Overall, I have to say that Procurement has been far more organized in defining and describing its role and process than have those in sales operations. Concepts like ‘procure-to-pay’ have represented useful ways to ensure coherent definitions of activities and responsibilities – even if execution is sometimes lacking and measurements may be driving the wrong results (but that is a different issue and not my theme for today).
On the sales side of the house, if the transaction is b2b, the process is often far more vague. In the name of ‘flexibility’ and ‘customer responsiveness’, I still encounter many organizations where Sales seem to engage groups like contract management or Legal on a discretionary basis. This leads to all sorts of problems – poor commitments, shortage of time, the need to unravel badly constructed deals.
So I welcome initiatives like ‘quote-to-cash’, recently introduced at Pitney-Bowes, in the hope that this might indicate a similar disciplined approach emerging in the sales arena.
Of course, there are good arguments to avoid rigidity – and it would certainly not be helpful to mirror the negative ‘compliance’ mentality of some buy-side organizations with a similar approach on the sell-side. We already see far too much time wasted in these low-value confrontations over whose standards will win. But there are benefits from a better disciplined sales process. These include:
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Greater clarity for Sales over roles and rules should mean better commitments
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Earlier involvement of contracts and legal experts will often result in more successful – and higher value – deals
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Less ‘fire-fighting’ will enable resources to be applied to more strategic management of offerings and relationships
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Perhaps – and this is a big ‘perhaps’ – we might even see greater Sales accountability for the outcomes of their deals
As we face a world of increasing complexity, with relationships that have ever-greater strategic significance, the sales process must be more fully integrated with execution. A concept like ‘quote-to-cash’ certainly implies a much more holistic view that ensures commitments match capabilities. So I am looking forward to talking with Tom Fuchs, from Pitney-Bowes, on an IACCM ‘ask the expert’ call on February 14th. The Role of Contract Management in the Quote-to-Cash Continuum is at 11:00 Eastern US time.
This week, IACCM released the results of its annual “Top Ten Most Frequently Negotiated Terms” survey. With responses representing thousands of b2b negotiators, it offers the world’s leading (perhaps only) insight to where negotiators spend their time and effort.
The list has shown little change over the 7 years in which IACCM has undertaken the study. And it shows most negotiations focus on ‘what happens when it goes wrong?’ One IACCM member wrote to me with the following observation:
“(Research has shown that) the top two perceived traits of respected leaders are Honesty and Competence, which – according to Covey – are exactly the elements required for trust. So, this means that successful leaders are those who inspire trust, but the question becomes “in whom are they inspiring this trust?” Their employees may trust them and they may trust their fellow-employees, but when it comes to dealing with the outside world, neither the leaders nor the employees are good at establishing trustful relationships. Hence they spend all their time negotiating terms about failure and exit strategies.”
These observations are important. I would question one aspect of the writer’s statement – and that is about fellow-employees. I think the core of this problem is that many negotiators do not in fact trust their own organization. They are protecting against bad commitments, promises that cannot be honored, concerns over true requirements and capabilities. Perhaps that is why CEO’s have highlighted ‘excellence in execution’ as such a high priority issue – they understand that their company must be clearer about its needs and its promises.
You can view the ‘top terms’ (the study in fact identifies the top 30) at this link.
The crisis in world markets, exacerbated by the ‘rogue trader’ at Societe Generale, simply illustrates the spiralling complexity of today’s trading conditions.Our networked world has enabled a massive new array of business offerings and transactions. Most of us – including it would seem the managers of institutions like the banks – appear completely bemused by their range and meaning. And the structure of these offerings, together with the manic motivation and measurement systems that accompany them, has resulted in behavior that is more symbolic of a casino than it is of responsible business management.
The London Times commented last week on work by Roger Steare, Professor of Organisational Ethics at Cass Business School. He put more than 700 financial services executives from major firms through integrity tests – and found that, as a group, they score lower than average in honesty, loyalty and self-discipline. This, according to Steare, indicates “a culture of greed and short-termism”.
