Several years ago, the hot issue for IT Procurement was whether or not it should be consolidated within the general procurement organization. The development of category management resulted in many specialist IT Procurement groups being swallowed up. While CIOs may not have been enthusiastic about losing their dedicated resources, most understood the business logic.
Today, we are seeing counter-arguments and a growing number of CIOs are appointing dedicated procurement and commercial staff within their organization. Sometimes they are fighting to reclaim the relevant category management teams; in other cases, they are looking to supplement these resources. In all cases, the driver seems to be a recognition that IT service delivery depends less on technical know-how and more and more on commercial competence. A CIOs success is increasingly measured by theeir ability to select and manage the right supply base.
Contract management, performance management and relationship management are critical issues in this new IT delivery environment. CIOs have regularly been exposed to the challenges of managign outsourced providers, so they know from experience how important it is to ensure accurate scope and goals, to respond to changing user needs and to ensure stringent performance oversight. Now, with the advent of cloud and mobile computing, there is every likelihood that the residue of technical and facility management will move to external providers – and hence the CIOs success will depend on their ability to select the right partners and manage their performance, while also retaining the ability to manage change through versatile terms and relationships.
IACCM has written about this trend several times over the last year, but a couple of months ago we decided that it was time for action. Our IT Procurment ‘community of interest’ has almost 2,500 members, so we recruited Bill Huber (former IACCM Chairman and today Director of CPO Services at TPI) to lead group discussions on some of the key issues. We started by running a survey that asked our commnunity members to rank their priorities.
As the graph shows, Cloud Computing is the number one issue, but closely followed by the challenges of relationship and perfromance management and the question of skills and training. Illustrating the point that software is very much the issue of the future, interest in ‘the cloud’ was supplemented by the broader question of software asset management.
IACCM has of course undertaken extensive work on the skills profile for IT Procurement and its assessment tools are in strong demand. Our Managed Learnig tools are also very relevant to the trainign needed by groups that increasingly need contracts, commercial and relationship knowledge in order to oversee supplier negotiations and performance.
Whether or not the trend towards organizational change continues, it is very clear that the need for skilled contract and relationship professionals in the IT and services procurement field will continue to increase. This represents a strong area of oppportunity – and one that is increasingly urgent.
IACCM members can join the IT Procurement community of interest as part of their membership selections at www.iaccm.com. Participation in the community conference calls, webcasts and surveys is free to IACCM memebrs.
“President Obama called the finger-pointing among the companies tied to the (Gulf of Mexico) oil spill a “ridiculous spectacle,” and vowed to end the “cozy relationship” between regulators and companies.” (New York Times, May 17th 2010).
I strongly endorse an end to the culture of blame that permeates so many of todays’ trading relationships. However, I am fearful that the term ‘cozy relationships’ may be misinterpreted and that we will see its replacement by increasingly adversarial relationships, which create similar results. While this epidemic of finger-pointing is not unique to the United States, it does appear more frequent here. Is that because of a more open and honest system, or is it because of the litigious nature of society and the role of lawyers in forming adversarial agreements?
‘Cozy relationships’ and an absence of real competition is a problem in public procurement in many parts of the world. Public procurement policy has tried to address this through open competition rules (which the US Senate and Congress have undermined) and laudable anti-corruption rules. In the private sector, while abuses remain, there is greater freedom to decide whether the balance of economic benefit is achieved via open competiton, or through established relationships. It is in part this absence of choice that creates problems for the public sector, because strict bidding rules often prevent open discourse with individual suppliers.
There is a big difference between cozy relationships and open, collaborative relationships. I hope that the frustration with governance failures does not result in a break down in buyer / supplier communications and a belief that the only way forward is to impose even greater risks and penalties on suppliers. It is right that President Obama questions the way things work right now, but once again we are seeing the results of measurement and reward systems that distort behavior. Successful relationships depend on people who exercize judgment based on objective measures of success, absent of personal financial rewards or incentives. Just over a year ago, Presidnet Obama was one of the leaders to sign the G20 communique which read: “Staff engaged in financial and risk control must be independent, have appropriate authority, and be compensated in a manner that is independent of the business areas they oversee and commensurate with their key role in the firm. Effective independence and appropriate authority of such staff are necessary to preserve the integrity of financial and risk management ….”.
This statement referred to the abuses within the financial services industry. Today, it could be applied to public sector procurement and regulation. The principles within this statement point to the need for high quality contracts and negotiations professionals, driven not so much by rules (though these matter), but more by a code of consistent and high quality judgment.
