Trust, according to Keld Jensen, CEO of MarketWatch, is at an all-time low. “It has fallen by 44% over the last ten years,” Jensen claims. And trust in multi-national companies is especially low – beneath even politicians.
Right at the top of the trusted list are NGOs – essentially, if you want people to believe you, it is best to be seen as relatively independent of financial motivations and to be linked to ‘a cause’. This is important to remember in today’s mass communication age; it is very hard for a large corporation to win in a battle with an NGO, regardless of the truth.
To what extent is this negative view of big business justified? Clearly, for many people, the financial crisis and debates over bonuses and executive compensation have seriously undermined belief in the integrity and moral standards of business leaders. It is disappointing that none are emerging to propose a new way forward – though perhaps that is an issue of newsworthiness (we must certainly not forget the role of media in this ‘battle for truth’).
But there are wider issues in corporate behaviour that rightly cause concern. A recent example arose at IACCM’s European conference. One session looked at the way negotiations have been impacted by the recession and highlighted the areas where terms and conditions came under greatest pressure. Payment terms was of course one of these – dominant companies used their power to impose substantially longer payment periods (for example, in the case of one major brewer, extending them to 120 days).
Actions such as this inevitably generated negative comment. At a time when small and medium businesses were struggling to remain afloat, generally unable to access bank funding, the world’s top companies were busy making a bad situation worse by starving them of cash flow. The politicians then became interested; France passed a law banning such extended payment periods and the European Commission is not far behind.
Many would criticize leading companies for such behaviour, not only for its moral implications but also because it would seem self-defeating. How can a one-time cash flow boost be worth all the negative press, the supplier alienation, potential supply disruptions etc.? So one might expect that an audience of contract and negotiation experts would take the view that this step was ill-considered and not ‘good practice’.
But no. The reaction was instead of outrage that ‘freedom to negotiate’ was being undermined by regulation (no one seemed to ask what ‘freedom to negotiate’ actually means for most small / medium businesses). Immediately the audience fell to discussions about ways to circumvent such ‘unreasonable’ regulation. “We’ll move our payment centers out of Europe”, declared one, “And make our contracts subject to the laws of non-EU countries”.
I am saddened by such reactions, not simply because they question moral judgment, but because the audience did not seem willing or able to evaluate the underlying economics of the situation. Anyone spending a few minutes on this would realise that most of the large companies which extended their payment periods actually missed a golden opportunity to both raise their reputation and favourably impact their bottom line. The one-time cash benefit of a longer payment period is dwarfed by the potential for price reduction or other benefit that might have been negotiated by reducing the payment period. And think of the positive press such a step could have generated, the goodwill that might have made that company buck the trend of falling trust.
Trust is critical in winning business and developing collaborative relationships. At a time when there is pressure on everyone to show their value, contract managers and procurement staff must start to assess the true economics of their contracting practices and term and condition choices. If we don’t even do that, then what exactly is our purpose – simply to implement other people’s rules, regardless of how ill-advised they are?
As technology drives us to master ever greater complexity, our contracting and commercial frameworks often struggle to keep pace.
Economic growth depends on success in world trade. Both depend upon the ability of people and organizations to work together creatively and collaboratively. Progress depends upon systems where competition is channeled into creative, rather than destructive, contention.
This is evident in so many areas right now. Of course, the continuing saga in the Gulf of Mexico is top of the list, with BP’s Chief Executive, Tony Hayward, highlighting the critical need for new commercial structures that offer better oversight and coordination between supply partners. Of course, many will dismiss this as another case of a beleaguered company calling for a change in the rules. But I think his appeals are worth attention, because they represent a much broader problem that we must address.
In an article in the Wall Street Journal, Hayward comments: “the industry should carefully evaluate its business model. For decades, exploration and production companies have relied on outsourcing work to specialized contractors. There’s much that makes sense about this kind of structure, and lots of talented people and well-run companies are a part of it. But the question after the Deepwater Horizon accident is how all involved parties—including exploration and production companies and drilling contractors—can work even more closely together to better understand and significantly reduce the various risks associated with drilling operations”.
