The world is often filled with pessimistic thoughts. Today we are surrounded by predictions of catastrophe from global warming, water shortages, religious conflicts, insufficient food or energy …. And while the list has changed, there have been similar prophecies of doom throughout our past.
Yet in reality, conditions for the vast majority continue to improve. I was listening this morning to an interview with the economist Matt Ridley (author of The Rational Optimist, referenced elsewhere in this blog). He was making the point that his childhood was surrounded by pessimistic views of the future, yet in reality his lifetime has seen a tripling of income for most people on the planet (in real terms) and on average an improvement of over 30% in food supply per person – even after the massive population growth of the last 40 years.
The fascinating point that he made regarding our relative income is that progress has mostly been achieved because of a dramatic increase in buying power.In terms of the hours of labor needed to acquire a specific good or service, things today are quite simply much cheaper than they used to be.
Ridley also made the point that the old saying ‘Necessity is the mother of invention’ is not true. Invention and innovation do not come from the most needy societies, but rather from the most prosperous. And it is these most propserous societies that have also led the way in pushing down prices, as more and more people demand to share in wealth and as companies see opportunity from growing markets, rathe rthan raising prices.
The explosion of relative human wealth has occurred in conjunction with the ‘professionalization’ of Procurement. And as we all know, Procurement’s role has largely been focused on driving down supplier prices. Of course, it seems improbable that there was a conscious movement to link global wealth with modern procurement practices,. It is more likely that the drive for mass production created an ever greater need for discipline and rigor in purchasing procedures. Yet whatever the connection, it has proved to be a happy conjunction.
So while many people disparage the role of Procurement and its unrelenting focus on input costs, it is important that we recognize the contribution this focus has made to our relative wealth and prosperity – and what we might lose if it went away.
During one of IACCM‘s ‘Ask The Expert’ calls, a listener asked the following question.
“My experience shows that it is very important to have “standard contracts” without overly turgid, legalistic language, otherwise the contract will be ignored after signature by everyone except the contract manager. Do you agree?”
In my opinion, there is a growing understanding that good contracts are clear and easily understood contracts – they can be used as operational guides. Of course, many lawyers argue against this because they are afraid of confusion in the event of litigation – they see it as ‘risky’ to present the courts with documents that are not full of conventional legal terminology. Of course, this argument assumes some likelihood of a dispute that will end up in litigation (itself in fact quite unlikely). But this view also fails to appreciate that obscure language increases the risk of failure. If no one understands what they are meant to be doing, a dispute is more likely. If someone writes a plain language interpretation of the contract, that in turn becomes risky, since it may differ from the contract … and if it doesn’t differ, why wasn’t it written that way in the first place?
A compromise position followed by many organizations is that the ‘boilerplate’ is often the preserve of the lawyers and they turn a blind eye to ‘supplements’, ‘attachments’, ‘service level agreements’ etc. But this just adds to the confusion:
- Many business people then think that ‘the contract’ doesn’t include these attachments etc. So they see no need to be disciplined in their creation and management.
- Because they are drafted separately, these important documents may in fact (intentionally or unintentionally) override or conflict with key aspects or terms in the boilerplate.
- When it comes to ensuring clarity over the goals, responsibilities, performance criteria and change management, the attachments, supplements and SLAs are the important documents; these typically merit far more attention than the boilerplate.
As many have observed over the years, ‘craft unions’ develop secret codes and language which may initially have been about creating efficiency in their communications, but over time represent a restrictive practice. For many, the feeling is that the legal and contracts profession has hijacked what should be a business document and turned it into slef-serving mumbo-jumbo.
What are your thoughts and experiences? What is ‘good practice’ when it comes to the wording of a contract?
Today I was asked to present on negotiation excellence to the sales force at a leading technology company. When I showed the results of IACCM‘s 2009 study of ‘the companies most admired for negotiation’, someone asked “Why is the top 5 so biased onto the IT industry?”
It is an interesting question and I realized that the answer may well be connected to the issues of complexity and intelligence that I have discussed in recent blogs.