Earlier this week, I attended a series of presentations at the Rothamsted Research Station in the UK. The focus was on the challenge of food supply and whether the world could adjust to the needs of a fast-growing population and the uncertainties created by climate change.
Ultimately the conclusion was quite optimistic. Scientists believe that new technologies – in particular genetically modified crops – will allow massive improvements in production that can support a world population f 9 billion people. They also believe that the population level will stabilize at around that number . The ‘wild card’, according to the scientists, is the price of energy; so long as energy prices can be controlled, then not only will we have adequate food, but also its price will remain relatively stable.
I emerged from the meeting feeling that advances in science do indeed often prevent ‘disaster scenarios’ becoming a reality. Yet at the same time, scientists may not be especially reliable sources when it comes to predicting the overall condition of the economy and society. Their optimism over food supplies and prices seemed to me to be based on three fairly unreliable factors – one, that population growth would slow; two, that we will soon find alternative energy sources or cut our energy requirements; and three, (which they did not mention) that complex, global supply chains will prove a reliable way to shift goods to the point of need.
However, I then read a review of a new book by Mat Ridley – ‘The Rational Optimist: How Prosperity Evolves’ – and was cheered by his conclusions. More importantly, I once again recognized the relevance of the contracts and commercial community in assisting this optimistic view of the future.
Some may recall my past writings abou the work of Nicholas Wade, author of ‘Before The Dawn’. Ridley is an economist; Wade is a scientist. But they reach remarkably similar conclusions that trade, in essence, lies at the heart of human innovation. In its summary of Ridley’s book, The Economist observes: ‘Trade is the spark that lit the fire of human imagination, as it made possible not only the exchange of goods, but also the exchange of ideas. Trade also encouraged specialisation since it rewarded individuals and communities who focus on areas of comparative advantage. Such specialists had the time and the incentive to develop better methods and technologies to do their tasks.”
It is the culture of continuous improvement that drives and provides incentive for innovation, without which the disaster scenario will become a reality. There have been those who predicted disaster from the very beginnings of time and insisted that we should all adjust or prepare for the apocolypse. Yet always we have survived, although not without tensions and problems. Today, the solution remains our readiness to innovate and our ability to collaborate. The enemies of these succcess factors are those who constantly focus on protecting against risk and therebydiscourage cooperation and limit the exchange of ideas.
If indeed it is trade that sits at the centre of our future success and our ability to prevent disaster, then the contracts community has a large and heavy responsibility to ensure it is not only removing barriers to to innovation, but that it is also itself innovating in the mthods through which trade occurs. We have a duty to ourselves and others to ensure that we contribute to the cultural and economic forces behind human progress.
“Thanks to the liberalising forces of globalisation, innovation is no longer the preserve of technocratic elites in ivory towers. It is increasingly an open, networked and democratic endeavour”, says Ridley. Contracts can – and must – create environments where openness, transparency and networked communication are encouraged and rewarded and where cultures of blame, risk allocation and punishment are avoided.
The decision by the Obama administration to split the responsibilities of the Minerals Management Service is just one more acknowledgement that organizations need clarity and compatibility in their goals. In this instance, creating a single organization that oversaw both revenue generation and compliance led to inherent weaknesses in oversight (see New York Times article for details).
In acknowledging that Federal authorities were to some extent lacking in their management of the industry, it seems unfair to also contemplate retroactive legislation to increase the liabilities that BP may face as a result of the oil rig explosion in the Gulf of Mexico. These threats are also potentially quite counter-productive – surely the issue right now is for all parties to collaborate in fixing the problem, rather than spending time on allocating blame? Yet that is exactly what is happening, with politicians leading the way. Once more, this illustrates how politics seems far more about finding fault in others, rather than acting in the public interest. What purpsoe was served by an inqisition of BP, Transocean and Halliburton executives at this stage? Clearly, such action was a distraction from the real issue and can only result in mutual finger-pointing by each party, none of which wants to face the potential for massive liability associated with this incident.
The break-up of the Minerals Management Service will ensure that one arm is working to maximize revenue, while the other is ensuring proper levels of compliance and quality control. The need to manage these tensions is well understood within the business world, with the pursuit of growth always needing to be tempered by the potential exposures and risks that growth entails. Certainly not all managements get it right – and at times of economic stress, the presures to cut corners can be extreme. In addition, the BP incident is just one more reminder of the complex web of relationships on which performance depends. It highlights the major significance of choosing the right trading partners, providing effective on-going oversight, and reconciling the pressures for innovation and growth with the need for proper business control and judgment.
