload and cycle times. While this research did not measure the economic cost of such policies, it is clear that they are responsible for lost savings opportunities.
The story begins with Procurement and the drive to contract standardization and compliance. As we all know, recent years have seen a steady push to develop standard term and condition templates. Many times, these are driven by Legal and have been accompanied by little if any discretion for negotiation by the procurement staff (separate research in 2007 confirmed this).
It seems obvious that risk and workload can be reduced by imposing standards on suppliers – and the research shows that this has indeed enabled a transfer of Legal resources away from support of Procurement. Indeed, in many cases, Legal has even imposed lengthy turn-round times for any deviation to the standards, to discourage requests for negotiation. (There is evidence that this is having significant adverse impacts on supplier relationships and wider aspects of business risk, such as innovation and pricing, but those findings are not the focus for this article.)
What the latest research reveals is that this approach has been self-defeating. The rigid and risk-averse clauses included in standard purchasing contracts have forced suppliers to push back and demand negotiation – especially in the typical areas of Legal concern, such as indemnities, liabilities and intellectual property. This has caused a substantial surge in workload for most Legal groups (in many cases close to 10% year on year) as they seek to counter the inflexibility of their customers. (About the only sectors immune from this are those in consumer industries – and they are some of the worst offenders when it comes to onerous terms and conditions and therefore among the most disliked by their suppliers.)
The research points to several shocking discoveries that forward-thinking corporations will wish to address:
- Nearly 40% of staff in Procurement and Contract Management see Legal as ‘a roadblock’
- Average contract review and approval cycle times in the last 5 years have INCREASED by more than 10%
- For every head that Legal has saved in support to Procurement, there has been an average increase of 2.1 heads supporting Sales contracts
This data alone points to an urgent need to reconsider policies and practices related to Procurement contracting. And that is not a task for Legal alone – one key reason for this rigid approach is that in many corporations, there is little contracts expertise within the purchasing organization. Even now, most training materials for those in sourcing / supply chain are seriously lacking in anything to do with contracts, therefore limiting opportunities for immediate empowerment and flexibility.
The economic and relationship consequences of this weakness are only now becoming apparent – and they will the subject of a series of further articles. Overall, it is clear that this issue deserves urgent attention and requires cooperative efforts from senior legal and procurement staff.
At a recent IACCM meeting, a senior member observed: ‘Our industry, and industries like automotive, have destroyed trust and collaboration (with the supply base). Shame on us. Now, as markets tighten and power moves to the supplier, we will reap the consequences of our behavior.”
In essence, he was suggesting that many in Procurement have been walking down a blind alley. For all the talk of strategy and of reaching the top table, the reality is that many sourcing organizations have been pushed into short-term objectives to grab price reductions, at the expense of longer-term strategic thinking. Globalization appeared to offer a never-ending source of cost reduction and fierce supplier competition. The emergence of today’s dramatic supply shortages has caused a crisis for many. Far from being able to sustain price reductions at this time of growing cost pressures, procurement is in some cases struggling to even find a source of supply at any price.
As worldwide wealth grew, what did ‘strategic visionaries’ expect? Two years ago, IACCM was warning its members that the change was coming and that suppliers were shifting their loyalties – for example, they were investing their marketing dollars in emerging markets, rather than their traditional (disloyal) customers.. We alerted buyers to the fact that they would pay a price for alienating the supply base. But the good times rolled on – commoditization, reverse auctions, confrontational contract terms – these were just some of the ways that buyers showed their lack of loyalty to the traditional supply base in their haste to grab low prices and exert their dominance.
For those in the West, who led this charge, the cost will be especially high. As we reported last year, their risk-averse behaviors have already resulted in suppliers looking East when it comes to innovation. Now they will also be exacting revenge through price hikes to recover from the years of buyer domination and abuse of power.
The result will inevitably be a further hit on the competitiveness of the leading western corporations. They will be faced by choices between higher prices or lower quality – neither being a recipe for success.
Is there a solution? Yes, but companies must act fast. They need to redeploy their resources to focus on trading relationship outcomes, rather than the short-term, input based ‘savings’ mentality. They must oversee contract life-cycles and ensure accountability for results.
Through such approaches, combined with a portfolio view, they can drive substantial efficiencies.
Another priority is to ensure a shift in measurements and to develop new terms and conditions that reward collaboration. IACCM has been working on such terms for more than a year.
Applications and skills will remain challenging. Since software inestment has largely assumed supplier compliance, it is questionable how much of the recent investment will survive. And skills – there is a desperate need for leaders who can oversee this latest transition.
