Among the many fascinating discussions that took place at IACCM Americas this week, one was on the topic of ‘Reputational Risk – our role in protecting the company’. It revealed that we have a long way to go in developing high quality and meaningful programs. And in the meantime, we are generating massive workload with limited results.
Moderator Daniel Bravard from Loomis asked participants to describe their role in protecting their company brand. For many this related to tasks such as ‘ensuring continuity of supply’ or ‘selecting reputable suppliers or customers’. Others highlighted their role in educating internal staff – and increasingly external suppliers or channel partners – in ethics and governance principles. For example, one delegate said: “We have to manage the behavior of about 60,000 internal staff, but an external (supply and partner) population of more than 180,000”.
External relationships represent the primary source of reputation risk – either because of our connection with a company that does soemthing wrong, or because of actions taken by our own staff. With increasing regulatory oversight in many industries, coupled with growing public expectations regarding ethical standards, it is not surprising that companies are pushing for more training of sales, project teams and any other groups with signifcant external interfaces. The roundtable participants discussed the methods by which this is achieved, because of course they go beyond training. Contract terms have been impacted – not just through the addition of new clauses, but also the tightening of others (for instance, business continuity, data protection, regulatory compliance). Codes of Conduct, suppplier questionnaires and anti-corruption surveys were cited as examples of the growing array of methods by which companies seek to implement their reputation coverage.
But in the end, all this discussion raised a fundamental question. Are we really concerned about doing the right thing, or about diverting blame when we do the wrong thing? It became very clear that all the contract terms, codes of conduct, 150+ page questionnaires are potentially just camouflage for real action. They certainly create a lot of extra work for everyone in the supply chain; they are applied regardless of need (for example, does any right-minded buyer really believe that companies like IBM, GE, Procter & Gamble, Rolls-Royce etc are so careless of their reputation that they will be driven in their behavior by a supplier questionnaire?).
It became evident that much of today’s action is driven by a wish to be able to point at the steps taken when things go wrong. We want to be able to say ‘But look at my code of conduct, look at this massive questionnaire, look at all this training I undertook – of course I did all I possibly could’.
In truth, we are not doing all we could. A meaningful program to manage reputation risk would be exploring and understanding the risk impact of different stakeholder perspectives and measurement systems. We would be rating suppliers, customers and channel partners based on the likelihood of them breaching our code. For example, do their measurement and motivation systems encourage unethical or dishonest behavior? What are the business practices in their market or their home country? What are their cultural attitudes to topics such as bribery or intellectual property rights?
Contracts, commercial and procurement staff should be bringing a new sophistication to this important area. The answers we really need will never be extracted on 150 page, one size fits all, questionnaires; they will be gathered by exploring and understanding markets and ensuring common understanding of what it is we consider important and why. Reputation is managed through proper research and communication; it is built around understanding and trust. As one attorney observed: “Today’s programs are all about being able to show the rgulators that we have a robust and consistently applied program. Whether it really addresses the issues is much less important”.
We have a long way to go in our management of reputation risk.
The 2010 IACCM Americas Conference got off to a flying start on Tuesday afternoon with a series of quick-fire presentations, introducing a new-look conference held in partnership with the Shared Services & Outsourcing Network’s (SSON) 14th Annual North American Shared Services and Outsourcing Week. The event brings together a cross-industry audience of almost 900 delegates, and with it hugely increased networking opportunities and a wide variety of sessions on a broad range of topics.
The main themes being covered at this year’s event not only concern the current position of commercial and contract management, but also the challenges that the community is likely to face in the future.
The role of the contract is increasingly becoming a tool for enabling value-added activities – a framework for a high-value relationship. However, the contract must also become increasingly adaptive to the speed of change in global markets; new technologies, new markets, and the demand for products to be brought to market faster than ever are bringing new challenges to the community.
The state of the global economy remains a key point of discussion – particularly with regard to the shift to risk analysis, where companies have been forced to decide whether to take on short term risk in order to protect their business, or to avoid it and run the risk of going out of business. This situation has led to contracts staff being increasingly required to perform a policing role, realising that these risks are necessary while assuming much of the responsibility for managing the consequences of risks that have been taken.
An additional area of focus is on the need for ‘commercial agility’. Recent academic research has highlighted contracting as one of 3 ‘core competencies’ necessary to the survival of a business, and as such the role must be adaptive to the needs of business in a constantly evolving environment. Fundamental to this is the shift from ‘reactive’ to ‘proactive’ contracting, and the change from a role of contracts administration to one of contract and relationship management. Indeed, the integration of contract management and relationship management will be key to the progression of the profession.
We have already heard from industry leaders, and will share some of their insights with you as we summarise the conference in the next post.
Today sees the start of the IACCM Americas conference, in Orlando. This year, we have a new model, partnering with Shared Services and Outsourcing Network.
An immediate difference for past attendees is the numbers of delagates. There are around 900 converging on the event this year. But of course a key difference is that they come from a much wider array of business functions, in particular, business operations, IT, Finance and Human Resources.
IACCM will run dedicated sessions for the contracts, legal and procurement community, as well as offering them the chance to join other tracks which explore many aspects of outsourcing and shared service delivery. For the SSON delegates, we provide the opportunity to engage on an area which they have identified as a primary interest and concern – the role of contracting and relationship management in structuring and managing their external relations.
Our goals in creating this combined event are to increase both cross-functional and inter-company collaboration and understanding. There is extensive evidence that long-term services contracts depend for their success on cooperation and governance standards, rather than on traditional contract terms. They demand a commitmnet to high quality communication and performance management which is achieved only through trust and respect for stakeholder views.
We know that shared events like this are just a beginning; but all innovations must start somewhere – and for the world of contracts, that ‘somewhere’ is Orlando, today.