Organizations have changed and the speed with which decisions must be made has increased. This has placed many of the ‘check and balance’ processes under great strain, sometimes because of resource levels, but also because of the scarcity of relevant skills or the lack of clarity in precise roles and responsibilities. IACCM has long focused on some of these uncomfortable questions and challenged its members and their management to address them. For example, we have opposed the idea of contracts professionals being motivated by deal-based incentives (because we believe that will impact their core role of good business judgment); we have questioned whether the skills profiles required for deal-making are the same as those in implementation and on-going management; we have highlighted the problems that arise when commercial staff are introduced too late into a business requirement or opportunity. We have also emphasized the urgency of developing commercial competence and the need for this to be supported by consistent professional standards.
The Obama administration’s move raises questions over the division of responsibilities that shoud be given careful thought by lawyers, contracts and procurement executives. To give just two examples:
- Is it right to have Procurement staff measured on savings, while at the same time having them make judgments over supplier quality and reliability?
- Should a commercial or contracts group charged with deal negotiation and management be part of a legal group which has responsibility for regulatory and risk compliance?
In both cases, this duality of role may create precisely the tensions that have been recognized within the Minerals Management Agency. By clear division of roles, we do not eliminate the tension, but we ensure it is visible and, where relevant, that issues are escalated to senior management for resolution. Through collaborative organizational models, designed around key business processes, we can also ensure joint and several accountability for outcomes, to drive cooperation in anticipating and fixing problems, rather than a culture of finger-pointing and blame.
Last week, I summarized a conference that I attended in Barcelona and undertook to write about some of the presentation highlights.
One was a session led by Sammy Rashed and Gerardo Aguilar from Novartis. They have been ‘evolving sourcing into the organizational productivity champion’. This is a cause dear to my heart because, in my experience, support functions that do not lead change are in for a sorry ending.
At its heart, the work at Novartis has transformed Procurement from being ‘a buying organization into an organization that manages buying organizations’. Internally, it has transitioned from being a service provider to becoming a business partner. This has been achieved by three core steps:
- Integration of the function into the business and a more strategic leadership, two levels below the CEO
- Category heads sit on relevant functional boards – for example, Marketing.
- The operational staff operate within the business untits, rather than as category teams.
These changes have been driven by a desire to move up-stream in terms of value and influence and to outsource traditional Procurement activities (in this case to Genpac). Re-defining the process also led to re-allocation of certain tasks – for example, efficiencies were realised by moving the issuing of orders to Finance, to sit alongside accounts payable. Internal transactional activity has largely been eliminated.
The project tackled core issues, such as demand management and cost of ownership, through the introduction of disciplines that look at what is being bought relative the value of the need being satisfied; and which introduce discipline over ‘must’, ‘nice’ or ‘smart’ to have.
The presenters summarized their efforts by explaining that they addressed ‘the need to develop cross-functional project leadership and business partnering as core capabilities’. This change was fundamental to altering the image of Procurement and the value it is able to deliver.
IACCM will soon feature Sammy and Gerardo in an ‘Ask The Expert’ interview, to provide its members with a more in-depth insight to this fascinating reengineering project which, in my view, provides a powerful insight to the future.
Whether or not you live in – or care about – the UK, there is so much we can draw from the remarkable process that has ensued from ‘the hung Parliament’ (which, according to one Russian commentator, means that all elected Members of Parliament have been hung! Perhaps in reality a move that would be greeted with the greatest public acclaim).
First, it is interesting that the media and politicians are so fixated on ‘a strong Government’ and the belief that a single party with a strong majority is desirable. They decry the need for coalitions and point to the ‘weak’ governments that result. For example, they cite Germany, where the need for behind-the-scenes compromise is invariably required. I find this observation quite remarkable when you compare the economic success of Germany with that of the UK. Perhaps compromise is not such a bad thing.
In fact, when you think about it, the countries with an adversarial, winner-takes-all political system are also those that tend to be adversarial in their contract negotiations. So perhaps a cultural shift to a situation where negotiation and compromise become the norm will lead to greater collaboration in other areas – and equip the Anglo-Saxon, common law model to fit better in an increasingly global environment.
