In 2008, it was the most admired for post-award contract management; in 2009, the focus switched to negotiation; and now it is the turn of pre-award bid and proposal management to come under the spotlight.
IACCM has had great success in raising executive awareness of the importance of contract and commercial management. Indeed, its ‘most admired’ studies originated as a direct result of conversations with one such leader. Ironically, it is the contracts community itself that often appears most reluctant to accept its need to professionalize through the adoption of more consistent, research-based practices.
The most admired series has assisted in identifying the practices that are most commonly followed by high performing contracts and commercial groups, both sell and buy-side. These studies have confirmed that broadly consistent approaches have emerged as ‘standards’ and enabled insights to the ‘best practices’ that allow organizatiosn to show leadership in their contracting process.
The latest survey was launched last week and has already attracted nominations from several hundred practitioners. The IACCM approach is simple and, in the words of one CEO, ‘truly represents objective peer review’. For executives, the results provide a meaningful target and benchmark; for practitioners, they offer the chance to gain executive attention and investment in improving their contract operations.
The survey will remain open for input for several week and can be accessed at https://www.surveymonkey.com/s/preaward
I spent last week in Turkey – mostly on the beach – and somehow resisted writing any blogs. But I did have some interesting conversations with a few of the friendly and hospitable Turks that I met.
For several years now, the question of Turkish membership of the European Union has made periodic headlines in the media. The United States is a powerful advocate; France is a powerful adversary; most other EU member states appear to have a majority of their population who oppose Turkish entry, though with varying degrees of hostility.
Those in favor suggest that the admission of Turkey to the European club would set a powerful example of Muslim / Christian cooperation and continue the process whereby the EU eliminates traditional hostilities and brings new levels of security. Those against (at least within Europe) fear that the extent of the cultural difference, coupled with the potential flood of low cost workers, would create possibly unmanageable tensions and destroy domestic jobs. These issues provide easy fodder for politicians to build popular fears.
Given the disparity in economic wealth between the EU and Turkey, one might therefore assume the Turks themselves would welcome the idea of EU membership. But far from it. In my conversations, it became clear that many Turks view membership as part of an EU plot to find low-cost workers who will prop up the living standards of an ageing EU population. They pointed out that the Turkist population at more than 70 million is the second largest in Europe. It is also on average much younger than other EU populations and therefore does not have the drain of a high proportion of pensioners and other welfare dependents. So in their minds, the EU politicians simpky want to exploit young Turkish workers.
And so ironically, ‘jobs’ turn out to the a common issue for both sides in this debate. Yet the perspectives are polar opposites, with each side believing that it is the one which will be exploited. And in the background is the intermediary (in this case the United States), whose motives are not trusted by either side because they see them as purely self-serving.
Overall, these conversations left me wondering how many negotiations are bedevilled by similar issues of suspicion and distrust. By failing to engage in open and honest debate, the parties retain assumptions and prejudices that prevent successful outcomes. When it comes to contract negotiators, I sense this happening far too often – and of course, our electronic age has made the situation even worse, because often the negotiators do not even meet each other. The problem can be overcome – but only if we are open to asking questions and making sure we focus less on what the other side is saying, and more on discovering why they are saying it.
I went for a hearing test today. The audiologist was talking about how uncomfortable he is with the speed of change in technology. He used to confidently prescribe a hearing aid knowing that it would be good for at least 5 years. That is no longer true. And it is disrupting the traditional economics of his business. When prescribing for a 5+year fitment, it was a fixed price, up-front fee that included periodic check-ups and maintenance. But what do you do when people may want to switch to a much better technology in 1 or 2 years?
In fact, his model (and that ot the industry more generally) has been disrupted even further because now there is a hearing aid on the market that is based on annual subscription. That is clearly a much smarter approach when technology life-cycles are so short – but it revolutionizes the commercial model. In addition, these new aids remain permanently in the ear and require specialist technicians if there is a problem. But what if the problem occurs when you are travelling? There has never been any ‘collaborative network’ concept in the industry – now there needs to be one.
The manufacturers of this revolutionary new product have decided to limit the publicity surrounding it until they have worked out how to cope with its implications – and especially its disruptive influence on their established market and distribution network.
This is a great example – in my mind – of how commercial and contracts experts must be contributing to the innovation debate at the time of product inception. It seems that the company behind this new product is only now recognizing the commercial challenges that accompany its release into the market … and cannot really work out how to deal with its consequences.