The BP situation is understandably generating worldwide attention – but in truth it is not an isolated incident. Indeed, the US Government offers many examples of failed projects and weak oversight and control. Many times, we enter into relationships in which the vision exceeds the capability, or where the underlying systems simply fail to meet requirements. In these situations, we can either blame others, or look to learn together and fix the problem.
I do not know specifically what aspects of ‘the business model’ Mr Hayward would seek to fix. Perhaps over time he will tell us. But I like to believe that he has grasped the issue of the dysfunctional behavior generated by today’s measurement systems – the race for growth, the political pressures that come from knee-jerk policies, the dishonesty and narrow-mindedness that come from Sales commissions and Procurement savings. And of course, out of these disingenuous metrics, we end up with contracts and agreements filled with negative incentives – a belief that somehow we are protected if we have onerous liability and damages clauses.
BP is just one of many large corporations that has relied upon this penalty-based approach to contracting. Most large organizations believe that they can force their suppliers to take responsibility for outcomes. To a degree, they are right. But as this incident shows – and as the persistent failure in many other complex projects confirms – real success depends on a structure where people know what is expected of them, where change management is disciplined, where communications and reporting are fundamental to performance – and ultimately, where the parties have positive incentives to work together
Our contracting and relationship management processes must be updated. IACCM has been calling for change for almost 10 years and today, we are seeing Governments and major corporations turning to us for help in building the necessary skills and organizational models. Progress may be slow, but it is coming – and those in the world of contracts, legal and procurement have the chance to lead it.
In today’s markets, organizations depend more than ever on the performance of their suppliers. Many people recognize this growing inter-dependency and they realise that it demands more collaboration, where cost competition is balanced by the potential for relationship value.
Yet it seems the only way many organizations achieve that value is by working around their Procurement group. Special teams are created in areas such as outsourcing, IT procurement and Supplier Relationship Management, either to eliminate Procurement’s involvement, or to neutralize its effect.
A few companies are following this approach as part of a strategic plan to eliminate the traditional buyer / purchasing function. They believe that a combination of automation and outsourcing will result in the steady erosion of commodity buyers and, in parallel, they are developing the more highly skilled professionals of the future.
But in many cases, there doesn’t appear to be a plan. New groups are emerging, often with some rivalry to Procurement, and without the remit or the resources to ensure broader organizational learning and improvement. Supplier Relationship Management is currently a great example of this. It is often created to manage just a handful of suppliers, its goals unclear and its message to the outside world confused.
Procurement executives regularly have compelling presentations that suggest they are on top of the challenges and changes demanded by a global economy. Perhaps they convince top management; and in a few isolated cases it may be true. But in most, it clearly is not.
Supplier relationships really are of critical importance and management should be devoting far more attention to this topic. It offers potential for deep sources of competitive advantage, but only if there is an integrated strategy. Procurement must be remissioned so that its behaviours and skills rapidly alter and enable the value that can be generated from collaborative trading relationships.
An IACCM member asked for help with gaining buy-in from his Legal department to the development of standard contract terms. While many organizations have had these in place for years, there are still a large proportion working to develop standards – or perhaps revising their initial approach.
This blog contains most of my response – I am hoping that others will add their thoughts and experiences, some of the ‘do’s and don’ts’ of standard contract templates. In this case, the focus was on Procurement, but I think most of the observations apply equally to sales contracts.
Standard templates improve business control, reduce risk and increase efficiency. They have been adopted by more than 70% of large companies. Specific benefits include:
– Reduced operational costs (managing variations)
– Reduced cycle times for contract review and approval
– Scarce, highly skilled resources (such as Legal) able to focus on important issues and agreements
– Change management simplified (because you know what is in the base agreements)
– Business control increased (variations can be identified; new policies / procedures simplified)
Here are a few examples of recent incidents when having standards proved beneficial.
