Last week I participated in a conference on Procurement Cost Management. The event, staged in Barcelona, attracted an impressive array of Chief Procurement Officers from major European companies.
When I agreed to speak (and chair the second day), I anticipated that most presentations would focus on new and draconian measures to enforce compliance and grind savings out of the supply base. It was therefore a pleasant surprise to discover the extent to which speakers and audience were attuned to more collaborative behaviors. Indeed, session after session highlighted the need for Procurement to transform its image both internally and to the supply base.
The theme of my presentation was ‘Gaining an Internal Trust of Skills and Capabilities’. I sub-titled the session ‘Beyond Spend Management’ because the core of my message was the need to continue the Procurement journey and to build on the benefits achieved from increased control over spend.
Recent years have seen a focus on compliance and category management. But in gaining control over spend through these mechanisms, Procurement has alienated many of its interfaces, internal and external. It is frequently seen as a destroyer of relationships, rather than as a builder of value. It is also pereceived as fulfilling the agenda of other people (especially the CFO), rather than having a value proposition of its own. Now is the time to leverage past success and to demonstrate a larger and more strategic business contribution.
There are several areas in which this change must be achieved. Procurement groups need to move:
- from process to judgment
- from implementing the agenda of others to influencing that agenda with new ideas and methods
- from treating suppliers as adversaries to suppliers as sources of innovation and value
To achieve these goals, Procurement groups must deliver commercial competence throughout the product or service life-cycle. They must become skilled at communication and relationship management. They must discover how to integrate market opportunities and needs with supply capabilities and innovations.
I found tremendous accord in many of the subsequent presentations. The CPO community was highlighting that contract and relationship skills and better use and understanding of terms and conditions were key to the future – and an area of skills shortage. Most were unaware of IACCM and its mission or membership – but that is no longer the case!
In coming days, I will feature a summary of some of the presentations from this conference, highlighting the changes that are being made in Procurement organizations as they strive to adjust to the needs of today’s market and business conditions.
The oil rig explosion in the Gulf of Mexico represents just the latest example of a high-risk incident for which preparations were inadequate. Like other recent examples (the volcanic ash from Iceland springs to mind), the relevant parties who should be engaged in resolution move quickly to recrimination.
There are several key aspects of these disruptive risk incidents that contracting experts should be considering. One – which I raised in a recent blog – is the fact that we cannot anticipate and make provision for every specific risk; instead, we should ensure that our contracts and relationship processes envisage and encourage a risk regime that causes the relevant players to come together rapidly and to cooperate in remediation. The Gulf incident appears to lack any such governance regime – and it is interesting how quickly the Federal government has moved to blame BP, when it could certainly be argued that they should have ensured the responsibilities for resolution were more clear and that the resources to deal with such incidents were in place.
An article in the New York Times questions the fairness of the criticisms levelled at BP and suggests that Federal officials shared the view that the incident was manageable and took no steps to validate the early assumptions. The article also points at the lack of coordination between relevant parties, especially within the government sector – a seemingly familiar refrain. One cannot help asking whether the public pronouncements by the US Administration are designed to help resolve the oil spill, or are instead focused on political damage limitation for government agencies.
Stratey+Business this week issued a timely and fascinating article entitled “Why We Hate The Oil Companies“. Written by a former President of Shell Oil, it highlights the need for better communications and transparency in an era where politicians are in denial over the truth of energy costs and policy. The volatility of oil prices is frequently seen as price gouging or profiteering by the industry, rather than subject to the laws of supply and demand. Oil companies make convenient scapegoats and public opinion is likely to assume their guilt. Therefore smart businesses will recognize and plan for this key aspect of reputational risk. Sustained focus on public image is critical to trust. Yet when I look at typical oil company behavior (as evidenced in their contracting practices), I see an environment in which transparency is discouraged (confidentiality is key) and where contracts focus on the allocation of blame and management through fear (onerous liabilities, indemnities and damages provisions).
The Gulf incident will of course have wider ramifications for the industry. In addition to the questions about off-shore drilling, we can doubtless expect more after-the-fact regulation by lawmakers and perhaps greater oversight by government agencies. But there will also be short-term impacts that raise other questions about the balancing of risk. For example, today’s lean supply chains will once again be tested by the diversion of resources towards this incident. How many oil companies may find their operations exposed by the lack of spare resources available to maintain their standard operations? To what extent will contractors take advantage of the resulting shortages to hike their prices?