First, the top ranked companies are not really IT companies any longer. They have largely escaped the trap of commodity supply and they are primarily solutions and services companies, often project-driven. This has caused them to focus on the outcomes of their contracts, to move away from the old world where they protected themselves with ‘selection and use’ criteria that denied responsibility for results. It has also forced them to think about their commitment capabilities and to communicate these to the front line negotiators; if you want to avoid price-based competition, then you must learn to sell on value – and that value must be relevant and quantifiable. Negotiation in these companies is not seen primarily as an individual talent, but much more as a corporate capability.
But I think their transformation and leadership is also the result of another factor – and that is globalization. These companies were at the forefront of global business need and trends. Their customers depended on technology to enable their global aspirations. The traditional, multi-national business model of companies like IBM, HP, Accenture and Microsoft frustrated customers’ goals and ambitions. Negotiators were forced to spend their time excusing incapability, rather than promoting positive competitive difference. When this challenge was understood, it drove a fundamental change to the business model and structure, which in turn generated an environment that was far more receptive to new ideas. Essentially, these companies opened themselves to the creativity that comes from inclusive, borderless communities. It may have been accidental, but the benefits are evident in their achievements today.
The dual demand of dealing with the complexity of a switch to selling value, rather than price, and offering global, rather than national or product-based capability, has placed these companies at the forefront. Their experiences have made them more agile, more flexible and more intelligent in dealing with the complexity of today’s volatile global markets.
Are they perfect? Far from it – all of our winners would acknowledge they have a long way to go. But when I look at their propensity to drive research or benchmarking projects, their eagerness to discuss new ideas and to innovate in their contract and negotiation practices, I see a common theme. And interestingly, these are also companies that are seen by many as among the most rigid when they negotiate – they are perhaps among the least likely to bend to customer-specific exceptions. That’s because they understand the costs associated with ‘deviation’ from the standard. They prefer to spend their time reviewing, challenging and changing the standard, to deliver consistent value, rather than managing the consequences of situational exceptions.
So global thinking really does pay dividends, so long as that thinking combines the development of worldwide standards with the readiness to listen and learn from worldwide feedback and ideas. We should all be thinking hard about the barriers we can remove and, in so doing, equip our negotiators with differentiated sources of value.
As a footnote, it is interesting to note that all but two of the top ten ‘most admired companies’ are active Corporate Members of IACCM. Of course, that may simply be a coincidence ….!
It takes intelligence to trade.
As a recent article in The Economist pointed out, societies that become isolated not only stop innovating, but over time they actually regress. This is because the drive for specialisation is directly related to the complexity of human interactions.
Complexity and opportunity in trade both come from the free flow of goods and services. By eliminating borders, we maximise the range of goods and services that are available as well as enabling specialisation based on comparative advantage. “The success of human beings depends crucially, but precariously, on their numbers and connections” says economist Matt Ridley in his book “The Rational Optimist: How Prosperity Evolves”.
In order to succeed, we need not only to innovate in the products and services we produce, but also in the ways that we make their acquisition possible. Today, the erosion of borders means that we are competing both to sell and to buy in almost every corner of the world. As was observed in the recent IBM Global CEO Study, this has resulted in unanticipated levels of complexity, as we try to make sense of the best ways to structure and manage our business relationships.
Trade depends on communication – and the purpose of that communication is to establish consensus and consent between the trading parties; to ensure clarity and reduce ambiguity; and to agree appropriate mechanisms that result in trust and confidence. These roles should be achieved through the contracting process, which in turn results in appropriate records and the adoption of the processes necessary to support performance.
As IACCM research has shown, the nature and quality of communication has a direct effect on the quality of the contract – and therefore its success in delivering these attributes of consensus, clarity and confidence. Many of today’s contracting practices run counter to the concepts of a free flow of ideas. Instead, they represent a spirit of protectionism that is mostly determined by the relative power of the parties. After all, it is easy to react to complexity by claiming everything is ‘too risky’ and, rather than seeking ways to manage that risk, simply seeking to avoid it.
