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.
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.
Commitment Matters 