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?
I have written several times in the past about e-sourcing and e-auctions, highlighting the need for organizations to understand how and when to use these approaches. With more than 80% of negotiations now undertaken primarily by ‘virtual’ means (i.e. limited or no face to face meetings), it has become imperative that buyers and sellers become more astute at their management.
When using automated systems – whether it be specific software applications or more general methods such as e-mail – it is easy to forget that there are real people with real feelings at the receiving end. Systems are not sensitive to their emotions or needs and it is very easy for misunderstandings to arise and alienation to occur.
This is illustrated in an interesting question posed by Supply Chain Vice-President Erik Lomholdt. Based in Denmark, but with substantial overseas and cross-cultural experience, it is perhaps not surprising that Erik is sensitive to the communication challenges associated with the use of software tools. In a brief article, he says: “Many of us are accustomed to various Reverse Auction programmes sending out Auto generated Post Auction Refusal Letters stating the obvious; that the supplier was unsuccessful and that the contract will be awarded to someone else – to the point and end of story.
In the hunt for savings I have seen many buyers forgetting that behind the unsuccessful leverage suppliers, there are real people with feelings that can turn quite ugly if they are not managed properly. ”
Erik goes on to ask how buyers are managing these feelings and the effect that poor management may have on a company’s reputation.
Among the replies to this question, respondents emphasize the importance of proper pre-qualification so that suppliers feel that their investment of time is worthwhile; and that standard, system generated notices of failure should not be used. “We typically use a combination of phone calls and personal emails to break the news,” says one, going on to add that most times when e-auction is used, it is for relatively short-term contracts, so frustrated bidders are soon likely to have new opportunities. Another respondent advocates: “Help the “losing” suppliers by telling them how they – seen from your perspective – can improve their future offering. In doing so you also help your own company by educating the suppliers about your expectations, and thereby helping them to prepare for next time the door opens”.
It is certainly important for buyers to remember that if they alienate too many potential suppliers, their future auctions are likely to suffer. It is also essential to vary the process around the use of the tool, to distinguish based on factors such as contract value, duration, the extent of competition and the need for a relationship that goes beyond simple transactions. I know that some organizations have developed far more sophistication in their use of spend management software, but I don’t know how general that is.
I would welcome supplier perspectives on their experiences – and in particular, any positive experiences that in your view represent ‘good practice’ in the use of e-auctions.
News that the UK is poised to pass new anti-bribery laws brings welcome strengthening of the steady push to eliminate bribery from business dealings.
For some time, the UK has appeared to lack vigor in its pursuit of British (or UK-domiciled) companies accused of using bribes. This week it is expected that the first substantial new legislation for more than 100 years will be passed, bringing the UK closely in line with the position of the US authorities.
In general, large corporations have welcomed this move; for most, their presence in the US market has obliged compliance for some time. Others may not be so happy – at least according to an article in today’s Financial Times. One concern is about the impact on competitiveness, fuelled by recent studies that suggest some industries are badly hit when they refuse to yield to the demands of public sector offficials in emerging economies. These bribes are often small – perhaps just hundreds of dollars – and yet are fundamental to obtaining licenses or gaining timely clearance of goods. Yet such behavior undermines social development and justice and it is surely right that countries which preach high standards of integrity should not compromise. It is also misleading to suggest that all – or even most- emerging economies are not similarly addressing this issue; we whould do all we can to support them.
The second concern is one that was often voiced in the US – the lack of precision over what will constitute an acceptable internal process to safeguard against corrupt practices. While this nervousness is understandable, the truth is that companies operating in the United States have generally managed to operate within the law. There is also a growing body of precedent on which companies and their advisors can draw. Certainly it will be important to ensure robust internal training and clear messages from executive management. It will also be advisable to undertake spot checks, especially in overseas locations. This is just one area where contracts experts can play a substantial role.
It is anticipated that there will be a number of high profile cases in the next few months, to ensure business understands that Government means business on this issue. Contracts and commercial staff should ensure they understand the legislation, study the approaches of leaders in the US, and advise management of the steps to take, to ensure they are not filling the newspaper headlines!
Last week I chaired several sessions at a conference jointly hosted by UNCITRAL and Pace University Law School in the United Nations Center in Vienna.
The purpose of the event was to establish the level of support for new online dispute resolution mechanisms, building from proposals tabled by the United States ata recent meeting of the Organization of Amercian States.
The issue is that traditional legal recourse is not a viable option for low value sales and acquisitions, either in terms of time or cost. In effect, this means that weaker parties (small business, consumers) have no meaningful recourse if they engage in cross-border trade.