With the massive investments by the financial services sector in risk-management systems and technology, plus all the regulatory oversight for the industry, it is shocking that such attitudes can prevail. Yet perhaps the two are directly linked. The industry rewards risk-takers at the same time as it tries to control them. It hires mavericks in order to drive growth and profits, using instruments that are incomprehensible to most people, and then tries to contain them with complex technology-based fences.
It should not be surprising when some of these mavericks find ways around the system – it is typical behavior for any group that is driven by lop-sided measurements.
What is interesting is that the problem facing financial services is not really so different from that facing any other company. We are talking here about trading commitments – or contracts. And what is needed is a system to monitor and capture those commitments, so that someone can see the portfolio and observe any specific trends or heightened exposures to risk. On one level, it seems remarkable that Societe Generale would not already have such an overview, enabling it to see the overall exposures to future market movements that resulted from M. Kerviel’s ‘bets’. And one presumes such insights might have prompted action.
What exactly have the banks been spending money on if they do not have even such a basic contract management system, or the controls needed to capture their external trading commitments?
And will this cause management in other companies to wake up and realise the risks they face through their failure to automate this critical – and increasingly complex – area of their business?
Continuing my theme of picking up on recent correspondence, I received the following observation from one of my contacts earlier this week:
“As in-house legal counsel and contract professionals, our primary responsibility is to protect the legal interests of the corporation/entity that we represent. It is not to maximize profit, minimize losses, or ensure a healthy balance sheet. We certainly can and should play a role on the business/finance side, but this is secondary to our key function which is to always ask, “how does X, Y or Z impact our legal interests”? We meet our primary responsibility by minimizing and, where possible, avoiding risk. And, when a company is in the business of developing, manufacturing and selling consumer products, risk is all around — from identifying intellectual property issues in developing new technologies, adhering to appropriate manufacturing standards, and meeting consumer expectations based on our advertising and marketing materials.”
Now this is a common perspective, but is it right? And more importantly, does it work in today’s fast-changing business conditions? In my reply, I commented as follows:
“You say “We meet our primary responsibility by minimizing and, where possible, avoiding risk.” To many in the business, this might be seen as a negative statement, suggesting that you are not interested in meeting market requirements. Another way to express the same sentiment could be “We meet our primary responsibility by assisting the business in its ability to accept risk.” The implication of the latter is that Legal / Contracts staff have a key role in ‘business enablement’, by spotting trends, competitive initiatives etc. that may challenge the accepted policies, practices or performance capabilities that are reflected in the contract standards. The question is – does good risk management wait for bad things to happen, or proactively seek to understand and anticipate those bad things and therefore equip to manage them? And to what extent is it our job to explore the outcomes that are generated by the words we write or the policies we protect.”
Perhaps the real point here is that the old model of managing risk through narrow functional perspectives and groups that were committed to maintaining the status-quo was great in an era of low-cost manufacturing (for which the typical organizational model today was designed); but it is useless in servicing a fast-moving economy where the need for flexibility and change to meet market and customer needs is paramount.
Functional specialisms were established to ensure and maintain high levels of quality in a standardized output. They were designed for efficiency and speed in an environment that sought to eliminate ‘deviations’. Today, ‘deviations’ are fast becoming the norm, but they need to be handled in a standardized way to ensure they are planned and capable of fulfilment. That’s why views like those expressed by my correspondent actually increase risk. And that is why at IACCM I have been promoting new organizational models to address the needs of business today.
What do you think?
‘Sourcing Innovation’ has produced a good summary of recent research on future trends in sourcing and supply chain management. The latest article focuses on the challenge of overseeing multiple supply networks – a topic that should interest both buy and sell side professionals.
Drawing from a recent report published jointly by ISM, AT Kearney and CAPS, the article starts with the observation:
In tomorrow’s world, the ability to respond to change will just be the price of admission. Competitive advantage will require agility, while supply chain excellence will be defined by the ability to:
- Anticipate changes in customer requirements, product offerings, supply conditions, regulations, and competitor actions
- Adapt to the changes by deftly reconfiguring existing supply chains or creatively assembling new ones
- Accelerate implementation of change to capture the new opportunities ahead of the competition
These comments are perhaps a longer and more detailed way of expressing IACCM’s recent comments that “in the future, we must become ‘Managers of Uncertainty'”.