Measures such as these will steadily restore the damaged buyer / supplier relationships of the ill-considered commodity era. But Procurement is going to face some tough times in the interim.
A major theme at this week’s IACCM Conference was the challenge of ‘alignment’. In today’s networked world, as businesses diversify and traditional organizational models fragment, how can controls be maintained?
As the Financial Services industry has vividly demonstrated, national laws and regulations are inadequate to handle the complex web of global relationships that typify today’s business. While transparency is increasing, so is overall complexity – and much can be missed.
“When it is a battle of rules versus culture, culture always wins” (a quote by IACCM Chairman, Tim Cowen). The latest debacle within the US airline industry is just another indicator that rules alone are not enough. Corporate behavior is ultimately driven from within, by people who care – people who are not driven by short-term measurements and operate as an independent source of management advice.
Audit groups and complaince officers have not shown themselves able to step up to the task, perhaps because their experience is typically too narrow. The same challenge faces the law department – their need to remain externally focused (to maintain knowledge and understanding of law) works against their ability to develop deep internal business understanding.
That is why at the IACCM event there was extensive discussion of the role of those in contract management (or perhaps commercial or commitment management) to perform such a role. They are typically the group that has extensive understanding of internal business processes and capabilities; they understand rules and practices; and – as their name implies – they have insight to the external relationships being formed by the business.
Arguably, therefore, they are ideally positioned to oversee the balance – not allowing ‘compliance and risk management’ to destroy opportunity, but at the same time preventing short-term greed or measurements to undermine responsible decisions.
One leading academic was so taken by the models that he discovered at the IACCM conference that he said: “You had better be ready – within 2 years this event will be attracting at least 2,000 people each time you run it”.
It does indeed appear that ‘commitment management’ is rapidly moving to the heart of the business. Exciting initiatives such as the Capability Maturity Model and the new concept of ‘Maintain, Manage, Initiate’ (MMI) that was introduced at the conference promise possible solutions that can sit alongside regulation and offer a more robust form of corporate management.
The old integrated enterprise is fast eroding, to be replaced by flexible supply networks. To maintain competitiveness, these networks are increasingly global and their oversight requires a new combination of skills and technology. At the heart of this new business model is the ability to orchestrate effective contract relationships, spanning sourcing, distribution and support.
So what happens when these skills are lacking? The answer, quite simply, is that you lose competitiveness and go out of business. At least, that should be the answer. But of course, such companies often attempt to blame others for their dilemma – and seek political support.
Such is the case with a company called Leggett & Platt – at least, according to research undertaken by Jason Busch, the editor of Spend Matters. In an article titled Anti-Dumping: A Topic Every Practitioner and Consultant Should Know About, Jason takes the management of Leggett & Platt to task and launches an appeal for each of us to consider the impacts of anti-dumping legislation when used to protect shortfalls in commercial competence.
As professionals, we should indeed care about this. Economic survival depends on each of us honing our skills and ensuring they are effectively deployed. That is the only sustainable way to build economic wealth and success. If we think we can hide behind regulatory barriers, we lose the urge and the incentive to develop our capabilities. Staying ahead depends on being better, not on handicapping the competition.
Recent IACCM research illustrates the urgency of this point. Our 2007 ‘issues’ survey indicated the dilemma we face when we live in an economically advanced society. For sourcing and contracts professionals in the West, the number one issue was ‘work-life balance’. For those in the emerging economies, the number one issue was ‘raising my personal skills and knowledge’. The prospect of wealth and personal success is a powerful incentive – much more so than simply protecting what you already have.
To further illustrate this point, more recent research focused on the areas of skill and knowledge that those in sourcing, contracts and legal feel are important. For those in the West, the traditional fields of legal knowledge, negotiation and teamwork topped the list; understanding technology and undertaking market research languished at the bottom. Once again, this provided a stark contrast with those in emerging economies, who see technology and market understanding as their routes to success.
So perhaps the real point behind the Leggett & Platt story is a moral tale and a warning of the fate that could easily befall all of us unless we have the energy and the determination to stay ahead.
Finally, I rather liked the analogy that Dick Locke made in his response to Jason’s blog posting. He analogized Leggett & Platt’s dilemma over bed springs to that which faced the PC industry several years ago. “I’m going to bet that if there is an antidumping duty on springs, there won’t be one on mattresses containing those springs. I remember once there was a 200% antidumping duty on laptop displays but not on laptops containing those displays. Guess what happened to the US laptop building industry?”