This incident is just the latest in a continuing series of unexpected events. The turmoil of recent times certainly appears to be part of the ‘new normal’ that has arisen from an increasingly inter-dependent and inter-connected global economy. It is also a result of the increasing dependence that companies have on external suppliers, with more and more of their core operations outsourced. All of this points to the critical importance of relationship management. As smart people, we know that good relationships are not based on a system of punishments for failure, but depend also on rewarding success. Contracts and contracting practices represent a fundamental element in framing those relationships and especially in providing a governance process which ensures coherent behaviors across a value chain. As professionals, it is the duty of contracting and legal experts to consider whether the instruments and approaches they use today are truly assisting in both the creation and protection of organizational reputation and value delivery.
I am often asked to define the difference between commercial management and contract management. So here goes.
First, commercial management is a role and job title that until several years ago was largely confined to the UK and some former parts of the British Empire. It appeared to be in terminal decline – but is currently making a resurgence and is now not uncommon as a job title in North America and even some parts of Europe and Asia.
Second, commercial managers believe themselves innately superior to contract managers. They bring levels of imagination and judgment to their task that are far beyond the process-driven, administrative activities of a contract manager.
Third, commercial managers are generally more focused on sales and business development, though some may also embrace procurement, especially in connection with major projects (as opposed to minor acquisitions, which are allocated to ‘buyers’). However, some procurement specialists have taken to calling themselves ‘commercial managers’, so what is going on ….?
Job titles are of course always a problem, because when they lack any formal professional underpinning, they represent a wide range of activities and qualifications. However, if forced to make a generalization, I do think that Commercial Managers are more frequently engaged in leadership roles; whereas Contract Managers tend to be more driven by process. In the words of an excellent short article in the Spring edition of The Conference Board Review: ‘Leaders make decisions, big decisions, mid-crisis decisions, without certainty of the outcome. Managers don’t.”
And that perhaps explains in part why Commercial Management was a largely European development and Contract Management largely originated in the United States. ‘Managers may have the best MBA education possible, but they measure metrics, analyze, maintain the status quo and, as they love to say, ‘do deep data dives’.” Contract Managers follow process (which was such a strength in the US mass production environment); Commercial Managers exercise judgment (often because there is no real process to follow).
But increasingly this divide has narrowed. In part, that is because the move towards higher-risk solutions and services demands greater judgment in all organizations (process is no longer enough); but it is also because the status of many commercial functions has reduced – today, to gain credibility, they need facts amd market intelligence, not just opinions.
In the end, title does not really matter. It is the readiness to make decisions and to be held accountable that represents leadership – and it is something to which both contracts and commercial managers can aspire – so long as they understand the need to deal with ambiguity, not having all the facts, not having all the data – in fact, if they can handle the conditions that will become increasingly common in today’s volatile global markets.
Financial capabilities and issues have always been fundamental to contract negotiations – hardly surprising, when you recognize that contracts are primarily about economic exchanges. I wrote recently about one aspect of this, following a conference about on-line dispute resolution.
Last week, there were a couple of announcements which illustrate the point that contracts experts need increasingly to be on top of financial trends and developments. One was a report from the International Chamber of Commerce on the ‘fragility’ of the recovery in world trade. A particular issue they have identified is the drop in trust between trading partners, reflected in increased demand for ‘higher levels of insurance’ by suppliers, in particular for confirmed letters of credit, where previously payments were taken on trust. Because of their aversion to credit risk, the banks have in turn increased their fees for commercial letters of credit and other instruments.
This aspect of the credit crunch has been under-reported. There has been extensive press about the fears of buyers that their suppliers might go out of business; but here is evidence from the other side of the coin – that suppliers are concerened about their buyers, and increasing the cost of doing business accordingly. For those buyers who demanded an extended payment period, the reaction by their suppliers is certainly understandable. Once again, it is the banks that profit!
The ability of the financial industry to protect its interests is reflected in the second story, that Visa has acquired e-commerce specialist, Cybersource. It is just the latest in a series of acquisitions by major credit card providers to ensure their ability to compete with alternative sources of funding and payment protection – for example e-Bay / Paypal (mentioned in my original story). Although the focus right now is on retail business (Cybersource apparently processes about a quarter of all US e-commerce transactions), how long will it be before such partnerships start to serve the lower end of business to business transactions?
