At an EU session I attended earlier this year, officials indicated that there would be a proposal to offer businesses trading across borders within the European Community the opportunity to agree to the use of a ‘neutral’ EU set of laws, as an alternative to the normal debate over which national law would apply.
That proposal has now been formally released for discussion.
In principle, this seems a good idea. I think that IACCM should definitely take a position and potentially include in our considerations input from outside the EU. For example, many of our corporate members operate through subsidiaries in Europe and this should in principle offer them significant simplification. However, some might see it as the thin end of the wedge; if they espouse this principle for trade within the EU, why wouldn’t that be seen as endorsing further steps towards more standards – for example, perhaps a convergent agreement that also embraced NAFTA countries or the ASEAN trade block? But many of our members might in fact welcome this potential for growing convergence of legal systems – or at least, an acceptance that organizations trading across borders will have a better structured alternative which equalizes risks.
Until now, most corporate lawyers have steadfastly resisted any move towards supra-national business contracts. The UNCISG has been in place for many years and is almost universally written out from most corporate contracts. In my experience this has more to do with lack of familiarity (and absence of extensive case law) than because it is intrinsically bad. So will this opportunity meet a similar fate, even though it might have significant benefits on business costs and efficiency. The record of the law – and the contracts community as a whole – is not especially positive when it comes to efficiency initiatives. So how will this project fare?
Certainly there are key questions that must be answered and concerns that will need to be addressed. For example, how will such a body of laws be constructed and what principles will govern their drafting? How and by whom will adjudication of disputes or litigation be managed? But at this point the question is one of principle – is this in itself a good and beneficial idea?
You can read the call for inputs and the background to the proposal at http://www.justice.gov.uk/news/newsrelease180810a.htm. Please make your comments below.
The stories about unilateral procurement initiatives continue to arrive. This week, a couple more global corporations have joined the stampede towards longer payment terms. ‘We are writing to you as a valued supplier to inform you that ….’ Well, whatever value I had before this extension of the payment period by 30 days, I have less now! And what a weak excuse – ‘ we are following industry trends and practice’. I thought companies were trying to distinguish themselves, to be differentitated. Wherever did that concept go?
But I recognise that payment terms are a lost cause for now .. although there is a ray of hope from an unlikely source. According to the Financial Times, the automotive industry has awakened from its plummet towards self-destruction and recognized that suppliers have value. They are doing some interesting things (I’ll write more about those another time), but one specifically is that they plan to take steps ‘to support supplier liquidity’. That includes ADVANCE payments on design and development projects (though maybe not so advance if they take 90 days to pay the invoice!).
However, the purpose of this blog is to highlight another new practice in partnering. It concerns one of our member companies (which shall remain nameless) that out of the blue received an invoice from their customer for ‘Procurement Services’. These were billed at 4% of contract value.
Well, we are all hearing about the pressure on Procurement to raise its contribution to the business – but this approach is certainly new to me. There was no contract and therefore – of course – no Purchase Order to support this unwelcome invoice. Yet clearly the Procurement department that issued it does not expect that its suppliers will follow standard purchasing procedures. They see themselves entitled to issue a non-contractual demand for payment – or else you will lose our business.
This is not business. This is blackmail. It is also remarkably stupid. What customer really believes that this action will not damage the trust and loyalty of their supplier? What customer really believes that a supplier will happily yield 4% of their margin – especially for the pleasure of propping up a Procurement department in another company? Of course they will rapidly find a way to cover this cost, by raising prices or cutting services.
I would love to know who sits behind this marvellous idea to shift costs and revenues within the business. Is it Finance? Do they reallythink suppliers will simply absorb the overhead? Or is it Procurement, desperate to find ways to justify its existence and ‘show value’? If I were the CEO, I would want to know why I was spending 4% on such an unimaginative organization. And rather than impose 4% levies on my suppliers, I would offer to split the difference and abolish the Procurement department. That way, I would have happy suppliers and I would be a total of 6% better off!
