The Logistics Viewpoints blog raises some good questions about the scope of most supply chain risk assessments and preparations. In the story of a well-fed turkey, the article highlights our tendency to focus on the most obvious questions and to ignore the ‘what if’s’ associated with our future.
In their excellent report earlier this year, insurance consultants MacTavish made similar observations regarding the tendency of risk management to focus on the past, rather than provision for the future. The turkey probably could not have avoided its fate, no matter how much it planned. Hopefully, the same is not true for us.
The Logistics Viewpoints article concentrates on forecasting, which is after all a fundamental element of many negotiations and post-award contract management. “Forecasting is based on history. Many supply chain and financial forecasting models are based on bell curves, with the tails of the curve representing highly unlikely events that can be “safely” ignored, at least for forecasting purposes. But a little examination of history will show that rude surprises, like the global financial meltdown we recently experienced, can intrude. All forecasts are thrown out the window when such catastrophic events occur. That is why companies should apply supply chain risk management to product forecasts and not just to factories, suppliers, and IT systems.”
The point it makes is that organizations rarely undertake scenario planning related to major shifts in forecast – up or down. And given the diversity and volatility of the markets in which we trade today, it is time that we undertook more scenario planning and increased our capbility to deal with the unexpected. Indeed, in previous blogs, I have highlighted how the role for many in the supply chain and commercial world requires them to act increasingly as ‘managers of uncertainty’. At the corporate level, this ability is set to become a major source of competitive advantage.
In an article on the BNET site, Geoffrey James seeks to identify the top 5 groups that ‘cripple sales efforts’. In fact, his article ultimately concentrates more on the attitudes and behaviors that undermine successful selling – and he is not averse to blaming the Sales organization itself for some of the failures.
James’s comments are focused on selling complex b2b solutions, which he rightly suggests require a team effort. His five ‘sources of failure’ are:
- Double-booking: operations groups over-commit against their support capabilities
- Finger-pointing: sales organizations destroy teamwork by looking for scapegoats, people to blame
- Penny-pinching: finance cuts so deeply into budgets that critical travel or training for required team members is not possible
- Stove-piping: support functions pursue functional goals without understanding their impact on generating revenue
- Showboating: sales people treat others badly because they beleive they are the only important function
I think these are all interesting factors and I am sure many in the world of contracts and negotiations have encountered them. However, I think the most fundamental issues are missing – and ‘blame’ is therefore being allocated in the wrong places.
- Dysfunctional measurements: executive management fails to create the right management system to encourage collaborative behaviors. Remuneration and performance systems that maybe worked well in an era of commodity sales are still being used to drive (or frustrate) complex services and solutions.
- Dishonesty: Sales organizations like closing deals. They often like it to the point that they do not mind whether the customer’s needs have been fully understood, or the risks of non-performance adequately assessed. The attitude is ‘ we’ll worry about that later’.
- Poor communications: customers are often their own worst enemy. They are unclear about requirements; they frustrate in-depth discussion with vendor staff; they take the view that performance is the supplier’s problem. Sales are often complicit in this because they do not want ‘tough issues’ to be raised.
The good news is that Mr James did not highlight contracting as one of the big obstacles, except perhaps in the context of stove-piping. But wouldn’t it be great if our community was in fact associated with proposing solutions to the problems, rather than being part of them? After all, we claim to be good at risk management – and what greater risk is there than having our company struggle to close revenue?
An article in GT News offers valuable insights into the world of accounts payable – and should alert those enaged in contracts to several issues that need our input.
The article discusses the latest trends in e-invoicing and highlights its rapid growth. In the US, there are forecasts that the number of e-invoices will overtake paper invoices in 2011. Many will welcome this development since it clearly represents a source of increased efficiency – for example, it leads to fewer errors and shortens approval times (industry estimates suggest these fall from an average of around 25 days in the paper-based system to just 10 – 15 days).
So suppliers may be excited by the prospect of earlier payments – but they would be wrong. As most know, large corporations have used the recession as a further excuse to prolong the payment term – now running at an average of 56 days, versus 53 days a year ago. So approvals are getting faster while payment is getting slower. And the large corporates are simply piling up the cash.