Many contracts staff tend to leave these issues – and awareness of market trends – to their colleagues in Finance. But this means that negotiations are frequently disjointed and trading opportunities are missed. It is time for those in the contracts and commercial world to ensure they are on top of the trends in trade finance.
It is now almost three years since IACCM urged its members to start thinking of themselves as ‘managers of uncertainty’. The point being made was that a globalized economy and a steady shift towards greater inter-dependency was making traaditional approaches to risk management inadequate and potentially inappropriate.
Recent events continue to illustrate this point – most notably the disruption that resulted from the volcanic eruptions in Iceland. Traditional risk registers would have been very unlikely to predict such an event and planning for it would have been considered highly inefficient.
The Economist has published an excellent article that reinforces this point. In discussing the future of risk management, it comments: “The aim is less about trying to predict what unlikely events may come along, and more about creating mechanisms and relationships that would help the firm and its partners respond with agility if disaster did strike. Such exercises, when done well, help their participants to develop a capacity to devise quick, creative solutions to unexpected problems, and to build trust among those who would have to take crucial decisions on the spot and those who would have to follow them.”
Once again, the point here is that business today needs to spend less time building rules and pushing risks onto other parties, and far more in creating collaborative networks and superior communications (but don’t forget to plan a fall-back in case it is those communication networks that fail!) Instinctively, many contracts and commercial professionals know that this is the smart way to go. Yet far too many contracting processes remain rigid and focused on the same adversarial terms and conditions.
Today, IACCM published the results of its annual survey of the Top Ten Negotiated Terms. Once more, it reflected virtually no change in the dominant issues – none of which are about forming collaborative networks. The contract remains fixated on trying to create certainties in a world where increasingly uncertainty reigns. We know that The Economist is right when it says we should be “creating mechanisms and relationships that would help the firm and its partners respond with agility” – so what are we doing about it?
Certainly some IACCM member companies are taking rapid steps to deal with uncertainty – and Contracts and Procurement groups are occasionally showing leadership in this work. Our recent survey on ‘commercial agility’ generated a large input and revealed a strong understanding that things must change – but also indicated that most are still playing at the edges, rather than addressing the core challenges.
I will write further on this topic when the Commercial Agility report is issued next week. But meantime, have you been taking steps that will help you deal with future uncertainty better than your competitors?
I wrote recently about the growing importance of change management . I was highlighting the need for properly defined change procedures that assist in maintaining alignment between the contracting parties and therefore play a key role in building cooperation and trust.
The frequency and speed of change (up by more than 30% in the last 5 years, according to recent IACCM research) has made it increasingly important for organizations to define the way it will be managed. Failure to do this almost inevitably results in disputes and means that opportunities for increased value or innovation will be lost.
Last week, a message board posting by an IACCM member shed a different light on this problem. Essentially, this professional was asking ‘How do you get internal and external management to engage in the change control process?’ Even though she works at one of the companies that is acknowledged for the excellence of its post-award contract management, she finds it extremely difficult to gain management attention or have them follow the established change procedures. That lack of discipline means that key conversations either do not occur or are not recorded, changes happen informally and when things go wrong … fingers point everywhere except at the true cause.
To see whether this was more than an isolated incident, I spoke with a few senior professionals in industries where efffective change management is critical to cost and performance – for example, aerospace, engineering and outsourcing. It became clear that the experience of the original author was far from unique. In the words of one very senior commercial executive: “The lower level contracting professionals follow process whereas seniors circumvent the process because they get paid to make really big decisions. In my career, (I found that these) very big decisions were very rarely written down. In my view, the level of risk rises in direct proportion to the level of seniority making the decision.”
Of course, one would expect that senior management is involved in the riskier decisions. But the point here is that senior management may often be the source of risk because it considers itself above trivial things like process and business discipline. Good change management is without question a source of better relationships and higher profits; but often, it seems, executives may be the ones who are the enemies of properly managed contract change.
Is that true in your organization?
The news that the Institute for Supply Management (ISM) and the Chartered Institute for Purchasing and Supply (CIPS) have entered into a ‘reciprocal agreement’ whereby they recognize each other’s professional credentials will be welcomed by many. I am sure there are hopes that this will lead to even more integration in the years ahead.