– When two major companies were recently hit by major reputational issues, the law department had to immediately deal with a range of damage limitation activities, some of which required detailed knowledge of the relevant contract terms. In the words of one General Counsel, “If I had not had standard contracts and confidence in how they could be handled, we would be out of business”
– With today’s diligence procedures, it has become increasingly important for law departments to be able to confirm the nature of their contractual obligations and commitments. For example, M&A activity often demands insight to areas such as termination rights, assignment rights etc. Many GCs are concerned about lack of visibility in areas such as this – and the time delays that can be created by having to check every contract.
– The volatility of today’s economy has made it critical for the law department to know what is in their contracts. Executive management expect them to know whether particular actions can or cannot be taken. For example, during the recession, many companies unilaterally changed payment terms, or sought to exercise termination rights. Without standard templates, this became a time-consuming – and risky – task.
– This issue of volatility is resulting in top companies re-thinking many of their standard terms. For example, we have been in contact with several recently that want to outsource aspects of their contract management, but realize that their agreements may not allow this (due to confidentiality undertakings etc). They are having to check every contract before they can take action – and in many cases go back to individual suppliers to negotiate waivers or changes.
– Law departments in many businesses are increasingly looking at ways to automate their contracts. They want reliable repositories; they want to be confident about the competitiveness of their terms; they want easy access to what has been negotiated; and they do not want to be seen as an inhibitor to getting business done. They also need to address workload issues. So at companies like Cisco, CSC, ArcelorMittal, LG Electronics, Verizon, Dell, Procter & Gamble etc etc, the law department is showing leadership or partnership with Procurement to ensure there are standards in place that reflect business needs and drive savings. In the words of Mark Chandler, GC at Cisco: “Legal must move from being a gatekeeper, to being a gateway”.
So without standards, there is no platform from which to manage change. This is important, because many businesses (especially like yours, where there are multiple brands and profit centers) presume that ‘standards = inflexibility’. But this is actually the opposite of the truth. Standards are in fact a pre-requisite of flexibility. Unless you know the base-line, change cannot be managed effectively or rapidly. You cannot empower the businesses to make decisions.
Overall, ‘contracting excellence’ is driving a minimum 5 – 7% improvement to the bottom line. Standard terms are only one element of this – but they are a fundamental element and without them, other improvements simply can’t be made.
However, be careful not to drive a ‘one size fits all’ approach. You must think through the types of relationship you wish to enable as a business as well as the categories to be covered. The structure as well as the content of contracts will be affected by this portfolio. For example, IBM, has 8 relationship types that it enables; and there are then variants depending on what is being bought – for example, software, services, products, ‘solutions’. The terms and conditions must be drafted to sit within each relevant contract template. Many times, the same term can apply to every agreement (for example, the Force Majeure clause); but others must be sensitive to the type of acquisition and the relationship (for example, IP rights).
Once you have templates, you can also develop a ‘playbook’ that offers guidance around the rules and procedures to follow when changes are to be made. The key point with standards is that if they are suited to the nature of the transaction or deal, they offer real efficiencies and enable the parties to focus on selectedd areas for negotiation.
The Financial Times features a report warning employers that they face a period of severe attrition, with one in four workers planning to leave within the next year.
The article highlights the damage that the recession has done to employee loyalty, following cost-cutting, wage and recruitment freezes, regular reorganizations and job uncertainty. Such actions have left staff feeling disengaged and has undermined productivity.
When it comes to plans to change job, I suspect that a key part of the problem is that many employees have lost faith in their employer’s ability – or willingness – to ensure that things improve. The real issue for many workers, as it is for society as a whole, is whether we believe that things will get better. A key driver of attrition will be the perception that the only way to progress is through a job move.
For those in the world of contracts and commercial management (as I reported in yesterday’s blog), there are growing opportunities to move. However, it seems unlikely that this will translate to large-scale attrition. Here are some reasons why.
First, a majority of those in the world of contracts and commercial management are not primarily driven by money. IACCM research shows that recognition is far more important. In those companies where the contracts / commercial job role is gaining increaased, attention and status, the interest in ‘moving on’ is substantially lower.