Now maybe there is a counter-side to this story, in which case I would love to hear it.
An IACCM member recently posted this question and suggested I might want to pursue the topic with a blog.
“I am looking for some perspectives on what career options are available for someone who has gained substantial experience in sell-side Contracts & Commercial Management. As an example, it is fairly well known that management consultants have the option of moving to industry & assuming senior positions within buyer industries.
A few mentors I have spoken to, regard Commercial / Contracts management as a fairly specialised field, and tend to recommmend not to become specialised early on in one’s career, especially in this climate. I do not entirely agree with this view, but if you can share your perspectives that will be helpful.”
I am going to start my comments with the optimists view. In my opinion, Commercial / Contract management is one of those rare areas that is both specialist and generalist. It can lead to a career path within the field – or generate openings elsewhere. The great thing about the role is that it offers extensive insights to many areas of the business and can generate significant exposure to senior management. The training this offers to high-performers is that they may rise up the ranks of the commercial function, or perhaps have the chance to branch into general management roles, such as business development or senior business unit positions, even business unit leadership. In an era when everyone is being pushed towards deeper and deeper professional specialization, contracts / commercial professionals have the best of both worlds – they can become a specialist in their own field, but in so doing maintain wide knowledge and contacts within many others (finance, legal, operations, marketing, channel management etc.) and thereby have options elsewhere.
Now to the counter-view. What I have written depends very much on how the organization regards the commercial /c ontracts role. If it is in fact more focused on compliance and has very limited strategic importance, it may indeed be a route to nowhere – at least within that company. If the scope is only to implement and administer other people’s rules, then it is not going to be seen by senior management as a ‘high contribution’ role and that will indeed be constraining. So the talented individual either needs to change the perception (by shifting the contribution and status of the function) or escape – either to another function or to another company.
I suspect the mentors in this case perceive the role in the latter light.
More generally, it is worthy of note that most commercial / contracts professionals enjoy their job, though a high proportion feel that their functional leadership is not sufficiently active in promoting the role. A high proportion also plan to stay in the role, though of course today many have entered from other groups – we still lack a high ratio of graduate entrants.
At IACCM, we know we have some way to go before there is universal recognition of the ‘professional status’ of a commercial / contracts manager. And it is this status that tends to lead to robust career path opportunities. But so long as you are in a company where there is respect for the role and real opportunity to contribute and make a difference, then I think it is rarely a dead-end job. If the openings within the function don’t appear, there are many instances of talented individuals moving to very senior roles because of the excellent grounding and experience they gained in their commercial role.
Many, like me, fall in love with the role .. and even if they move out of it for a while, find the lure of returing too hard to resist.
I look forward to other views and comments …..
Last week I read that English law is increasingly being selected for international contracts, at the expense of US law. This is apparently because of the perceived risks associated with the US legal system – a greater propensity to litiagate, the more aggressive behavior of US lawyers, the unpredictable (and often headline-grabbing) scale of US court awards.
There have been previous studies that suggest an aversion to exposure to the US legal system – for example, a paper in the Journal of Empirical Legal Studies (Volume 5, Issue 1, 1–20, March 2008) compared the choice of law in arbitration cases and demonstrated an overwhelming preference for English law (though the relatively poor showing of US law might be explained by the aversion of US corporations to the inclusion of arbitration / mediation clauses in their contracts).
As with all data, it is hard to establish the truth. However, the recent IACCM study on the risks of doing business internationally also picked up a sense of fear about the US legal system. While the headline cases are unrepresentative of the norms in litigation, they do create an underlying perception in the rest of the world, because the headlines are all that people see. This can easily be reinforced by other data – for example, why do US corporations need in-house law groups that are double the size of non-US corporations (findings of Rees Morrison’s international benchmark study)? Isn’t a higher frequency of litiagation inevitable when there are so many more lawyers than in other countries (although the scale of this imbalance is frequently overstated)? Shouldn’t people be scared when the US appears so ready to apply ex-territorial principles and to position itself as having jurisdiction over the world (for example, one-sided extradition rights or the recent Supreme Court case over class actions – see http://business.timesonline.co.uk/tol/business/law/article7079461.ece))?