The real point, of course, is that change is happening ever-faster and our systems and capabilities must mirror this new reality. And one area where that has dramatic impact is in the contract relationship. Since so much is unpredictable, we can increasingly forget about things like volume commitments or rigid supply forecasts. Clearly , we have to get comfortable with the fact that customers cannot accurately forecast requirements in any sense – they won’t know what they are. Trading relationships will have to be based on an understanding of mutual interest in each other’s success and a commitment to work together in dealing with an uncertain – and fast-changing – world.
But on the other side, if suppliers can no longer expect such firm commitments from their customers, what is reasonable in terms of what customers can expect from them? Clearly (and as recent IACCM case study articles have shown), traditional buyer behavior of shifting risk to the supplier while taking none themselves is not the type of ‘flexible partnership’ that this new world demands. You cannot expect a supplier to invest in ‘anticipating changes’ and ‘deftly reconfiguring’, nor providing the latest innovations, if the core of your relationship is constant – and unilateral – focus on cost reduction and an atmosphere of blame for any shortcoming. If you cannot accurately define your requirements, how can they possibly make firm commitments – except commitments of fidelity, of integrity and honesty.
This ‘new world’ points to the critical need for more collaborative relationship structures and that in turn suggests a focus on outcomes, rather than inputs. While those involved in structuring and negotiating the relationship remain fixated on short-term objectives, that tend to assume dishonesty, it is unlikely that we will see emergence of the capabilities indicated by this article.
Since the bidding, negotiation and contracting phase precedes the relationship, or shapes its governance framework, we will only build these more integrated and collaborative structures by re-thinking our approach and policies in the set-up phase. In addition, if we are truly establishing networks, we must start to look at the interplay between contracted relationships and create models that encourage transparency and cooperation.
Today, such discussions are far too often taking place between groups and individuals who are outside the contracting process; functions such as Legal, Procurement and Contract Management are seen as obstacles to getting the right relationships in place. The words of one executive always ring in my ears at moments like this: “We believe that we can collaborate in spite of the contract.”
While true, is this not an indictment of our work and is it not a threat to our future relevance?
It is time for both buy-side and sell-side to consider the impacts of reports such as Succeeding in a Dynamic World: Supply Management in the Decade Ahead and to work on developing the practices, procedures and policies needed to ensure competitiveness in this emerging business environment.
(See the Sourcing Innovation commentary at http://blog.sourcinginnovation.com/)
One of the key trends we observed at IACCM in 2007 was the rising threat to Western companies – and in particular, US companies – because of their attitudes to risk. They do not have confidence in their ability to manage risk, so they seek to avoid it. And in so doing, they open the way to their more nimble competitors from emerging markets. This is especially evident in the contracting and negotiation practices and policies followed by many international corporations.
Innately we all understand that we must take risks. Every moment of every day, we are surrounded by possibilities and uncertainties – things could go badly wrong at any moment.The big question is how comfortable we feel about consciously taking risks. And the answer to this is very personal; it depends on how good we are at analyzing situations (do we recognize the risks?); how accurate we are at assessing their likelihood or consequence; and how confident we feel about accepting and managing that risk. As the table below shows, there are significant issues of trust that impact those who are responsible for forming and managing trading relationships. We asked our community of lawyers, procurement professionals and contract managers how they felt about the qualities of risk management within their organization.
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% saying that they personally are ‘good’ or ‘excellent’ at risk identification and management |
92% |
| % saying that people generally in their company are ‘good’ or ‘excellent’ at risk identification and management | 18% |
| % saying that their company’s executive management is ‘good’ or ‘excellent’ at risk identification and management | 57% |
| % saying that their immediate colleagues (those performing similar jobs) are ‘good’ or ‘excellent’ at risk identification and management | 51% |
We then asked users of their services – people in Sales, Business Unit managers, project managers – how they felt about the risk management capabilities of their Legal, Procurement and Contract Management groups. Just 16% gave a ‘good’ or ‘excellent’ rating. Most felt that the groups were risk-averse and driven by rules, rather than judgment.
Who is right? Probably neither side is completely right or wrong; the important point here is that no one has a monopoly on good judgment and that perceptions of what is ‘good’ are frequently very subjective.