Second, IACCM’s morale index has shown a high level of disillusionment, but in general it does not translate to an immediate wish to move. About 40% feel that morale has fallen in the last year (early 2010 survey data). But issues such as location have become increasingly important to many and mobility is now further constrained by the challenges of the housing market. As a result, most would consider moving only if they could gain a pay increase of at least 20% – and in current conditions, that is very unlikely for all but a select few.
Transferability of skills also remains a big issue. Many contracts / commercial specialists find themselves trapped within a specific industry – so those who most want to move may be least able to do so. This problem is unlikely to ease until there is wider adoption of consistent professional standards. For example, a growing number of job specifications cite IACCM Certification and possession of this can therefore offer a passport between industries and countries, because it demonstrates a core knowledge and level of achievement.
Regional differences in employee attitudes are significant. For example, in India morale is much higher – and loyalty much lower! In booming market conditions, the belief that higher wages are attainable elsewhere is prompting much greater intentions to move job – and much higher expectations of the salary increase that will be achieved.
Overall, those in the world of contract and commercial management tend to be a little more cynical than some. Perhaps this results in slightly lower expectations and greater resilience in the face of testing circumstances. Research suggests that this community is also more loyal, though in part that may be because the job market is less well developed and it is much harder to find new opportunities.
Therefore, while employers should not panic over attrition in the ranks of their contracts and commercial staff, this does not mean they should be complacent. Senior roles for high quality candidates are opening up. You may not lose many of your people – but you might lose the best. The research suggests that one of the key issues – and most regular failings – is the quality of functional leadership. So ensuring that you demonstrate leadership through recognizing your team’s achievements and by creating an environment of optimism for the future are important steps.
IACCM recently released a series of regional salary and benefit surveys that included some of the morale data cited in this article.
There is strong competition for business. There is a lot of uncertainty about existing contracts. In this environment, terms and conditions have the dual challenge of becoming simultaneously more creative and more protective.
The number of job openings for high-quality contracts and commercial management professionals has increased. Salary levels for these positions are down a little, but have remained robust. In general, contracts and commercial groups have not seen the attrition levels of some other functions.
However, there is no question that management is becoming far more demanding of its contracts / commercial staff. They want people with a strong commitment to success, people who can close deals or ensure their delivery. They demand creative thinkers who can make the difference between winning and losing business – because today, commercial creativity is a major source of competitive difference. At the same time, the business needs practitioners who can protect and defend margins and ensure trading relationships remain strong.
So I am observing great interest in new terms and conditions, in better ways to package business relationships. Issues like agility and flexibility, imaginative ways to address revenue recognition, new approaches to pricing and financing, change management, intellectual property, termination rights – these are examples of the subjects under fierce debate. The key driver for all of this is the need to operae within an acceptable economic framework – not just our own, but also that of our trading partner. Top commercial and contracts pr0fessionals are those who devise and manage mutually winning deals.
Over the next few years, market volatility will continue. Many companies will face regular renegotiation of their public sector contracts; this will flow into their sub-contractors. The President of Hitachi recently alluded to this challenge in an interview with the Financial Times. He also highlighted the increase in competition, both because of general cut-backs and due to new market entrants. The IACCM message boards and mail boxes have been filling with debates and questions that illustrate the major role that is being demanded of the contracts and commercial community.
So is it a good time to be a contract or commercial manager? The answer quite clearly is yes – but it is also a challenging time, where an increased contribution is expected and where results must become far more visible. Top performers will flourish.
In the past, the only way to become a ‘top performer’ was through a combination of the right personal skills (that won’t change), the right overall experience and (if you were lucky) some good mentoring. There was no structured community to provide advice, to answer questions. There was no structured training – just a few sporadic classess, or materials that focused on the more administrative aspects of contract management. There was no defined profile of the role, the required skills, or a professional certification. And today, this has changed – IACCM offers fast, practical routes to gain structured training, to validate skills, to become certified and to participate in a vibrant professional community.
So as the world becomes both more challenging and more rewarding for contracts and commercial managers, it is easy to understand why IACCM continues to add new members at a rate of more than 500 a month. Yet more evidence that this is indeed a good time to be a high performing and professionally well-connected contract or commercial manager.