The number of lawyers in the US has certainly created a lower-cost access to the law – but of course that is part of the problem, at least when looked at from outside, because it increases the propensity to initiate actions, regardless of their merit. And of course, the external party is inevitably placed at a relative disadvantage in terms of cost, understanding, familiarity with the system, language etc.
On the counter-side of these arguments, there are many who would say that US lawyers tend to be far more business-aware than their overseas colleagues. Others would point to the rigor of US regulation, driving the relative growth of in-house legal departments. Many would highlight the extent to which the US legal system has led the world in creating a relatively fairer, more open and less corrupt social and political environment.
In the end, there are no absolutes of right or wrong in making a choice of law or jurisdiction. Decisions will be made according to competitive principles. But there are two key messages worth considering. One is that the laws of competition are just as applicable to lawyers and legal services as to any other area of commerce – and globalization is removing the protection that traditional national jurisdictions conveyed. Lawyers everywhere need to be aware that they are increasingly in a battle to demonstrate the relative value of their services.
The second message to consider is what exactly that ‘value’ is about. To what extent does the law industry understand the way that shifting social attitudes may be impacting expectations from the lawyer? Has the apparent increase in more tolerant and collaborative approaches extended to the way that people want their legal advisers to behave? Might the real challenge for US law and lawyers be that they have an image that is increasingly out of step with wider business and social values?
Yesterday I wrote about the ‘conspiracy of optimism’ that has been identified as a key challenge for successful project execution.
Another topic that arose at the ICCPM (International Centre for Complex Project Management) event was around the quality of requirements.
I raised this issue at the conference since it is a recurrent theme for IACCM members. The annual study of ‘most negotiated terms’ reveals that this is the area where negotition professionals believe more time should be spent. After hearing this story, the reaction of the project management community (and some procurement experts who were present at the event) was interesting.
There was unanimous support for the view that the quality of requirements definition is generally poor. In fact, there appeared to be consensus that ‘the current requirements process is broken’. In addition to a general failure to capture and define comprehensive requirements, it fails to address or acknowledge the inevitablity of change (or scope creep – but often the two are hard to distinguish). The ‘single point of contact model’ (for supplier / customer relationships and requirement definiton) does not work any more (this conclusion came from very senior government representative who is looking at procurement policy); so a key question is ‘How do you contract for uncertainty? What skills and knowledge does this need?
In meetings today, I heard similar issues form two senior commercial attorneys who are engaged in managed services and cloud computing. They were complaining about the challenge of getting engaged sufficiently early to assist in shaping the deal. ‘By the time we are introduced, both sides think they have reached agreement. They don’t want to hear that their current structure contravenes laws or regulations. They see comments like that as negative, as introducing obstacles. Yet these obstacles are real – and avoidable. They simply require a different deal structure – which would have been so easy to do when the discussions began.”
None of this is new news to seasoned lawyers or sales contract negotiators. But it does appear to be outside the traditional knowledge or experience of most buyers. As we move to a world of more services and solutions, including many cross-border or multi-country deals, the need for increased commercial input and understanding during the requirements definition phase is very important. Of course, that is what IACCM and its training programs are designed to deliver, but from all the discussions this week it is very clear that there is still a long way to go in penetrating the Procurement community.
In a subsequent conversation with a group of senior Procurement staff, the topic turned to compliance and leakage. I steadily realised that that this group was in fact asking how they could prevent changes to scope and requirements. Unfortunately they are fighting the wrong battles. They had failed to understand that constraining the business to the solution they originally contracted might indeed deliver the original savings – but at the expense of the solution and value that the business actually needs. There is still some way to go before buy-side and sell-side negotiators are working towards a common agenda and finding ways to jointly manage change and uncertainty.