This is where the story becomes really interesting. The article tells us: “Large companies have emerged from the financial crisis with record levels of cash: the S&P 500 industrial companies increased their holdings of cash and marketable securities to US$820bn, up 27% from a year earlier. What is more, an analysis of the 500 largest non-financial US companies by the Wall Street Journal reveals that the cash to assets ratio has reached 9.8%, up from values between 4% and 6% in the 1990s (a similar study by Goldman Sachs reports a jump from 6% in 2002 to more than 10% today).”
But this windfall for the largest companies is at the expense of many of their suppliers. The SME market has seen a reverse trend. Their cash reserves have fallen and “small businesses are having to pay more to borrow relative to the Federal Reserve’s benchmark rate than at any time in at least a quarter of a century, according to official data from the central bank. Moreover, often credit is not readily available, forcing many SMEs to factor their receivables, frequently at interest rates of 10-20% annually. The worldwide factoring market in 2009 was a stunning US$1.8 trillion.”
So we have a picture in which the largest companies have used the recession to build their war-chests, in part at the expense of their suppliers. And now, armed with this data and all the insights that they are gaining from their new e-invoicing systems, Finance managers see a new opportunity to turn the screw. Rather than thinking about supplier liquidity as a problem, they see it as an opportunity. They are preparing either to offer factoring services, or to increase their use of early payment discounts.
Their new electronic systems offer a far more efficient way to manage such programs, including the ability for selective application or to turn the system on or off depending on cash needs. “The cumulative amount of business-to-business (B2B) invoices approved but awaiting payment has never been higher. These invoices can be used to improve working capital or profits. Upon approval, the buyer can either guarantee payment of an invoice (reverse factoring/supply chain finance (SCF)), or pay the invoice early against attractive additional discounts (dynamic discounting).”
Should those of us in the world of contracting and procurement care about this? Well, as suppliers, many of us will obviously not be happy about this trend and its impact on our business. But those in Procurement should also be asking questions, rather than allowing this financially driven shift to take place by default. In my response to the article, I made the following observation:
“This analysis is typical of that used within the finance community, but ignores the broader economic cost of such policies. First, companies pay a premium when they delay. Suppliers are not stupid – they mark up their price to take account of the delay or to cover the early payment discount. Second, such behavior by large corporates jeopardises the performance (and sometimes survival) of their suppliers. This can have significant downstream consequences as suppliers struggle to cut corners and cut costs. Smart finance experts also examine the broader business consequences of their behavior.”
Just because we can do something does not necessarily make it right or make it wise. If you work in a large corporation, be sure that you are involved in this debate. And if you work in an SME, be prepared; decide now what policies you will put in place to protect yourself from the impacts of this financial engineering.
We all make judgments about who we can learn from. I find wide variations between individuals, business functions and organizations in their openness to learning. There are some companies that appear largely closed to outside influences. Others are highly judgmental in the types of organizations from which they feel they can learn.
In ‘Zilch: The Power of Zero in Business”, non-profit leader Nancy Lublin suggests that business could learn from charities. She observes that most people in the for-profit sector perceive those in the non-profit arena as ‘horribly inefficient’. Consultants exhort them to adopt the behaviors associated with ‘the concentrating power of the profit motive’.
Some non-profits are inefficient. But they are not unique in that attribute. As Ms Lublin points out, many private sector companies are also non-profits in the strict sense of the term, even though it is not their intent. In my experience, non-profits can also be among the most efficient organizations. They frequently lack resources to develop a bureaucracy; they tend to have a strong sense of mission and motivation; they operate with levels of teamwork that are generally seen only in start-ups. And their marketing can be extremely effective, since it depends on creating a sense of faith and belief in their audience.
Non-profits generally motivate their employees without needing to pay a fortune. They often create ‘brand enthusiasts’ who volunteer their time to help and become powerful advocates – just the sort of viral marketing that businesses often seek to achieve. And they find creative ways to address problems or to innovate because they don’t have the budget to do it any other way.
As the leader at a non-profit, who moved from the world of large corporations, I find the experience refreshing. It is good to be able to do the right thing, rather than the most profitable thing. It is good to be able to offer help where we feel it is needed, rather than based solely on who will pay. It is good to have an outstanding team that is driven by a sense of mission and enthusiasm for what we do. It is good to have the appreciation of our members, who recognize that everyone at IACCM really cares and works long hours to deliver valuable services.