One of the discussion forums at the recent IACCM Europe, Middel East and Africa conference focused on contract claims and disputes. IACCM research has shown that the frequency of claims and disputes has increased by more than 30% in the last 3 years, so the topic rightly generated considerable interest.
The moderator, Richard Russell, initially focused on defining the difference between a claim and a dispute. He suggested that ‘claims relate to alleged non-performance and represent the assertion of a right’. Failure to resolve a claim may, of course, lead to a dispute.
During a lively discussion, delegates compared differing industry practices, observing that some have entrenched expectations of a claim / dispute procedure ‘as a form of economic restoration or rebalancing’. It was also noted that tough economic times lead to a greater inclination to use claim and dispute procedures.
The discussion led to broad agreement that claims and disputes are primarily about issues of quality and several participants confirmed that their company’s analysis pointed to around 70% of claims being commercially (rather than technically) related. Their incidence is also higher in contracts related to solutions or services, when there si more potential for disagreement or confusion over precise specifications.
These observations tie back to the IACCM research on the most frequently negotiated terms. When identifying the most important terms (as opposed to those that today gain greatest focus), IACCM members highlight scope, change management and communications as the areas that will best safeguard successful results.
Virtuallly none of the companies represented in the discussion undertake regular tracking and analysis of claims and disputes. For those that do, the findings assist in improving procedures and practices and in steadily eliminating the sources of claims. It was also apparent that relatively few companies undertake regular review of their contract review and escalation procedures, to see whether issues could be identified and resolved at an earlier stage.
Overall, the session demonstrated another area where the contracts and commercial community could be operating more proactively to bring value to the business. The combination of increased focus on the relevant terms and conditions and more thorough analysis of the reasons for claims and disputes would result in significant improvements in contract performance for both buyers and sellers.
In an excellent article in the Financial Times, historian and social commentator Simon Schama issues a stark warning. He observes that periods of great public anger are often followed by a period of relative quiet. It is in that period that leadership has a chance to take decisive action – or risk a violent backlash.
Schama is of course referring to the recession and the ending of the belief – at least in much of the Western world – that the future will be better than the past, that we can expect our children to have greater economic opportunities than we had. He argues that these conditions carry all the hallmarks of past revolutions and that people are expecting change. The key point is that the change must not be cosmetic – it is not just a case of re-arranging the deck chairs.
In today’s environment, much of the pent-up anger appears to be based around a feeling of social inequity. This is not just about inequality, but rather a feeling that rewards are unmerited. In particular, the financial services community is a target because many within it are seen as both the cause and the benficiaries of the economic downturn. While others suffer, they are once again on the rise. But it goes further than that. Executive pay is another area in which a majority of the public cannot see justice. Most business leaders are not entrepreneurs. They do not take significant personal risks. Their ‘windfall’ bonuses and pension rights appear out of all proportion to the level of effort and personal sacrifice demanded of them. Even when they fail, they leave with a significant pay-off, equal to many years’ salary for the average worker.
And in the end, this perhaps all comes around to the effect of today’s measurement and motivation systems. Whether it is bankers, executives, sales representatives or procurement groups, we all know that measurements drive – and distort – behavior. Those of us in the world of contracting see evidence of this every day. Too often, these measurments are acting against the public interest. It is time to engage in serious discussion – and in the case of the more extreme examples, it is time to take action.
The focus of negotiation in 2009 / early 2010 swung towards greater risk aversion, according to IACCM’s worldwide survey of contract negotiators. There were strong pressures on financial terms and issues such as the right to terminate. Tough economic conditions meant that the amount of negotiation increased – and ironically, many buyers saw this greater contact with their suppliers as indicative of ‘greater collaboration’. This view that was not shared by their suppliers, many of whom felt bruised by the unilatral imposition of new terms for established agreements.