It takes intelligence to trade and it takes intelligence to take risks. That is because complexity requires innovation and progress depends upon us learning and re-using that innovation. Those who are charged with the contracting process must become better at identifying and promoting the innovative commercial ideas that assist in managing increased complexity. We must resist the temptation to stick with the tools of the past. Our future is indeed exciting – if we choose to make it so.
Has Procurement really grasped what ‘supplier relationship management’ is about?
That was one of the questions that arose during a meeting with SRM executives last week. The session had been called to review the results of the State of Flux survey on the state of supplier relationship management. And based on those results, the answer appears to be ‘no’.
For many in Procurement, relationship management is typically seen as an extension of current duties. It is a relatively peripheral activity (rather like the typical view of contract management), occupying at best a few hours each week. The survey reveals that most Procurement-based ‘relationship managers’ handle 3 to 5 accounts. Their primary goal is to ensure continued savings and to oversee performance. Indeed, the point that emerges from the study is that ‘relationship management’ has been seen by the Procurement community as simply another name for ‘performance management’.
This represents a massive contrast with the sell-side focus and perspective of relationship management. For most suppliers, their key accounts are overseen by a seasoned and respected account executive. It is a prestigious role that oversees all aspects of the inter-company relationship and is dedicated to a single account. The account executive has ready access to the top levels of management and has substantial influence and authority.
The State of Flux survey provided indications that those responding understood the challenges for SRM. For example, the skills they highlighted as most important were communications, trust-building and cross-functional working. Their counterparts in Sales would recognise these attributes. But the difference is that the sales organization tends to have such capabilities embedded, whereas they are not characteristics typically associated with Procurement.
An IACCM member asked me recently to outline my thoughts on analyzing payment terms strategy, from the perspective of a buyer. I thought I would share my answer in the hope that others will add to (or correct!) these ideas (of course, the IACCM library and training materials are full of guidance like this, for anyone who wants to know more!)
The two aspects of payment terms which require the greatest strategic thought are
- The trigger for payment becoming due; and
- The period within which payment will be made.
A third significant factor may be whether you seek to apply an ‘early payment discount’.
In principle, there is no barrier to developing consistent payment terms across all your contracts and this can offer systems efficiencies. However, there are some points to consider in establishing how feasible that single standard will be:
- In general, the triggering event for payment becoming due is likely to be receipt or acceptance of the supplier’s invoice. However, your readiness to accept and process that invoice is going to vary depending on the nature of the product or service. In some cases, you may accept invoicing on shipment or receipt of goods; in others you may want specific acceptance; for certain services or projects, you may accept making partial payments against particular milestones or prescribed intervals; for others, you may pay only on completion. Obviously you should define your policies as they relate to each type of acquisition. From a strategic perspective, I suggest you consider also the nature of the market and your experience in taking specific positions. In particular, how much supplier push-back, negotiation and variation is being generated? Does this end up with creating more cost than the savings from the specific standard? An obvious example here would be consultancy agreements. It may be that you would prefer to pay only on completion of the assignment. But of course the consultant will want at the very least to have some stage payments. Therefore would it make sense to either a) make your standard more balanced; or b) have a standard fall-back position to cut the frequency and duration of negotiations. A further example would be to understand whether particular types of agreement are generally with powerful suppliers who simply will not accept your standard; once again, what is your low cost / low risk strategy for handling this? Finally, if you decide that in some deals you want to withhold payment (or have the ability to claim it back) for a substantial period, you need to appreciate that there may be local laws affecting this; and also that suppliers will have major concerns because of their ability to recognize revenue when payments are in any way conditional.