There is no doubt that for-profit business can offer a different set of rewards; but I agree with Ms Lublin that there are always many opportunities for cross-learning and that includes better understanding of how it is that non-profits can also succeed and develop highly efficient delivery models. And in that process, perhaps also better understanding the way that for-profit motivations can distort behavior and undermine long-term performance.
Having choice carries a cost.
That is the theme of a book – entitled Choice – by Renata Scalecl, Professor of Law at the London School of Economics. Although her selected topics relate largely to personal choices, there is much relevance to the dilemma of the corporate world – the buyer ‘faced with a bewildering range of options and with the feeling of looming censure for the wrong one’.
I am not aware of any specific research which has explored the economic cost of choice for the business buyer – the cost of exploring options; the cost of delay in making a selection; the cost of pressure for continuous re-evaluation, even after the decision has been made. There is no question that buyers and providers face added costs as a result of this uncertainty and the threat it represents to longer-term relationships.
Yet to what extent has the range of choice actually expanded? Certainly, buyers of goods and services can now realistically explore multiple geographic markets (itself a relatively complex and somewhat risky endeavor). For some categories of purchase, this has certainly resulted in the proliferation of choice; but in others, the difference may be minimal. And just as technology has enabled this potential explosion, so it has provided new tools (such as e-auction software) with which to control it.
Ms Salecl makes the observation that ‘the simplistic search for the perfect choice is not only impractical, but leads to misery’. To what extent have modern purchasing practices resulted in this misery – and how will we learn to control them by ensuring that they truly do deliver economic benefit?
‘If only we had been involved earlier’ is a comment that occurs with great regularity from those in the world of contracting.
There is no question that the contribution of contracts expertise – buy-side, sell-side or legal – can make a tremendous difference to outcomes. And much of this potential for value is down to timing. The reason why many feel frustrated is because their late involvement often results in poorly defined requirements, ill-considered commitments or badly structured relationships that fail to realise the full business opportunity.
This issue of timing can arise in the bid, negotiation or change management phases. My experience – confirmed by IACCM’s research – leads me to agree that late involvement by qualified contracts and commercial resources costs many businesses a lot of time and money. It frequently sub-optimises opportunities, delays their closure or results in poorly assessed risks.
But for those who exprience this problem, I suggest there are two fundamental questions to answer. The first of these is to ask “Why does it happen?” Many times it is because the business or opportunity owner simply doesn’t want ‘the people from contracts (or legal, or procurement)’ involved any longer than necessary. Their image is often not that of a real ‘team player’ and there is a concern that their negative views (of risk, in particular) will de-rail or delay the deal. But even when the business would welcome early involvement, I often find the commercial / contracts / legal group reluctant to provide it. They are frequently too busy to get engaged in the up-front phases of deal structuring or strategy.
The second question is: “How might it be addressed?” Many businesses have failed to think about how to achieve early intervention in a resource and cost-efficient manner. They have also failed to consider the use of technology. As a result, physical resources are engaged in far too many situations and they are frequently absorbed in repetitive, low-value tasks and fire-fighting. This adds to their reputation as tactical and risk-oriented.
There are two immediate steps that any contracts group can take. One is to increase their alignment with product or service management. By understanding the markets in which products or services will compete, we can ensure the terms being offered are appropriate to these markets and reduce the frequency of exceptions and negotiations. Contract standards are structured to support business needs, rather than the ‘one size fits all’ approach that is a business imposition, or the ‘every case is different’ argumant, which means no established contract standards and guarantees the need for negotiation every time.
And secondly, we must escape the assumption that commercial acumen is always delivered by physical means. The most successful organizations are those that empower good decision making early in the process – and they can do this by a mix of education and information availability. With today’s technology, we have no excuse for failing to deliver the rght tools and knowledge to the business.
So my advice to those who say ‘If only we had been involved earlier’ is to ask the question ‘What do we need to do differently to make sure that the business has the benefit of our knowledge and skills when and where they are needed?’
The latest edition of Strategy+Business offers an excellent article on building and maintaining company brand. Although written with a focus on consumer markets, the concepts have universal application. It is essential reading for anyone involved in contracting and negotiation.
The article suggests that brand management is no longer the preserve of the Marketing department. “Trust in brands has diminished and customers are more likely to view brands cynically, and to feel uncomfortable with brands’ desire to control. This has created a challenge for many brand owners, because they are ill equipped to cope with greater openness.”