I have just returned from a symposium on complex project management, hosted by the business school in Lille, France. The event brought together some of the leading minds from the world of project management, including a number of acclaimed authors and the leadership from the International Centre for Complex Project Management (ICCPM). I was honored to present the perspective of the contracts and commercial world in this forum.
I perceive project managers having similar challenges to those of contract and commercial managers. While they moved down the road to ‘professionalization’ several years before IACCM, they are still wrestling with many open questions regarding their exact role and status. They also face some problems that conract management does not – such as competing professional associations with their varied views on the underlying body of knowledge.
However, I find ICCPM has many ideas and approaches in common with those of IACCM. Not least of those is its openness to collaboration and the view that, as non-profit associations, we are often helping organizations achieve competence, rather than dictating an organizational model that involves hiring more and more of our professional community.
Among the many interesting aspects of ICCPM research has been a recent study that led to a paper titled ‘The conspiracy of optimism’. They found that organizati0ns – both customer and supplier – consistently over-estimate their capabilities to deliver complex projects and consistently under-estimate the associated costs and time required. In addition, even though these experiences occur consistently, management only accepts and welcomes those who reinforce their own optimistic view.
So maybe that explains why contracts, commercial and project staff are often not the most popular. It is our tendency to highlight the challenges and question assumptions that makes us unwelcome team members. And so at the end of the process, when it may have slightly cold feet, management calls us in to protect them from the worst ramifications of that optimism, by ensuring some fall-back clauses that limit the consequences when it all goes wrong. Sadly, they overlook the greatest value we can offer – of helping to structure such deals in ways that they would be far more likely to succeed – or sometimes, of course, of avoiding them altogether.
IACCM recently completed a study on the relative ease of doing business in almost 50 of the world’s major markets. I find the results extremely interesting – and potentially of great use to contract negotiatiors.
The study asked members with direct experience of negotiating in overseas countries to rate their experiences on a scale of 1 to 5, where 1 was especially difficult and 5 was positive. IACCM then asked the participants to identify which of 9 categories of ‘issue’ they had encountered. These categories were:
- Ethics / business culture
- Contract or negotiation skills / understanding
- Problems with payment
- Demands for performance bonds or guarantees
- Dealing with licenses
- Local laws or regulations
- Maintaining rights to assets or property
- Language
- Enforcing contracts
The survey has three major purposes:
- For the overseas negotiator: the findings will assist in anticipating some of the risks and issues they need to address or overcome. Of course, it may even mean they decide against a market entry at all.
- For the domestic negotiator, the survey offers insight to external perceptions of their country and equips them to think about how they may adddress the fears that their counterpart may have in doing business with them.
- For government agencies, the findings represent an agenda for improvement.
IACCM plans to dig deeper into the initial results and to capture specific issues. For example, if a country scores badly on local laws and regulations, what are the precise concerns or experiences that have generated this rating?
The study has already generated a high level of interest from professionals and the media. It is anticipated that it will become an annual study to ensure continued awareness for international negotiators, to provide advice on possible solutions and to monitor progress on improvements.
The table of results is available from IACCM, by writing to info@iaccm.com.
There are those who will celebrate Dalip Raheja’s announcement that ‘Strategic Sourcing Is Dead’. Others may question whether it was ever really alive. But whatever our views, Dalip is yet another thought leader who is calling out the need for fundamental change in the way that goods and services are procured.
At the core of Dalip’s article is the argument that Procurement and Supply Management groups have generally failed to escape the role of supplier-bashing. Whether by mandate or by design, they are perceived as unrelenting cost-cutters and ‘ the flaws (in today’s process) sometimes lead to destruction of overall, or system wide, value’.