- Historically, the payment trigger was usually related to receipt of the supplier’s invoice. Most suppliers still use that as the term in their contracts. However, buyers have mostly switched to say ‘acceptance’ and this, of course, may be some time after receipt. There is often a lack of clarity over what the exact acceptance procedure will be and in some companies it appears to take up to 30 days as a matter of course from ‘receipt’ to ‘acceptance’. Companies often have invoices go to a specific department where they will be accepted and then forwarded to accounts payable. Internal procedures to validate complete and satisfactory supply are understandable; it is of course important to ensure these are not causing massive internal costs through inefficiency and multiple handling. I believe you should also think carefully about the effect that these delays have on your suppliers and on wider internal workload. For example, how frequently do such delays result in suppliers contacting your staff to pursue payment etc.?
- Most buyers have steadily extended the payment period. For large corporations, our research shows 60 days is now normal as a standard, with some having gone to 120 days. In reality, as indicated in point 2 above, the real period before payment can be considerably longer. If you have outsourced payment to a third party, you must be especially vigilant regarding the delays that they impose in the system (e.g. by rejecting invoices for minor technicalities, or by changing invoice addresses to force suppliers to start over etc). In the end, this is where you have a major economic decision to make:
- Suppliers price for delay. They have already paid all their costs of supply; you are simply holing their cash flow. So they will charge for the cost of money and the risk. You should be asking whether the value of the cash in your bank exceeds the benefit you might have gained by paying faster and seeking some other concession.
- Long payment periods impact the financial health of your suppliers. Is that a risk worth taking? What is the cost of either losing a supplier or having to bail them out?
- Long payment periods damage reputation. Suppliers learn about companies that take a long time (or pay rapidly and reliably) and it impacts their readiness to do business with you, relative to competition.
- Legislators are increasingly interested in this topic. You will increasingly find that local practices are being replaced with regulation. France has already implemented statutory maximum terms and the EU is poised to follow. If you want a global standard, it may be best to do it within the regulatory frameworks.
Early payment discounts are another supplier irritant, because they are typically not fair. Many of the customers who use them are those with the longest payment period – for example, one major software company has 90 day terms and they ensure they pay on day 89 and take a 2.5% discount. Obviously, suppliers get wise to this and price accordingly.
Overall, I suggest you aim to achieve a high degree of consistency, but in making your selection consider the true economic cost:
- Of supplier push-back and the costs of negotiation, query handling and exception management
- Of market reaction, with supplier’s pricing for your policy (and remember that price can be a positive or a negative, depending on your approach)
- Of reputation cost, as a company that is fair and easy to deal with, versus unfair and hard to do business
IBM Corporation recently published the results of its Global CEO study, featuring the results of more than 1,500 interviews. The biggest challenge – according to 79% of these executives – is the increasing global complexity that faces their business and their decision-making. In his introduction, Sam Palmisano (IBM’s CEO) talks of ‘the unprecedented level of interconnection and interdependency’ that is driving this complexity.
In other words, global networked technology has taken us into new dimensions of worldwide interaction, but of course it cannot actually structure or manage the relationships that are needed at a human level.
And that, of course, is why those who are charged with forming, documenting and managing such relationships find themselves under so much pressure. Our historic instrument (contracts based on jurisdictional laws and cultural practices) are woefully inadequate when it comes to dealing with these new dimensions.
The IBM report highlights three widely shared perspectives among executives:
- The rapid escalation of ‘complexity’ is the biggest challenge they face; they expect it to continue and accelerate in the coming years.
- Enterprises today are generally not equipped to cope effectively with this complexity in the global environment.
- They identify ‘creativity’ as the most important leadership competency for enterprises seeking a path through this complexity.
In other words, we face a world in which making and managing successful business relationships will be increasingly critical. The environment in which this is happening will be ever-more complex. This demands creative new approaches that will both enable and protect the enterprise. At the heart of IBM’s findings is the need to become better at taking risks, better at eliminating rules and bureaucracy, better at making and managing customer relationships. 88% believe they must ‘get closer to the the customer’, which for the leaders means ‘more insight and intelligence’.
Our executives are looking for those who offer creative leadership. They know that this will involve new strategies and better insight to markets and specific customers. This represents a tremendous opportunity to re-think relationship structures, financial models and contract terms. While innovation may sometimes be the result of individual inspiration, it will most likely come from dedicated research and analysis – a readiness to explore new ideas and discover innovative interpretations.