Today’s successful brands engage a growing number of stakeholders – internal and external – in promoting the corporate image and developing its products and services. This challenges many traditional concepts of how relationships are managed, as well as demanding new approaches to information flows and intellectual property.
Back in the mid-1990s, when I was working at IBM, the then CEO Lou Gerstner took the view that contracting was ‘primarily about brand image’. He saw that the process as well as the individual terms and conditions sent a clear message to customers about how much they were respected and the extent to which they could trust IBM as a partner and supplier. This led to a transformation in the way that IBM formed and managed its contracts – creating approaches from which it still benefits today.
Gerstner was ahead of his time in making this connection. The Strategy+Business article indicates that he was not alone – and that it is time for others to catch up. If brands are to be trusted, they must be more overt about the commitments they will make and more open in their management and achievement. Contracts and commercial experts must apply serious thought to the image that is transmitted by current terms and contracting policies. As revealed by IACCM‘s research, most contracts and negotiations today are surrounded by concepts of secrecy, control and limiting obligations. For example, many transactions are preceded by some form of confidentiality or non-disclosure agreement; big companies seek to abrogate all intellectual property rights; organizations battle long and hard to limit liabilities, indemnities and warranties; we resist clauses that might imply openness in areas such as audit or benchmarking. And the more important the deal, the more we apply long and laborious review and approval procedures that often imply either a lack of trust or an absence of competence.
“Although we might argue that the very essence of brands is about trust …. in reality trust has often been missing. Organizations have trusted neither their customers nor their employees. As Francis Fukuyama notes in his book Trust: The Social Virtues and the Creation of Prosperity (Free Press, 1995), the “assumption that trust does not exist in the system” contributes significantly to the high cost of doing business in certain business sectors and societies. When there is a want of trust, organizations spend much time and effort watching and monitoring what people do. Brand delivery is jeopardized by the constraints placed on employees, who respond to the lack of trust either by finding ways around rules and procedures or by telling managers what they want to hear.”
Of course contracts and commercial management alone are not the drivers of brand image. But they are a fundamental component. In the words of one executive: “We had to let go of the old-fashioned concept of an organization built on mistrust and rules. Instead, we started focusing on trust between people; between ourselves and our customers and between the management and the staff.”
In this new world, “Trust has to be earned over time through the experience of promises delivered, which means less of a focus on telling people about how great your brand is and more on building relevant content”. This means that the contracting process must switch its role from protection against failure to enabling success. It becomes strongly focused on the matching of needs and capabilities, to generate clear commitments and a governance process through which they will be delivered. Failure is an after-thought, rather than the dominant concept.
To achieve this new world, as the S+B article so clearly reveals, there has to be trust and honesty throughout the organization – and that means we must ensure the marketing hype and the sales promises accurately reflect what we can and will do for our customers (or indeed, on the other side of the coin, for our suppliers). So the start of this journey is to ensure a far more holistic appreciation of the risks we are managing and the adaptations we must make if we are to build a long-term, successful brand.
In earlier blogs, I have highlighted the 2010 IBM CEO Survey ‘Capitalizing on Complexity’. I am very much looking forward to discussing the implications of this study with three Procurement executives on a webinar ‘Finding Ways To Capitalize On Complexity’.
As the title implies, the purpose of the discussion is to explore how Procurement can best respond to the needs that were identified by more than 1,500 CEOs who participated in teh IBM study. In particular, what are they doing – or what can they do – to improve Procurement’s contribution to risk management, the elimination of bureaucracy and improving the quality of customer relationships?
These are not areas of great strength for most Procurement groups. They tend today to be far more associated with risk avoidance than with its management; many would see them as a source of bureaucracy, rather than its eliminator; and the image of Procurement in groups like Sales and Marketing is rarely positive.
Today’s planning session for the webcast generated some lively discussion and revealed three enlightened leaders – though perhaps sometimes strruggling with traditional perceptions of the Procurement role and with how best to escape the constraints of today’s organization and measurements.
The conversation promises to be lively – you can see more details and register by clicking here.
IACCM will continue to explore the implications of the IBM CEO survey and its work will also be embracing the sell-side contract and commercial perspective.
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.
Commitment Matters 