Those who have followed IACCM research and the articles in this blog will be aware that the association has been promoting similar thoughts for several years. As the only organization that brings together the buy-side and sell-side of those responsible for forming trading relationships, it is uniquely positioned to bring balance to these discussions. However, as Dalip highlights, understanding the need for change is not the same as executing on that need.
A key point in many analyses of Procurement weakness is the difficulty the function often has in ‘forming relationships’. Cost-cutters and compliance monitors are rarely popular – and most purchasing groups are probably vying with the auditors when it comes to that particular contest. But so much has been written about Procurement transformation, its migration to the ‘top table’, its strategic importance etc. etc. that one has to ask whether it can ever really change – or indeed whether executive management actually wants it to.
Modern business is designed around contention systems. These are the methods by which specialist groups (or business functions) seek to reach consensus on the overall business interest. These systems are often unvwieldy, tend to become bureaucratic and may become destructive (if, for example, power levels become unbalanced or measurement systems distort behavior). Functional frustration with such systems leads many to propose that their particular group should expand its role and have greater power and influence on decisions; not unnaturally, the other groups in the system rarely agree. Occasionally, executives decide a particular group is no longer needed, and they take action to eliminate it, or consolidate it with another group.
I think there is little question that businesses need to change the way they select, form and manage their trading relationships, with suppliers, customers and distribution channels. But a fundamental question is whether existing procurement (or for that matter, contract management) resources are capable of making the necessary transition. Their problem is sometimes the skills and behaviors they bring to their job. On other occasions, it is because management is simply unable to see them in any other role.
But let’s assume for a moment that change is possible – and respond to Dalip’s request for debate. How would I approach this issue with my top management?
First, I would highlight that the complexity of business in today’s global markets has increased and that this is adding to the risks we face (few executives would disagree with that). Next, I would point out that a high proportion of those risks are market related – they arise from failings in meeting customer commitments, or failings to offer the right commitments; they come from failure to oversee and manage the supply base effectively; they come from inadequate market and business intelligence related to new markets, new sources of supply, and the ability to fully evaluate those risks. And I would also suggest that internal rules and bureaucracy are adding to the complexty, either delaying decisions, or leading to the wrong decisions.
Second, I would point out the diversity and volaitility of the markets we serve and the diversity of the levels and types of relationship needed with customers and suppliers. While we certainly do not need infinite variability in how we select, form and manage those relationships, we must also understand that there is no ‘one size fits all’ model. In the interests of speed and responsiveness, we need to find ways to equip the business units to identify and select the right relational offerings, with the right customers and suppliers.
Achieving that model requires the elimination of transaction-oriented Procurement and sell-side contract management organizations, except to the extent that individual business units require continued support (which is then likely to be provided through an outsource relationship for which they pay). This elimination will be achieved through the creation of a Trading Relationship Enablement group which ensures the availability of the guidelines, procedures, policies, tools and templates needed for business success and increased self-sufficiency. This group’s role will include a responsibility to ensure that required expert skills or resources are available – either locally or centrally, depending on the extent and frequency of need and overall business efficiency. It will also act to coordinate the perspectives of the many stakeholders key to success and ensure their views are reconciled and embedded in relevant commercial offerings and practices.
It will reflect both sell and buy side perspectives because a failure to do this will result in dysfunctional behaviors and constrained business capabilities. We buy things only because we sell things. Buying is there to support sales, not frustrate or limit them.
For those who wish to follow this path, a possible title for the senior management proposal might be ‘Achieving Compliance Through The Elimination Of Bureaucracy: A New Approach To The Management Of Business Risk & Opportunity’. I will be delighted to help you develop the presentation!
For others, there is no doubt that incremental change is possible. In either case, the key to progress is to shift your functions role to take far more responsibility for relationship outcomes, not just in terms of cost, but in terms of overall contribution to the performance of the business.
Most organisations proclaim they are open to new ideas and are seeking to be ‘at the leading edge’. This is true even in a traditionally conservative area such as contracting or risk management.