For the individual professional, this announcement means greater portability of their credentials – though it still leaves more than 80 countries with their local purchasing associations and accreditation standards. However, one must assume many of them may now seek to gain cross-recognition with the ISM / CIPS powerhouse.
However, the real driver for this link-up is not of course the individual member, but rather the major international corporations which have been calling for greater consistency since ‘globalization’ began. I recall speaking with CIPS and ISM on this issue many times over the last 20 years – an indication of just how slow change can be.
Unfortunately, the time it has taken to make this progress does not augur well for ISM, CIPS or the professionals they represent. In my opinion, professional associations must show leadership; if they cannot change, then how can they be effective agents of change for their members? If it has taken so long to acknowledge the merits of their respective certification programs, how long will it be before they tackle the more fundamental issues related to the evolving skills and knowledge of the supply management professional?
Although the organizations claim a combined total of 150,000 members ‘and individuals holding their professional credentials’, it is clear that they face growing competition and challenges from many directions. Traditional associations are being squeezed by a large number of up-starts, especially in the supply management field, as welll as options such as LinkedIn, Plaxo and a wealth of networking sites.
Given this diversity of choice, there are many who now question whether the old-style, one size fits all, mass association can survive. In my view, it can (and indeed should), so long as it can find a way to meet both individual needs and collective interests. This requires a strong management system which marraiges of convenience are unlikely to produce.
My experiences in working with ISM have been overwhelmingly positive and I wish them well. I think the questions for both organizations will now be whether they see this shift as a major accomplishment in its own right, or whether it is simply the first small step in a series of much more revolutionary changes that they – and their members – desperately need in order to remain relevant.
A few weeks ago, I wrote a short article on the importance of communication. It highlighted the growing challenges for the contracts and commercial community, as increasingly we need to work across cultures, languages and become expert in the use of new technologies that transform the way we communicate.
Communication skills are important in most jobs, but they are fundamental to the performance of ours. We must be able to work with others to assemble and interpret a range of (often conflicting) stakeholder views and inputs; we must be able to reconcile those views and propose solutions. And then we must communicate and manage the results – and increasingly also deal with continuing change to whatever was agreed.
Keeping stakeholders (internal and external) on board throughout the contracting life-cycle is a demanding job. Encouraging and supporting good communication is an absolute requirement. It is the only way we will manage risks; it is the only way that we can remain pro-active; it is the only way to maintain cooperation.
Our community is innately aware of the importance of good communication. IACCM‘s 2009 study on the ‘Most Admired Companies for Negotiation’ highlighted that the number one characteristic of the winners was – yes, you have guessed it – the quality of their communication. Timely, appropriate, clear, informative.
So it should be a cause for real concern that a more recent study suggests that poor communication skill is a key weakness in today’s contract management staff. This is especially pronounced for those in Procurement, where colleagues and suppliers feel there is a reluctance to provide information, there is a lack of empathy and understanding of broader business perspectives, there is an unwillingnesss to consider the impacts of communication techniques on outcomes and there is a tendency ‘to create barriers to open communication’.
These failures, where they exist, inevitably result in missed opportunities and reduced status. Such individuals and groups become defensive and increasingly uncommunicative. People often ask me ‘If there is one thing I should be doing to advance my career or function, what would it be?’ Based on these findings, the answer for many of us must be: ‘Improve your communication skills’. We must become more proactive, better at selecting the medium for communication, more ready to listen, more prepared to facilitate discussion between others and more skilled at explaining positions and describing sources of value.
Last month, I wrote about the growing interest in more flexible contracts and ‘commercial agility’.
The speed of change in today’s markets has forced many organizations to look at business risk and its management in new ways. This has impacted the way they think about contracts and to innovate in key areas of commercial practice and policy. In my earlier article, I listed some of the terms and clauses that are most afffected.
For some, the pressing issue is to increase their flexibility and limit the scale and duration of commitments; for others, it is about speed; and sometimes it is driven by issues of competitiveness and innovation. For example, to attract suppliers with high value goods or services it may be necessary to throw established rules and procedures out of the window and explore new ways of partnering.