Thi is just one more example of an industry sector that is having to transition from the old product sales model, to a service-based and higher value offering. It is always interesting how every business seems to need to learn these lessons afresh, rather than looking at other industries that have already gone through the transition. In part, I suggest that this is because of the absence of any professional network of commercial and contracts staff. They are the people who should be engaging with product planning and marketing to ensure they have the commercial intelligence to enable its success.
According to the results of a recent survey by BearingPoint, “contract management is not a priority at European enterprises”. The study (which is based on data from more than 100 enterprises in 18 countries) reveals low levels of centralization and investment in contract management resources and process.
These results are interesting and somewhat at variance with IACCM‘s experiences. Of course, we all know that attitudes to contract and commercial management vary substantially within Europe. While they are traditional areas within common law countries, the picture is very different elsewhere. Business units tend to operate with much greater autonomy and, while some may decide to invest in people with contract or negotiation skills, many have not. They may turn to lawyers or project managers, or simply take the view that ‘business acumen’ is expected of all senior staff.
This background is consistent with the BearingPoint observations regarding low levels of centralization and investment. Where I disagree with their findings is that we have seen a strong shift in this position stretching back several years. European companies no longer tend to trade predominantly within their own borders. As they form relationships across the EU and beyond, the cosy and relatively informal relationships of the past are being replaced with more formal approaches to negotiation and performance management.
Historically, IACCM data shows that it wasn’t just contract management that was missing – it was contracts! Just like Japan, there was no widespread belief that contracts were necesssary. Much business was undertaken via handshakes and informal methods of management and control. In countries with statute law, there was no point in having a contract – everyone knew the rules. That approach is not sustainable in a global business environment. Even so, it may not always lead to ‘contracts’ in the typical US business context; and it may not lead to a view that there needs to be extensive investment in ‘contract management’ tools and resources.
But large corporations and those with extensive international trading links woke up to the problems that this creates several years ago. Not only does informality generate real risks of misunderstanding, or non-enforceability, but it also means there is no management data to understand the commitments or obligations affecting their company. So we have seen rapid movements in all the EU countries to improve their controls and the visibility of contract data. Several European software providers have had great success in implementing their products. IACCM membership in these countries has also been growing strongly, but not always from designated ‘contracts professioanls’. The drivers for improvement may be lawyers, but also they are often from business operations, project management or even finance. Companies in France, Germany, Spain, the Netherlands and the Nordics are all moving fast to develop ‘contracting competence’. And this is in some cases mirrored in public sector agencies.
So I agree whole-heartedly with the conclusion of the BearingPoint report: ““With enterprises becoming increasingly global, transparent and functionally diverse, it is essential to keep an overview of all the company’s activities and obligations with sustained and efficient contract management. Since management support is crucial for the operation, executives should have quick and convenient access to all contract information at any time. Therefore, broad situation analysis, change management and a wide and interconnected IT system for process support are vital for optimal contract management”. What surprises me is that they have found so few companies already on this journey – but maybe they did not talk to many of the 5,000+ corporations that have become members of IACCM!
Are buyer-supplier relationships becoming more collaborative? Are the views of value and performance used by Procurement extending beyond the traditional measures?
According to the results of a recent IACCM survey on Spend Management, the answer is a tentative’yes’. 46% feel that ‘Overall, our trading partner relationships today are stronger, more collaborative, more innovative, and more mutually-beneficial than they were 24 months ago’. This mirrors a perspective that was evident during the 2010 IACCM conferences, when buyers felt that the recession had in many ways brought them closer to their suppliers.
Certainly, the survey results show that large numbers of today’s Procurement staff believe that they have responsibility for supplier success and that this includes the need for ‘building relationships and credibility’ and contributing to trading partner collaboration and satisfaction’.
Yet interestingly these positive indicators are not reflected in the tools or methods that procurement groups are using. For example, an overwhelming majority use spend management software and well over half have sourcing tools. But well under a quarter have automated supplier relationship management. And while there is overwhelming (and hardly surprising) support for the statement ‘Achieving price concessions is a significant objective of procurement in contract negotiation”, less than 30% indicate that their organization measures trading partner satisfaction.