Most would agree that growth in international trade is a good thing – not only for the sake of the overall economy, but also in breaking down barriers and encouraging greater international collaboration. But of course, in order to trade, people must have trust in the underlying system. There are apparently signs that this has been diminishing recently and the growth of low-value, cross-border trade has slowed.
The definition of low value varies, but the US has been talking in terms of around $60,000 and the EU around 50,000 euros (both of course very large sums in some economies). These levels also imply that the system would not be limited to consumers, but would also offer alternative recourse to some business-to-business transactions.
The proposal is that there would be an arbitration service operating with independence from the courts and national governments. It is envisaged that this could be linked to the credit card charge-back system already operational in the US, but of varying applicability elsewhere (reliance on such an approach has the problem that it would have little meaning in many areas of the world where there is virtually no credit card penetration). Such a service would draw on an international panel of approved arbitrators and would be conducted entirely on-line, in order to ensure that it was both speedy and affordable.
There are certainly practical obstacles to be overcome, but the conference gave strong support to the development of such a system and the current Chairman of UNCITRAL voiced his belief that it should be sponsored as an UNCITRAL project. I found the universal nature of the support especially interesting. Delegates came from all world regions.
Debates of this type are likely to become steadily more common, as business and governments seek practical ways to work around the reluctance of national governments to cede powers or to univeralize legal principles. This development also has enormous potential for driving more and more disputes out of the courts and towards more robust and predictable arbitration and mediation services.
Whatever the merits of the case, the news that Facebook is being dragged into the Federal courts over a patent challenge can only be bad news for the credibility of US commercial practices.
These high profile patent litigation stories only appear to arise in the United States (most recently it was of course RIM and the Blackberry that was forced into a multi-million dollar settlement). They simply re-inforce the impression of a get-rich-quick culture that has dubious morality. Coming so soon after the financial crisis (again, rightly or wrongly seen as inspired by US trading practices), this case sends out a negative message to the world – and the global Facebook community.
First, what is wrong with cases like this? The impression they give is that the US patent system allows people who have invented and invested nothing simply patenting ‘ideas’, often written in such general terms that they can apply to many later endeavors. It often seems like these individuals then just wait until an innocent party has successfully invested time and money in developing a similar idea – and then they pounce. Morally, this seems wrong. The argument in favor of patents and intellectual property rights is that many inventions take substantial investment and it would be wrong to deny those investors a reasonable chance to make money from their endeavor. If they were so denied, the argument goes, then invention itself would suffer.
But the counter-side of intellectual property rights is that they can become a restraint on trade and open competition. At their worst, they can in fact stifle invention – and that is what the current US system at least appears to enable. US inventiveness in the 19th century itself relied quite heavily on poaching ideas from elsewhere. The US prospered because it excelled at developing low-cost versions of those ideas. Today, cases like Facebook give the impression that US ‘entrepreneurs’ are trying to hold the world to ransom and gain income from the work of others.
So second, what are the possible consequences? If I were sitting in China or India or any developing nation hungry for new ideas and sources of wealth, I would question the integrity and morality of a patent and IP system that appeared to constrain competition. I would find it hard to understand why individuals who invested nothing could patent some general idea or concept and then make money from someone else’s risk and endeavor. And as a result, I would feel little obligation to honor intellectual property rights that were linked to such a debatable process.
Overall, for world trade to flourish, there must be systems that are visibly fair and equitable and which are based on broadly accepted standards of moral behavior. The US does so many good things – for example, its principles of openness, its campaigns against bribery and corruption. It is therefore such a pity when it fails to recognize how badly its image is dented by apparent ‘get-rich-quick’ schemes that are clearly against the wider public interest. The patent laws and thier operation need urgent overhaul so that they represent a model for the global networked economy.
I wrote earlier this week about the recent IACCM conference session on ‘What Did We Learn From The Recession?’ One topic that was not mentioned – but should probably be the key learning – is the dramatic shift in economic power towards Asia.
Of course this shift is not the result of the recession, but it has been emphasized and accelerated as a result of it. The reality is that economic power is rapidly moving to China and India – and this will result in many traditional assumptions and relationships being challenged. Take just two examples that have been highlighted this week – one related to the pricing of iron ore and the other to Middle East oil supplies.
In the case of iron ore, the negotiation of annual fixed price contracts has been scrapped. The move to spot pricing and the inclusion of shipping charges at actual is expected to add some 30% to steel prices in 2010. Of course, over time it may lead to massive price fluctuations up and down, very similar to the pattern of oil prices over recent years. The primary cause of this change has been the dramatic increase in Chinese demand and the refusal of major suppliers to operate on the old fixed price basis.