Yet where do these organisations and their leaders seek those new ideas? Many rely on the quality of the people they hire. They are confident that they innovate because of the intelligence and knowledge of their highly skilled (and often highly paid) professional staff. Others seek new ideas through articles or case studies delivered by magazines, webcasts or conferences. Some may use consultants as a periodic source of ideas and a few will undertake research or commission benchmarks to validate their performance, frequently from organizsations with limited insight (ideally they reflect only the perspective of the function in question and therefore won’t ask too many tough questions).
In truth, most functional groups are not especially open or welcoming of new ideas or innovative approaches to old problems. Many do not welcome suggestions that things could be done better. Quite a number are in denial that there are problems – and those that exist are someone else’s fault, and therefore not their responsibilty to fix. When these groups discover new ideas or methods, there is a tendency to think of all the reasons why ‘it wouldn’t work here’. This is especially true of anecdotal evidence (which is the type they often prefer), because individual case studies are in part interesting precisely because they can be dismissed as ‘not applicable’.
It is also rare to find examples of cross-functional collaboration to identify sources of improvement. Most functions prevent internal analysis or constructive criticism of their services.
Yet all the evidence shows that innovation depends on a readiness to listen to and work with outsiders. It is through the combination of their perspectives and our knowledge that we come up with new approaches.
Often, it takes a dramatic shock to open eyes and ears to innovation. If a company survives the shock, it goes through a period of soul-searching and true openness to innovation and change (of course, some resist and continue on a downward spiral). But it seems sad that we cannot become enthusiasts for change and continuous improvement. It should be a source of real pride that we are evolving and adding new sources of value. We should be eager to list the ways we have changed ourselves, our processes and those of others; have you thought about the list of improvements you have initiated recently? Are you an innovator, or just waiting for the external pressure to force change upon you?
Tim Minahan, CMO at Ariba, wrote a comment in response to my blog of July 13th on The State of Customer/Supplier Relationships.
Tim made the following observations: “As we’ve discussed in the past, collaboration is often more lip service than a committed initiative. And tough economic periods, like the one we just went through (are still in?) strain even those most committed to real buyer-seller collaboration.
However, the idea somehow that online sourcing and procurement tools are enemies to collaboration is misguided for three key reasons (possibly more):
1) online sourcing tools bring a transparency and openness to negotiations that is often lacking from offline negotiations.
2) leading online sourcing tools enable greater buyer-seller collaboration during the negotiation process, often times allowing suppliers to provide alternative bundles, delivery schedules, or product or process innovation recommendations that can enhance the value of the good/service being purchased and take cost out of the system — without negatively impacting the supplier’s profit margins
3) finally, we must be careful not to confuse the negotiation with the relationship. Such online tools speed sourcing cycles 50%-70%, giving buyers and sellers more time to focus on collaboration and relationship management. (In fact, we’re seeing far greater demand for our supplier collaboration and management solutions from those companies with online sourcing tools than those without.)
Bottomline: I agree that buyers and sellers need to put more commitment into their collaboration oaths. But online negotiation tools and collaboration can not only peacefully co-exist but actually can enhance one another.”
These comments in many respects complement those made in a recent IACCM ‘Ask The Expert’ interview with reverse-auction guru Dr David Wyld (visit the IACCM Member Library to hear a recording). David is an avid proponent of the applications now available to support business transactions and contracting – but of course he stresses that their effectiveness depends on correct use. Introducing reverse-auction software represents a major change-management initiative – and organizations that simply implement it without re-thinking process, without investing in internal and supplier training, without ensuring understanding of its correct use relative to differing contract and relationship types will have problems.
Automation is here to stay because the benefits are undeniable. Ten years ago, I remember feeling (as a supplier) very hostile to the new procurement software tools. Today, I still encounter frequent problems in the way they are used. But in truth, the biggest issue is a lack of imagination and aptitude by the user community. It is once more a case of ‘a bad workman blaming his tools’. So this is the problem on which we must focus.
Commitment Matters 