From previous research, we know that the supplier view is that the recession generally marked a deterioration in relationships. In part, that may simply be because they found themselves at a substantial disadvantage in negotiation and unable to resist unilateral demands for concessions. Our evidence suggests that some suppliers had only themselves to blame for the way things turned out. But regardless of this, it is clear that progress in relationship management skills and techniques remains slow.
(For follow-on this discussion, see https://tcummins.wordpress.com/2010/08/06/the-bottom-line-on-sourcing-procurement-software/)
Some years ago, the consolidation debate was mostly over whether or not to centralize Procurement or Contract / Commercial Management resources. Today, the questions have shifted towards the creation of Shared Service Centers … and increasingly to the possible consolidation of buy-side and sell-side contracting.
An IACCM member recently posted a question on this topic, because she had been given the mission of creating a combined commercial group. In responding to her questions, I made a number of observations.
Firstly, I assured her that she was not alone in overseeing both buy and sell-side contracting. However, the drivers for consolidation and the results in terms of organization model are quite variable. The drivers may be simply an expectation that there are potential efficiencies and cost-cutting opportunities. Or they are sometimes due to the drive to get Procurement closer to the market, or to raise and align commercial skills. I have observed particular battles in companies where there is extensive sub-contracting, or regular teaming arrangements and these are sometimes resolved by putting both groups under single leadership.
When it comes to organization, many mid-size companies tend to have a consolidated ‘commercial management’ group with a common manager, but some maintain distinct buy / sell teams. Others have driven integration because much of their activity is project based and they want closer coordination of the customer and sub-contracting activities (examples here come from areas like outsourcing and aerospace industries). Finally, there are a few that consolidated because they saw synergies in terms of skills and also the need for better integration of market and business intelligence (Agilent Technologies is a leader in this regard).
In my experience, there are real benefits to be gained through this consolidation and today’s market trends are making the case steadily more compelling. It is essential for companies to have a consistent nerve-center developing strategy and overseeing operations for their key customer and supplier relationships. Increasingly, those relationships are multi-faceted and integration becomes key to the speed and flexibility needed to compete for the best customers and the best suppliers.
In general, I am a strong supporter not only of consolidation but also of shared service centers as the model for value-focused organizations. I believe that commercial groups – buy and sell – must increasingly undertake ‘make or buy’ analysis for their services and should be judged on the degree of innovation and added-value they are bringing to the business.
Eliminating waste is about cutting out any action that does not bring value to the customer.
That is a principle that lies at the heart of any ‘lean’ process and it is one that is far too rarely applied in the field of contract and commercial management.
Waste includes not only redundant activities, but also those which cause avoidable delays or rework. Such activities tend to have a ripple effect in terms of overall business performance and cost.
Obvious examples in contracting arise in areas such as:
- clothing products or services with market-driven terms and conditions.
- re-using past experience from relevant bid and proposal activity.
- updating standard terms and conditions to reflect market experiences and shifts in competitive conditions.
- streamlining review and approval procedures.
- examining contract hand-over and communication methods from pre-awrd to post-award.
- learning from performance claims or disputes to ensure sources are identified and eliminated.
Each of these examples demands collaboration between user groups and a readiness to look at the portfolio of contracts and negotiations, to identify common occurrences, rather than insisting each situation is unique.
While ‘lean’ will always result in standards, these will never be rigid or unchanging. The standards represent today’s best ideas and methods and require systems that provide on-going data capture to support continuous improvement in the face of changing circumstances.
The reason I am so confident that many organizations lack efficiency in their commercial operations is that in general they do not even have data about their performance – and without that, the chances of change are low. Indeed, it is more than 2 years since IACCM produced a short on-line module on ‘lean contracting’ – and the level of interest it aroused has been negligible.
And that, of course, is why few customers perceive ‘contracting’ as a customer-focused activity and why executives think of it as a necessary operational activity, rather than a source of real strategic value.
For today’s IACCM ‘expert interview’, I spoke with Rees Morrison, author of the lawdepartmentmanagement blog.
Rees has been undertaking a massive benchmark of corporate law departments (including a significant number of IACCM members) and we were reviewing some of the results. At this point, much of the data is relatively high level – Rees explained his wish to continue collecting more input so that there could be reliable segmentation by country, industry and company size. Future questionnaires will also enable better understanding of the causes of variance – for example, does a high level of automation make a difference to efficiency?