Similar surges in Chinese demand (and to a lesser extent that of India) now means that Opec is switching its attention eastward. Demand form the US and Europe has remained relatively static – with the result that countries such as Saudi Arabia now find China is a bigger customer than the US. This inevitably means a continuing loss of influence over supplier loyalty and broader commercial practices.
Moving away from the world of commodities, I discovered this week that even in areas such as electronic commerce, Asia is now pushing ahead of the ‘developed’ economies. In fact, in 2009, the number of internet users in Asia was not far behind the North American and European numbers combined. With 42% of worldwide users, Asia lags by just 7% and that gap is likely to close by 2011.
Clearly the recession has severely damaged Western credibility and influence. Of course, in many ways this is merely a symbol of the inevitable shifts in global power that have occurred throughout history. But with those shifts come a whole host of other consequences, in particular with respect to trading patterns and methods. And it is in those areas that contracts and commercial practitioners should be paying attention.
Among the most obvious consequences will be a sustained shift in buying and negotiating power. The ability of Western companies to impose their terms on either buyers or sellers will steadily diminish. They must expect a steady reduction in the extent to which customers or suppliers in Asian markets are prepared to accept things such as creditworthiness or choice of law. But at a more fundamental level, there will be growing push-back on other practices, such as negotiation style or assumptions on contract models. Today, for example, international contracts are typically based on Common Law principles; it would be foolish to assume that this will remain unchallenged, especially in areas such as liabilities, indemnities, intellectual property and confidentiality.
Of course, change will not occur overnight. But although gradual, I think we can now expect that it will be rapid. Contracting experts – from commercial , procurement or legal – must start thinking about these changes in the context of their markets and industry, and must develop a strategy that responds to the emerging new world order.
Another of the fascinating discussions at the IACCM Americas conference centered on the question: “What did we learn from the recession?”
The audience was divided on the question of whether the recession is behind us, continuing, or simply in abeyance and due for a double-dip. This view is not surprising, and reflects our most recent survey on the state of the global economy. This showed substantial variations between industries, and some strong contrasts between companies within industries.
Terms and conditions were impacted at the on-set of the recession. As moderator Tim McCarthy observed: “It felt like all the buyers had been on the same program – suddenly everyone wanted net 120 day payment terms”. Many participants in the conference reported strong pressure from their Finance department to manage credit. Although at one level this resulted in greater scrutiny of suppliers (to see whether they would stay afloat), many found great difficulty in gaining reliable information. A few buyers highlighted steps they took to protect vulnerable suppliers, but a majority acknowledged that they had pushed out the payment period. “We were using suppliers to fund our business”, confessed one.
Renegotiation of existing contracts was a major trend in early 2009 – but again, many acknowledge that it was not really ‘renegotiation’ so much as unilateral demands for price decreases. Few suppliers reported success in seeking discussions on rebalancing the contract to achieve mutual value. Several commented that they pushed suppliers for earlier payment, but those who succeeded were the exception.
Other terms that were highlighted as ‘lessons learned’ included those relating to recovery of goods (for example when customers declared insolvency); currency risks;; and delays / deferrals.
But these operational challenges – while interesting – are lessons of detail, rather than substance. It was when the conversation switched to more fundamental issues that it became interesting. For example, the audience was united in its view that, despite all the disruption, there had been very little churn in relationships, in terms of gaining or losing suppliers or customers. Most buyers in the session thought that relationships became stronger because it forced conversations with a wide range of their suppliers, and these engendered a view that ‘we are in this together’. However, suppliers did not agree. They felt that trust had been undermined by ‘aggressive’ and ‘one-sided’ behavior. “Yes, there was more conversation”, agreed one. “But it was not equitable”.
For the suppliers, there was a general observation that the recession caused ethics to suffer, both in the way that many buyers forced contract renegotiation on price and also the behavior it induced in the Sales organization, desperate to win business. Another comment related to the lack of internal coordination between Procurement and Sales contracting, to discuss their respective pressures and strategies. And finally, the conversation turned briefly to the fact that ‘this might all happen again – are we in fact any better prepared?’ To which the answer, sadly, appeared to be “No”.
In conclusion, the lesson we should take from the recession is that relationships can survive tremendous shocks, but if they are to flourish we must become better at enabling and ensuring regular, open discussion; we must institute procedures that leave the parties with a sense of balance and equity (give and take); and we must also address the quality of communication and collaboration within our businesses, to facilitate better coordination and more coherent responses to shifting market conditions.
Since sudden and dramatic change appears to be a more regular feature of our world today, the fundamental lesson is perhaps that we have not engineered our businesses, our contracts and our relationship management processes in a way that gives us agility to respond. And creating this agility should be our immediate strategic focus – before the next crisis strikes.
Commitment Matters 