A second fascinating aspect of the UK situation is the inter-party negotiation, with the Liberal Democrats being courted by both the major parties, giving them great strength, but also exposing them to massive future risk. Behind the scenes, there are many conversations taking place; the negotiations have many faces and represent the potential for a remarkable case study. And of course, time alone will tell us who really won as a result of their outcome.
Meantime, the Conservatives court the Liberals, while the Labour party operates a disruptive campaign behind the scenes. Gordon Brown persists as Prime Minister and demonstrates his devious methods as a deal maker or deal breaker. Will he resign or won’t he? Is the deal he offers really a cup of good cheer, or a poisoned chalice? The tricks and techniques being used to shape public opinion and to impact negotiating positions are truly fascinating. Machiavelli would have been proud of his pupils!
Leslie Willcocks, author and London School of Economics professor, recently suggested that contract management and relationship management will steadily integrate into a single competency. I discussed this idea with Dalip Raheja, CEO of The MPower Group, in an IACCM ‘Ask The Expert’ interview (see recording in the IACCM Member Library).
Dalip opened by observing that today’s contracts are used to allocate risks between the parties and ensuring rewards are set accordingly. Relationship management is typically viewed as a separate activity.
However, we agreed that ‘contracting’ should be a wider discipline, offering a strategic view of the best relationship to achieve desired results. ‘The contract’ is an output – and contracting strategy may conclude that the best approach in some circumstances is in fact to have no formal contract. This simply represents an extension of the decision on how to allocate risks.
Organizations must distinguish between the contract and the contracting process and strategy, ensuring that the form of contract reflects the nature of the required relationship. In other words, relationship definition comes first. And in the event that the relationship changes, then the contract must also be adjusted. Also, for longer term and more complex deals, the risk focus should be more on how they will be managed than on how they will be allocated.
Good contracting starts with defining the best form of relationship to achieve the desired business results. Since ‘the relationship’ will often continue well beyond contract signature, it is essential that the parties include governance principles. Dalip suggested that negotiators should think in three phases – first, relationship models; second, contracting models; and third, communication models.
Traditional Procurement and sourcing processes focus on price, rather than value. They are built on assumptions that ‘suppliers take advantage of us’. Many suppliers, on the other hand, feel that customers are ‘confused about what they really want’. This stand-off frequently results in poorly established relationships and a failure to focus on ‘value extraction’.
Our conversation confirmed Professor Willcocks’ view that contract and relationship management must integrate in order to deal with the growing complexity of today’s trading relationships, but also recognized some obstacles to this transition. One is the need for different skills among procurement and contracts staff; another is a shift in measurements; and a third is to address the challenge of organizational models and perceptions – in particular, on the sell-side, to resolve the relationship between account management and contract / commercial management.
A majority of contracts and legal professionals believe that they face growing complexity. This view is confirmed in the most recent ‘European Legal Pulse Survey’ from Equaterra.
The survey focuses on outsourcing agreements and states:
“When asked about contract complexity over the past few quarters (e.g., service levels, contract structure, pricing models, use of global sourcing, etc.), 52 percent of the survey respondents answered that the degree of complexity in contracting for outsourced services has increased (see Figure 3). When combined with the respondents who stated that complexity has remained static in recent years, the total is 96 percent. The results confirm a consensus that the contracting for outsourced services is not getting simpler through standardisation. A majority of respondents who believe that transactions have become more complex specified pricing and service level mechanics as the foundation for their conclusions. Managing and allocating risk was the second choice, with respondents pointing to transition/transformation and termination rights and fees as the areas driving complexity in contracting.”
These findings accord with the wider views expressed by the IACCM community. And they are not, of course, especially new. Indeed, there has yet to be a study that suggests people feel that contracting has become simpler. In large part, this is indicative of the fact that terms and conditions reflect the intricacies of trading relationships and the unending efforts of buyers and sellers to find new sources of advantage and success. As the Equaterra results indicate, the parties constantly seek fresh ways to allocate or manage risks, or to manage performance, or to apportion costs and rewards.
There is nothing to suggest that complexity will reduce. Indeed, it is this continuous growth in complexity – and the need for its effective management – that drives the need for commercial and contracting expertise. Through our professionalism, it is our duty to manage this complexity in ways that make it simple and understandable for our colleagues and management. And of course, we must strive constantly to deliver simplification in today’s process and tools, so that we can successfully move forward with further innovations.
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.
Commitment Matters 