The study aims to help General Counsel rate their relative efficiency and effectiveness – an important activity that as workloads increase, resource levels are under pressure, and demands for greater value continue to grow. Among the data points in the initial results, Rees has been able to extrapolate the mix of internal and external spend (‘make versus buy’) and an average fully-loaded effective billing rate (for US law departments, this equates to around $200 per hour). He has also made a start on what he terms ‘leverage’ – an attempt to understand the mix of personnel within a law department, such as administrative, paralegals and perhaps contract managers.
One data point that we discussed in some depth is the finding that the total legal spend as a percentage of company revenue in US corporations is approximately double that of equivalent European companies. There may of course be many factors – the legal system, the regulatory environment, the relative propensity to resort to law, as well as the tendency to do deals on a handshake versus via a formal contract. This will certainly be an area for continued investigation.
The data has also shown that about half the average law department staff is undertaking commercial activity and around half of that time is on specific contract-related tasks (drafting, reviewing, negotiating).
As legal services become more and more subject to the disciplines of category management, benchmark data will be an important element of resource and organizational decision-making. Similar disciplines are likely to apply increasingly to services like Procurement and Contract Management, since outsourced alternatives now exist. The demand for reliable benchmark information will therefore grow – especially if that data can assist in understanding not just relative cost of service, but more importantly the models and investment levels that drive the greatest added value.
Research has consistently shown the importance of cultural understanding to the results achieved from trading relationships. Perhaps best known is the work of Hofstede, but this has been augmented by many other academics and in recent times has been a particular focus in the world of project management, as well as related studies by IACCM.
Contracts are a representation of culture. They reflect not only our ‘domicile’ through the selection of language and jurisdiction, but also our attitudes to risk, our levels of trust, the extent to which we focus on detail (the ‘what’ versus the ‘how’). In that sense, they reflect not only the culture of the business environment in which we operate, but also of each specific company or organization.
For this reason, contracts – and the approach to their negotiation – should act as a key indicator of compatiblity between the contracting parties. For example, organizations that seek to impose their rules and procedures without extensive dialogue and explanation are unlikely to be collaborative partners.
Successful relationships can emerge along a wide spectrum of collaboration levels, from fully integrated to fully subservient. But in all cases, it requires both parties to be willing to operate in ways that reduce the risk of failure or misunderstanding. For example, can the relationship succeed if the terms and conditions are entirely one-sided? The answer is yes, but only if the weaker party finds ways to build a relationship around them. On the other hand, a balanced contract does not in itself guarantee success, if for example the culture of one or both parties is to find fault, rather than work to mutually agreed solutions.
There is innate understanding in many experienced contract managers and negotiators that we can use the contracting process to better understand the other side, to identify and evaluate the differences in culture and the impact this may have on performance. Yet these indicators are rarely acknowledged or used as a more formal basis of decision-making.
As organizations increasingly depend on strategic relationships, and as more of these cross not only business boundaries, but also geographies, perhaps it is time to develop a structured ‘cultural alignment scorecard’ and to use this in identifying the likelihood that a lack of cultural empathy and understanding will undermine the success of a relationship.
There are many who prefer to ignore the networked world. It creates all sorts of uncomfortable questions. But it won’t go away – and it is producing a growing number of challenges for anyone involved in contracting.
Most contracts today include a variety of clauses related to data protection, information security, disaster recovery; we look for undertakings, indemnities, confirmations of compliance. Buyers struggle to decide the level and methods to employ related to ‘supplier assurance’. When does due diligence cross the line into specific instruction, and potentially reduce the supplier responsibility?
Global networks are far from secure. Indeed,one General Counsel that I spoke with recently questioned whether any company – or indeed any public sector entity – is actually compliant with either the law or its own undertakings. The Economist this week features a supplement on cybercrime which makes similar points. All today’s networks are highly vulnerbale to atttack and to espionage. Governments are well aware of this – and there has been a conspiracy of silence on the issue. (Although there are indications that this may soon be addressed – though it is likely to take years to reach consensus on how to best handle the topic.)
For those of us in contracting, we spend hours crafting clauses and negotiating terms which are mostly of limited honesty or meaning. Is this because we really don’t care, or because we are blissfully unaware of the truth? Companies simply cannot promise complete security of data or information management. It is an area of relative security and safety – and one in which we must become far more expert and knowledgeable.
Commitment Matters 