The IBM report emphasizes that executives see complexity as both an opportunity and a threat. Those in the world of contracts and relationship management must ensure we offer ideas that enable this balance, that we demonstrate our ability to be creative at both an operational and strategic level. It is time for us to ‘capitalize on complexity’ and, if we wish to be taken seriously as a profession, we must do this collectively by challenging the models of the past and presenting new ideas through which to better manage this ‘unprecedented level of interconnection and interdependency’.
We all know that things are different when we are contracting outside our own country. But how different?
Most negotiators and contract managers find themselves on a voyage of discovery when they start working on international deals or relationships. There are some books available, and maybe we have internal mentors or colleagues who can help. There are areas which we know will be different – for example, the legal system – but the real risks and challenges are in the unknown areas, of which there are many.
A growing number of IACCM members turn to others within the association for help. With more than 120 countries now represented in the membership, it is generally quite easy to identify someone who will know the local conditions and pitfalls. But I have encountered a growing number of comments recently about the challenges of doing business in many markets – issues such as lack of contracting skills or understanding, difficulties in getting paid, cultures with an intrinsic lack of trust. Factors such as these can result in highly unpredictable behavior, with discussions taking a sudden turn into a completely unexpected direction or negotiations being abruptly terminated. Was the other side palying games, did we do something wrong, or were there hidden forces pulling the strings?
It is with these types of experiences in mind that IACCM is currently running a study to better understand the relative ease / difficulty of doing business with different countries. It includes input on the specific areas which represent risk or present negotiation challenges – for example, business ethics, contracting skills, language, enforcement – and is coming up with some fascinating results. The output will include a table showing not only relative ‘ease of doing business’ from a contracting perspective, but also indicators of the particular issues that negotiators and contract / procurement managers have encountered.
IACCM plans to dig deeper. Based on the results, it will develop a more detailed analysis and report on the things to watch out for in specific countries. Input to date has generated some fascinating findings. Even the most ‘advanced’ countries have areas in which they can improve. So negotiators will gain not only an understanding of the traps they may want to avoid, but also the possible perceptions of the other side. For example, when it comes to legal risk, which countries should you be most worried about? The answer will probably surprise you!
If you would like to participate in this IACCM study, please visit https://www.surveymonkey.com/s/marketcomparisons. All input remains confidential and, as a participant, you can elect to be sent a full copy of the final report.
Balancing safety and innovation can be a tough challenge. Are we at risk of stifling scientific and commercial progress by becoming too risk averse?
Of course it is important to protect our world from the damaging consequences that can come from scientific or commercial innovation. But when is ‘enough’? To what extent do we risk impeding new developments by making them either too slow or too costly or simply too risky for anyone to develop them? And do we apply anywhere close to equal standards in deciding when to make rigorous assessments of risk and benefit? For example, it is now quite evident that we applied far too little analysis and questioning to the new financial instruments devised by the global banking industry. If we had undertaken the scrutiny to which GM crops have been subjected, we would most likely have avoided the financial collapse.
And now, in the wake of disaster, we appear ready to apply much greater rigor to other areas of technological development, in this case deep-sea drilling. Increased regulation continues to drive up the cost of developing new drugs and pharmaceuticals. In fact, in many areas of major human interest, we are creating costs and delays – and potentially making the world of scientific discovery unaffordable. Risk management is not an absolute – it must be adaptive to conditions. So as we think about risk, we must not seek to eliminate unpleasant things happening, but rather build systems and approaches that enable us to gain early visibility, respond rapidly and contain the consequences.
That is where good contracting and good relationship management come into the equation. As we deal with ever-greater complexity, our contracts must spell out the mechanisms and contain the incentives through which risk will be managed on an on-going basis – ensuring early awareness and collaborative management.
On Procurement Excellence, Peter Smith kindly reported on IACCM’s recent initiative to introduce certification standards for supplier relationship management. While welcoming this, Peter raised a question about one of IACCM’s core value propositions – “Would I want to associate professionally with the people who might be across the table from me in contractual negotiations?” It is a good discussion point – and I thank Peter for raising it.