The experience of the last year has not altered the belief in the professional negotiation community that the agenda should shift towards terms and conditions that represent greater cooperation and improved clarity and governance. However, the survey results show that once more we are making little progress, partly due to our perception of ‘resistance by the other side’ and partly because of the difficulty of altering internal stakeholder positions. The interpretation at IACCM is that few contracts / legal / commercial groups are championing change at either an organizational or deal-based level. Changes can be made, but only by either a more strategic view, or as a result of improved negotiation planning. Either of these demands a focused change initiative and the garnering of senior management support – which evidence suggests would often be met with open arms.
WHAT MIGHT YOU DO WITH THESE RESULTS?
IACCM comments that its experience is that many senior executives are enthusiastic about greater levels of cooperation with key customers and suppliers and would welcome improvements in contracting. Some IACCM members use this annual report to focus internal discussion on the benefits to be achieved by changing the focus of negotiation and the shifts that this would require in internal organization and management. Many of these members turn to IACCM for additional input on the best way to address these changes and also to describe the improvements and value that they generate.
The detailed results are also used by many to assist in a strategic review of their current terms and conditions. They compare external experiences (as set out in this report) with their internal results. They also look at ways to reduce the frequency of repetitive negotiation issues since these can result in reduced cycle times, improved financial returns and greater ‘ease of doing business’. However, while such initiaitvves are worthwhile, it must be remembered that external benchmarks of this type only allow improvement relative to external norms; they will not in themselves prove transformational. At times of great change, such as we are currrently experiencing, organizations should undertake a much more holistic review of their contract and commercial strategies, to determine the opportunity that could arise from innovative terms and offerings, rather than simply marginal improvements relative to the competiton and their own past.
IACCM’s report on ‘The Most Negotiated Terms’ is available to members at no charge.
It doesn’t matter where I go, it seems that principles of more collaboration, more cooperation are sweeping through business and society.
Last week I was at a lunch with Dr. Vince Cable, the new Secretary of State for Business in the UK’s coalition government. I guess it may not be surprising that those forming a coalition might sing the praises of collaboration, but he was far from alone. Today, at the IACCM Europe, Middle East & Africa conference, his message was echoed by the Scottish Minister for Industry, who declared that ‘results can only be optimised through collaboration’. Politicians, trade association leaders, business executives, scientists and leaders in supply chain are all suddenly espousing the idea that innovation, value and risk management are improved if we work together to generate ideas and solutions. I could recite a long list of recent news articles and presentations to illustrate my point.
The cynics might suggst that this is simply a passing phase – that Western politicians and businesses are reeling from the impacts of the recession and are suddenly awakening to their loss of power and influence, so are calling on the new power-elite to be ‘collaborative’. Under this theory, the alpha-male is merely in abeyance – and will re-surface when the good times return.
Such a concept would of course depend on the fact that ‘the good times’ will return, at least in the forseeable future. Also, there are many who would point to the fact that we have created an increasingly borderless world with far greater inter-dependency between companies, organizations, political entities and individuals. This will force us to challenge some of our former beliefs and behaviors.
Among these, of course, are the ways we have gone about contracting and negotiation. We all know that these vary to some extent by culture and business practice. However, as the recent IACCM ‘Most Negotiated Terms Survey’ revealed, the international differences in contracting have continued to decline, driven by a broad adoption of the common law framework and habits (at least for international trade). These habits include a transactionally driven, adversarial approach to many negotiations: an approch that is, quite simply, out of step with public and political sentiment. Negotiators know this (they tell us what the focus should be, and it is very different), but feel powerless to change.
Such a defeatist attitude is disappointing. But more than that, it is potentially self-destructive. Contract drafters and negotiators are not immune from global trends; if they fail to adjust, they will simply be swept aside. Change is not an option. The option we have is whether to be among the leaders or among the victims. It is time to re-think the focus of contract content and negotiation planning. The change can be made. There are already collaborative models in place; there are examples we can draw from. There is no good excuse for continuing to fight battles that others can see are undermining value, increasing risk of failure and inhibiting new ideas and innovation.
Copies of the latest IACCM study into the Most Negotiated Terms are available from info@iaccm.com
Commitment Matters 