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.
A note from IACCM member Leslie Marell reminds me of one of the key characteristics of high-performing legal and contracts groups – their focus on enabling others.
Leslie wrote: “Early on (in my time as an in-house counsel), I recognized that my clients didn’t understand what we were trying to accomplish and that there was great frustration on both sides. I found that if I went to the various company branches/ divisions and explained the underlying concepts and rationales for the clauses – in plain English, and by using real world examples –many of the sales and purchasing people “got it”, (and) … would raise these issues early on with their customers/ suppliers, realizing that doing so often expedited the closing of the contract/ business.”
Helping others to help themselves remains the exception rather than the rule. In many organizations, IACCM research shows that there is a lack of trust and respect between functional groups. The result of this is that cycle times are longer, negotiations less well planned, win rates are lower.
Of course, meaningful empowerment is about more than simply visiting the business units, but good communications is an essential component in building contracting capability. Far too many organizations operate with a culture of blame, rather than a sense of shared responsibility.
If you ever hear (or perhaps utter) sentiments like ‘Those idiots in Sales’, or ‘They always involve us too late’, or ‘If only they had asked me …’, then the chances are you are part of an organization that has failed to reach out and help others become more effective. My experience is that the more we work to empower good decisions, the earlier we are involved and the more productive our work becomes.
And I agree fully with Leslie’s sentiment: “I frankly don’t understand why more of us lawyers/ contracting professionals don’t “reach out” to our clients and help them understand these issues. A basic tenet of any good relationship is communication and taking the time to explain ourselves to the other guy. When that happens, the relationship always improves. ”
Are you doing enough to enable good contracting?
Just as important, I also learned that people were very receptive and eager for this information since they were frequently in the dark about the why and meaning of the clauses. Few, if any, of their legal/ contracts people had taken the time to explain these concepts to them. Once they understood the concepts/ rationales, I found that the lawyer/ contracts / business person relationship greatly improved.
“We often don’t talk much about change during a contract negotiation because … well, it often isn’t a very comfortable subject.”
Those words were spoken by a senior executive at a forum I ran last year and they came back to me when I read a recent IACCM member question on the association’s message board. The question was: “I am looking for ideas on how organizations train their Program Staff on handling Change Management with customers and/or suppliers. Particularly if you have any lessons learned on dealing with cultural issues surrounding customer’s views of contract changes from varying cultures perspectives.”
The truth is that change management mostly gains attention when it is adversarial and used as a stick with which to beat the other side. I regularly hear complaints; I rarely hear stories of excellence. Some companies are adept at drivng margin through change; others are adept at arguing that no change is out of scope and thereby resisting increases in contract price. In some cases, entire industries (and contracts / legal departments) flourish on the battles over change – construction being the most obvious example.
Change management is an area of rapidly growing importance. As professionals, we all attest to the fact that change is happening more rapidly and that its impacts are often dramatic. We regularly observe that defining relationship goals and setting a firm contract scope has become more challenging – and that many agreements lack the precision we would like. When asked about the key terms that we should be spending time negotiating, change management is in the top three. Yet when asked what it is we actually spend time negotiating, it struggles to make the top twenty.
As professionals who claim that one of our core roles is anticipating and managing risk, how can be so relaxed about the management of change – which must surely be one of the most fundamental risks in any contracted relationship? Strategically, do we really believe that the best contracts and relationships are those where we either trick the other side, or create the environment for confrontation and dispute?
I suggest that this is just one more example where the contract and negotiation profession is today frequently failing to do its job. Even assuming that we have grasped the importance of change management, contracts staff may be stifled by other stakeholders (for example, Sales are frequently disinclined to address topics like change because of the Pandora’s box it may open); or we may lack the courage to establish the truth about our ‘cultural fit’ with the other side (in which case we really have failed in our fundamental duty of risk recognition). Sometimes, of course, it is simply that we are not allowed near the other side to mount the exploration!
The truth is that in today’s major contracts, negotiation only ends when the relationship is terminated. The circumstances surrounding our most important trading relationships are never static and therefore change management must become a core capability and discipline. But it cannot be unilateral; change involves both (or all) parties to a contract and having a mutually agreed mechansim with accepted procedures and consequences is fundamental to a mutually successful outcome. The scope and goals will often not be precise, or will alter with time. Our skill must be to manage the consequences of that uncertainty in a way that ensures continued harmony and mutual benefit.
So rather than simply recognize that change management should be a major negotiation topic, what are you going to do to ensure that it actually becomes one?
Commitment Matters 