IACCM’s perspective is that companies rely on the success of their trading relationships – buy-side and sell-side. In recent years, these relationships have continued to become more complex. We are increasingly dealing with rapid change, volatile market conditions, a growing number of cross-border relationships, more frequent shifts in technology, new sources and forms of competition, a growing dependence on a ‘virtual’ world – all in all, the skills and professionalism of those who are charged with forming and managing these trading relationships is under tremendous pressure and is rapidly maturing way beyond the old world of purchasing and contract administration.
The response by some Procurement and Contract / Commercial Management groups has been muted. Far from grasping the opportunity to raise their profile and contribution, many appear to resist the demands for greater collaboration, innovation and risk management. They remain focused on spend management and adversarial, highly repetitive negotiations. Many Procurement groups continue to have little negotiating authority and to deny that they have any substantive role in post-award management. They therefore gain limited understanding of what contracting is really about. In the words of one senior executive (on the buy-side, I should add): “In looking at the value from contracts staff, we have to move away from endless arguments over things that may be unimportant or inappropriate to the deal in hand. My goals are to get into contracts quicker, based on reasonable positions, and to drive greater savings through improved outcomes. These benefits depend on improving organizational and individual skills and in ensuring their consistency on both sides of the negotiating table”.
Or read the words of the UK’s Head of the National Audit Office (again speaking as a buyer): “Commercial skills are essential to success in complex projects and a great deal of money rests on this; but there is still not a coherent system for providing skills across government or for using the existing skills as efficiently as possible.”
Buy-side and sell-side are locked into traditional adversarial battles which are often based on a high degree of mutual misunderstanding. Many contracts professionals talk about the importance of communication – and they are right. The quality of communication lies at the heart of all successful relationships. Communication is not always friendly; it does not always lead to agreement; its purpose is to ensure clarity, to enable honesty (or spot dishonesty), to assist understanding. A classic example of misunderstanding came up in one of Peter’s comments, when he mentioned ‘the commercial manager’s bonus structures’. In fact, very few commercial managers have any sort of deal-based incentive because their role is to ensure objective assessment of the opportunity and associated risks – very much in line with the role that the Procurement professional should be playing on the other side.
So let’s look at a few facts:
- Approximately 40% of IACCM’s current members already handle both buy-side and sell-side negotiations and contracts.
- A further 20% have at some time switched from buy-side to sell-side (or vice-versa, though that is more rare). So the case for transferability of skill and knowledge is not simply an opinion.
- More than 8,000 contracts and commercial staff have completed IACCM’s skills assessment, drawing from a common set of skill templates covering buyers and sellers. Over 6,000 have then progressed into the IACCM Managed Learning syllabus – which has approximately 45 modules, of which more than 30 are common to both buy-side and sell-side personnel.
By failing to have a common body of knowledge, similar methodologies and good mutual understanding , buy-side and sell-side negotiators place their organizations at risk. Both should be endeavoring to develop and oversee successful trading relationships. That is a point of mutual interest for their companies and is a compelling reason to ensure increased professional synergy for anyone who wants to be handling the more important and strategic relationships for their company or organization.
Finally, I come back to Peter’s original observation: “Would I want to associate professionally with the people who might be across the table from me in contractual negotiations?” I cannot think of any other professional group that makes this division. CEOs negotiate, lawyers negotiate, project managers negotiate, finance executives negotiate – there is not one professional body I can think of where the members avoid each other because they perhaps represent opposing interests. Indeed, if this is to be the basis of ‘professional association’, I guess that buyers should not really talk with anyone employed by a competitor, either. The truth is that real professionals understand that they sometimes need to maintain confidentiality and manage conflicts of interest. That is another skill that they learn as members of IACCM!
I would like to thank Peter Smith for entering into the spirit of this debate and like him, will welcome your thoughts and comments on this topic.
Commitment Matters 