There is another aspect to taking risk, one that is often overlooked or is considered too narrowly. And that is to understand the nature of the opportunity that comes from taking the risk. Risky actions are not taken in a vacuum – they are in connection with doing or achieving something. So the counter-side of risk is opportunity – and we can make good risk decisions only if we understand what we might gain or lose as a result of our decision.
The problem we face – and the reason that risk is highlighted as Factor #3 in this series – is that business is contending with heightened complexity and uncertainty. This has tremendous impact on groups like Procurement, Legal and Contract / Commercial Management because they feel they are custodians of responsible risk behavior. And that is a very difficult task when the risks are not just hard to quantify, but may not even be recognized.
As we venture into the global networked economy, we daily encounter new experiences, new pieces of information, new ways of doing things. In such an environment, doing anything seems risky. Our networked world has also facilitated far wider input and involvement – and each of those involved has their own take on risk and on the things that might turn out to be problems. Some of the consequences of this environment are readily evident. They come in the form of supply chain disasters; exposures to safety or the environment; performance failures on major contracts; regulatory or compliance exposures. Today, such failures are instantly visible through networked news and it is rarely possible to apportion blame to the other side.
Academics such as Rob Handfield of NCSU have undertaken massive research into the impacts of these supply chain failures. There is also extensive work on how companies should handle problems to limit the fall-out (or sometimes even turn it into a positive because of the excellent way they handle the situation). But behind the scenes, there are less visible – yet pervasive – consequences of this world of risk and uncertainty. We see it in our benchmarks and our research studies – decisions are taking longer to be reached; contract lead-times are extending; workload from review and approval is increasing; confrontation in negotiation is growing. And the hidden results of these ‘risk containment’ measures are that the vision of the opportunity is lost. Far from managing risk, we are often guilty of converting risk – and the new risks we create may be far more terminal in nature than those we avoid.
The last edition of IACCM’s newsletter, Contracting Excellence, contained some great examples of this. One was the story from the telecoms industry, where customers impose rigorous and rigid liabilities, indemnities and damages. As these flow through the supply chain, they force companies to reduce the possibility that things might go wrong. They have two immediate methods by which they might do that. One is to create a defensive culture that always places blame and fault elsewhere. The other is to limit doing risky things – and in this case, that means constraining innovation. By using only tried and tested products or services, it is certainly possible to reduce the chances of things going wrong – but it also means that you are constantly behind the competitive curve.
One of the key trends we observed at IACCM in 2007 was the rising threat to Western companies – and in particular, US companies – because of their attitudes to risk. They do not have confidence in their ability to manage risk, so they seek to avoid it. And in so doing, they open the way to their more nimble competitors from emerging markets. It isn’t just a matter of those competitors being more prepared to take risks, it is also that they have become more attractive trading partners. My conversations with business leaders from a range of industries indicate that they are turning to overseas trading relationships not just because of future opportunities or lower costs, but because these companies are often easier to do business with.
To be blunt, the ‘sophisticated’ economies run the risk that they will become so paralyzed by rules, regulations, procedures and the fear of doing something wrong that it will be almost impossible to do anything right. If lawyers, contract managers and sourcing experts truly wish to be viewed as responsible and credible managers of corporate and business risk, then they must start to challenge the behaviors that could otherwise destroy not just their company, but their nation’s competitiveness. At present, far too many either push a self-defeating ‘control and compliance’ approach, or alternatively they insist that every situation demands their personal oversight and judgment. In either case, they are effectively placing a straitjacket around their business and its competitiveness. Today’s trading conditions mean that we must abandon notions of controlling circumstances and creating certainty. We must stop taking the view that risk is somehow manged if it has been handed to someone else. In this world of inter-dependent supply networks, we must focus on building the tools, systems, techniques and skills needed to become exceptional ‘managers of uncertainty’.