As I mentioned in the earlier article, IACCM planned to do more in-depth research on these trends – and that research has now started with a brief survey. It can be accessed at https://www.surveymonkey.com/s/agility and, as with all IACCM surveys, all participants receive a copy of the results. Its purpose is to discover how many industries are thinking in terms of commercial agility and whether it spreads across geographies.
IACCM intends to follow up from this initial survey to explore more specific areas in which contract and commercial innovation is occurring and how these changes are being implemented. This may include selective ‘roundtable’ discussion groups.
It is through change initiatives such as this that contracts and commercial staff gain strategic influence and organizational status. My suspicion is that we will find only a small number who are ‘leading edge’ in this area; but I hope that the ideas it generates will enable others to step forward and raise their profile to new levels.
Take a look at the business and technology sections in any serious newspaper today and you cannot help but be overwhelmed by the way that information flows are transforming our world – and how surely this will revolutionize the way that we form and manage trading relationships, no matter which market sector we operate in.
I will take just a few examples from today’s press.
Facebook is once again cited for the pressure it is placing on regulators around data privacy rules. Its attitude that users must opt-out rather than opt-in has already resulted in action by the authorities in Canada and has now raised the concerns of regulators in Germany and Switzerland, who claim that photos of third parties must have their approval before they are posted. Facebook’s director of public policy takes the view that ‘There seems to be a real disconnect between the regulators and the people .. they are embracing sharing with one another’. And the evidence suggests he is right.
In reality, how do people react to be being ‘targeted’? It is an issue raised by the British election campaign, with claims that cancer sufferers are receiving specific mailings which attempt to create fear about health service policies. If true, this is clearly an example where personal records are being built by someone who can then make money from their knowledge. Of course the politicians cry ‘Foul!’, but how much do the wider public really care?
The magazine ‘Business Life’ is just the latest to suggest that the issue is largely generational – that the ‘oldies’ seek to protect bygone principles and sensitivities, alien to today’s tech-savvy youngsters. For those who have been raised in the internet world, ideas of privacy and secretiveness are from another era. They thrive on the latest gossip; they admire those who push at boundaries; they are the first to view confidential information and intellectual property rights as concepts to be breached. Raised in a celebrity world, reputations are here today, gone tomorrow .. but also perhaps restored at some future date.
In this new world, loyalties are short-lived. So when Twitter needed to plug gaps in its capabilities, it was delighted to have the contribution of voluntary application developers, who in return were able to advertise their offerings at no charge. But once established, Twitter has turned its back on these developers and is formulating a new charging and advertising model to monetize its potential. The exciting, open forum innovator becomes instead the revenue hungry predator ….
And as mobile devices become the new face of technology, Apple increasingly challenges many of the incumbents. Its devices –the iPad and iPhone – offer instant access to data and to software as a service (SaaS) applications, such as customer relationship management. This enables suppliers to obtain instant information – especially in areas related to personal or business information – which guides on-the-spot decisions. These may range from a credit check or buying history, to decide whether to do business, to instant guidance on patient treatment, which may save your life.
As i read all of this, I think about how it will impact the way we construct and manage our contracts. The answer will of course vary depending on the nature of the product or service being provided, but all relationships will be impacted by the availability of real-time data. A current example that will affect all of us is the switch in the iron ore industry from annual pricing to quarterly priced contracts. Technology has made it possible to monitor and analyze spot market trends in a far more dynamic way. Might this be a future trend in commodity pricing generally, perhaps ultimately spreading even to consumer markets?
To take another example, to what extent may suppliers use customers to assist in the development of new product or services and then start to charge a higher price for the ‘enhanced’ product? In primitive forms, this concept has always existed (from informal feedback, through to the more structured ‘beta testing’), but the advent of message boards and instant messaging has made the potential for ‘joint development’ far more immediate and dynamic – and of course challenging to traditional concepts of intellectual property rights.
Future profitability will increasingly depend on smart contracting, whether it is a Facebook model that pushes at the boundaries and tests acceptability of new standards, or Twitter that successfully exploits the work of others, or Apple that creates new go to market models and partnerships to marginalize incumbent technologies. The information age is still in its infancy; the winners will be those who are ready to challenge traditional policies and practices, to formulate new commercial relationships and offerings that leverage the flows of information and knowledge to drive proactive update and change in their trading terms. The contracts community must be at the forefront of this change in order to ensure its strategic relevance.
Commitment Matters 