Dick’s observation reinforces the basic principle of physics – “For every action there is an equal and opposite reaction”. Use of instruments like anti-dumping simply masks the real problem and moves its effects elsewhere.
The old ‘4Ps’ (product, price, place and promotion) have driven Marketing thinking since the 1960s. Although attacked in recent years as ‘too simplistic’, the Marketing approach in many companies remains strongly focused on products and features. And while advertising and promotion make extensive promises that go beyond the core product, it is notable how frequently those promises are not supported by intrinsic business capabilities.
We recently researched a number of top corporate websites and explored the strategic goals and advertised benefits . We looked at ‘Corporate Codes’ and their commitments to ethics, standards and policies. Then we tested people in Legal, Procurement and Sales Contracting to see whether they could recognize their own company’s promises and the extent to which the contracts they write reflect these obligations.
The truth is, there is little alignment. In many cases, the Marketing department do not even bother to communicate their messages to these internal groups. It is not clear whether that is because they think it unnecessary, or whether they want to avoid push-back. But either way, the problem is that commitment capabilities frequently do not match market promises.
Does that really matter? I think it does. Executives today are emphasizing the importance of trust and integrity; companies are pouring million sof dollars, pounds, euros etc. into complex (and often ineffective) compliance programs. Yet they are failing on the basics – ‘excellence in execution’.
I admired the honesty of the head of Hewlett-Packard’s channel sales organization when last week he listed the main areas that are threatening channel loyalty and performance. And it was interesting to see the Number 1 issue on his list:
For many companies, the situation is getting worse because today’s services economy is driving ever-higher expectations around ‘ease of doing business’. A couple of years ago, I was prepared to get support from a call center. Today, that is a massive inconvenience – I want on-demand answers via the website, at times convenient to me. I don’t have time to read terms and conditions – so if you need to write exclusions, I guess I can’t trust you and I should move on. I want simple, clear, accurate billing – otherwise, I don’t pay.
Our networked world is changing expectations and companies that want to win in the market must develop superior commitment systems that make distinctive promises – and keep them. This comment that I recently found on another blog sums it up nicely: “For years, everything has been about planning and execution. This model works great when you have an “inside out” mentality – a push model where you build things and push them out the door. But as soon as you move to an “outside in”, or pull, model, it’s not enough. You now need to empower people with the tools for risk tradeoff and response to manage the daily exceptions that are now at the heart of your ability to compete.”
An IACCM member asked recently whether anyone had suggestions about successful ways to handle corrupt customs officials. “What do you do,” they asked” when you have expensive capital equipment and the only way to get it released is to pay a bribe?”
I contacted one of the world’s top experts, Alexandra Wrage, the Executive Director of TRACE International. Alexandra leads a fascinating life as she travels the globe, working with governments, overseas companies and the major international corporates. When I first made contact, she was fleeing rebel forces in Chad – I guess they were not a good audience for anti-bribery compliance at just that moment!
When we finally caught up, Alexandra was certainly sympathetic to the problem, but could not offer any silver bullet. She did observe, however, that companies that simply say ‘no’ are meeting with increased success. She explained that smart business people are citing the major fines, penalties and even jail terms now being imposed on those found guilty of corruption – and that, while foreign officials may not like this removal of their source of funds, they do understand that there really is no choice.
So the stock answer seems to be, make sure that you and your staff have the facts in front of you and treat this like any other negotiation – explain why you will not and cannot accede to their demands. And if you want to find evidence to support this, the TRACE website is a great place to start.
Our conversation moved on to cover some of the contractual methods open to companies with regard to anti-bribery measures. This is where things remain tricky. Many companies are today focusing on contract terms that require their suppliers to adhere to regulatory and other ethical standards – bribery, environmental, child labor all being examples. Increasingly, they insist that such provisions are passed through to sub-contractors and service providers. The problem is, how is this validated?
Self-certification is one choice; but some companies go further and insist on a right of audit (which is what the US Department of Justice recommends). This is potentially a double-edged sword, because if you have the right of audit and an exposure then arises, you may be judged negligent if you were not active in pursuing your audit rights.
Realistically, most companies simply cannot afford the overhead of conducting regular audits of their global supply base. So perhaps self-certification, with extensive consequnces for any non-compliance, may be the best answer right now. And maybe it also means that companies need to consider avoiding smaller, local suppliers who may find it harder to push back against corruption. By working with larger multi-nationals, the transaction price may be higher, but the business cost will be lower. And perhaps the loss of trade will be an added incentive to foreign governments to act against corrupt practices.
Commitment Matters 