Trading relationships are becoming more strategic and more complex. Therefore the challenge as we enter 2008 is to implement risk regimes that are far more holistic in their data collection and analysis. Risk categorization must be improved (there are some great models, such as that offered by Synaptic Decisions). Economic analysis must be faster and more complete (that means more integrated business functions and business information, a better understanding of the financial consequences of terms and conditions). Trend data must be collected to allow improved portfolio analysis (for example, contract management systems that identify frequently negotiated terms or capture repetitive performance issues). Fall-backs must be issued to support greater empowerment and to eliminate the need for such frequent review and approval. But above all, there must be accountability. Leaders in our contracts community must step forward and promote the measurements and KPIs that support an environment where risk is truly understood and managed, rather than simply contained.
As we enter 2008, businesses face mounting uncertainty. Political tensions, shifting economic power, threats to the financial system … it is tough to predict how the world will look a year from now. These issues add to (and to some extent result from) the underlying changes still being driven by the networked world. An era of cheap and easy communication is transforming how, where, when and with whom we do business.
While periods of rapid and unpredictable change threaten many, they also represent tremendous opportunity. Some will simply prove lucky – but others will focus on the key issues and attributes necessary to ensure their survival. And those same factors should also influence the attitudes and behaviors of individual employees who want to not just weather the storm, but emerge with their status stronger and their career plan intact.
In this series of posts, I will highlight five factors that appear to be critical and which represent these areas of opportunity. The first is Globalization.
Globalization will not go away. It will continue to open new sourcing opportunities, not only to reduce prices but also to tap new ideas, methods and labor pools. Increasingly, sophisticated supply chain experts will look at broader issues of acquisition cost and sophisticated suppliers will understand how they can leverage the risks of extended supply chains to create competitive advantage. Let’s look at a few of the trends that may become ‘big news’ in 2008.
For several years, globalization has placed negotiating power in the hands of the buyer. It has contributed significantly to the renewed focus on cost and the virtual blindness of many buyers to any other value factor. A combination of cheap labor and weak commodity prices created an environment where falling input costs became a norm. That era is not fully over, but the end is in sight. And in addition, the issues of quality, environment, social responsibility and rising commodity prices are limiting the options for such a simplistic and confrontational approach.
Already, some industry sectors have started to develop a more sophisticated approach to their sourcing management – better segmentation of relationships based on value and importance; greater sensitivity to future shortages and supply threats; more holistic measurements that incent a change in procurement and negotiation practices. These changes have some way to go, but they will be rapidly adopted by the winners in 2008.
Part of that shift will be for buyers to analyze the true costs of acquisition, rather than simply purchase price. They will take greater account of logistics issues – the cost of delays, shipping, customs and duties; installation, maintenance and running costs. They will also become more sophisticated in understanding the risks behind global sourcing and in considering the need for improved information flows and greater transparency.
For suppliers, these shifts represent real opportunities. After years of being beaten up over price, of being forced to move production to low-cost centers, they will be able to step back and consider how to build competitive advantage into their offerings. For example, can they take on some of the buyer’s risk in areas like transportation or export / import? Can they differentiate by offering more reliable supply? Can they create better integrated technologies that offer on-demand capabilities and information flows?
Suppliers are also waking up to the fact that globalization is creating new pockets of wealth. The markets that were yesterday’s sources of cheap labor are today’s emerging economies. Already we see major suppliers switiching their sales and marketing spend, building new alliances, partnering with the international corporations of tomorrow. Buyers who maintian their old, confrontational approaches to negotiation may soon find that their suppliers simply shrug and turn elsewhere.
Finally, what about the impacts of globalization in those emerging markets themselves? The Western press tends to focus on how globalization affects the developed economies. It may report on the opportunities that are being created, but it rarely looks at how business leaders in those fast-growing economies are handling their success.
Interestingly, many of the emerging companies appear to have learnt little; they show every sign of emulating the traditional (and crumbling) enterprise model of the 20th century corporation. Rather than thinking about lean organizations, with a center-led, outsourced approach to operations, they are building centralized infrastructures, huge facilities and campuses. It is a model built on short-term opportunities for labor arbitrage – and defies the economic forces that led to their success. So the final trend that I believe will emerge in 2008 is that a weakening economy will place some of these early leaders in countries such as India under very real pressure. They will need to rapidly reengineer and develop a business model and structure that does not depend on such high volume employment, but instead that operates with disciplined business processes and technology that allows superior information flows.
Commitment Matters 