The IACCM / SSON conference series continues with the European event taking place in May (24th – 26th, Edinburgh) and the Asian event in Singapore (September 20th – 22nd).
The latest edition of TPI’s ‘The Platform’ contains a couple of interesting articles by seasoned deal consultants. One looks at IT vendor management and the other at contract renegotiation.
In recent blogs, I have commented about the growing focus on IT procurement and supply management. TPI confirms my impression that in general, post-award management is tending to be undertaken by groups that are separate from Procurement. Unfortunately, they also observe the fact that such groups are often scattered around the organization with no coordination regarding their precise role and, of course, no central investment to develop skills or provide consistent tools.
Suppliers struggle with this type of fragmentation because it frequently leads to mixed messages. Of course, they sometimes play off the various groups against each other, but quality suppliers are frustrated by uncoordinated interfaces because it delays implementation, slows down performance and frequently prevents timely change – ultimately resulting in disappointing results for both parties. In her article, Cynthia Batty sets out five useful tips for customer organizations to prevent such disappointment. These are:
- Define the terms
- Create a clear definition of roles
- Cooperate with data
- Understand the difference between contracts for services and for products
- Share business processes to achieve maximum control
Failure to address issues such as this often leads to pressure for renegotiation and David Howie discusses some points to consider when preparing to renegotiate. He asserts that there will be more than 500 major renegotiations of outsourcing agreements this coming year and that ‘most major outsourcing agreements will be renegotiated during their term’. Again, these comments reflect those by IACCM and within other articles on this blog. In part, such renegotiations are inevitable – market volatility leads to increasing frequency of change in the original terms. However, much of the problem goes to the fact that requirements are often poorly defined. This does not always mean that they are imprecise; indeed, the problem can be the exact opposite. Too much precision at a time of market volatility makes renegotiation almost inevitable.
David’s article also offers some useful points to consider, though I would have liked to see more thought given to the positive incentives for a supplier to renegotiate. If, as the article asserts, suppliers try to ignore requests for renegotiation, it is perhaps because such conversatiosn tend to be driven by negativity. I do not agree that win-win is not achievable – and indeed, if it is not, then why are the parties remaining in contract?
The article also fails to suggest that the inevitability of change in many of today’s contracts should lead the parties increasingly to embed planned renegotiation into their agreements. If indeed it is so hard to come back to the table (despite disappointing results), it would surely make sense to ensure automatic triggers for fundamental review of the terms and goals. Increasingly we observe renegotiation becoming part of the planned relationship, rather than an enforced – and perhaps acrimonious – event.
Sadly, I only became aware of the work of Ian Macneil when I read his obituary. I wish that I had met him, because his work on contracting aligns closely with the views and mission of IACCM – and offers yet another legal and academic underpin for our vision of the future. Several of his ideas yield critical insights to the work of any contract, legal or procurement professional.
Ian recognized that classical legal practice failed to address the needs and reality of business-to-business contracting. He observed that classical principles are based on assumptions of selfishness which mean that each party seeks to operate at the expense of other parties. He argued that this overlooks the reality of business contracting, which in fact occurs only because the parties have recognized a potential for mutual gain and understand that this can be realized only if they are willing and able to work together.
His writings then go on to illustrate how narrow perspectives and transactional behavior will undermine the relational aspects of a contract. He depicts how companies have choices regarding the depth of the relationship they wish to form – and how this depth must drive very different contract mechanisms. This connection between economic theory and behavioral reality has been increasingly embraced by top economists – but is still largely absent from the practice of law and is severely challenged by the ‘commodity price’ strategies of many Procurement groups.
“Classical law,” comments Macneil, “views ‘cooperation’ as being of little interest and external to the contract.” Yet in business, contracts arise precisely because the parties recognize there is more to be gained by cooperation than by separation. Successful contracts therefore operate with mechanisms that foster cooperation and depend on the parties consciously adopting a cooperative attitude. As an example, they must accept that ‘damages and losses are not precisely quantifiable and it is pointless to try’ (unlike the theories that govern classical law, which assumes precision in these areas).
Good contracting, Macneil tells us, ‘escapes the classical legal model and is replaced by very different adjustment processes of an on-going administrative kind. This includes internal and external dispute resolution structures … the relationship becomes a mini-society with an array of norms beyond those that centered on the exchange and its immediate processes.” In this, he is clearly alluding to areas of contract and relationship governance, information flows, transparency and performance management.
There is a further point in Macneil’s work that should especially strike us. He made the observation that classical law – and its attitude to contracting – is built on the premise that the parties are operating within ‘a common base of presumed rules’. In today’s global economy, this presumption is of course a fallacy. The parties frequently have very different beliefs and understanding of ‘the rules’ – whether legal, economic or social. This again points to the fundamental inadequacy of most contract development and negotiation processes. It illustrates why parties who seek to use power to impose their view of ‘the rules’ will almost inevitably destroy the potential value that could have been achieved from the relationship.
This idea that cooperation is the fundamental underpin to contracting is obvious – yet is also a revelation. And with this insight, it must lead all of us to ask what aspects of our behavior threaten cooperation; what areas of our terms and conditions support and enable it; what techniques and tactics in negotiation establish the framework for mutual success. Although aspects of the law represent an important underpin to contracting, the real essence of the process is that it must establish and define the reason for cooperation, the economic exchanges that will occur and how the parties will structure and commit to ensure the gains are achieved.
Intrinsically, most experienced contract professional know this already. Yet we still struggle to put our knowledge into operation. We still revert to our use of ‘potential external sanctions’ as the way to drive behavior. Reading Macneil’s work will help us to think in a new way – and more importantly, to challenge the old way. Today’s business realities depend upon great thinkers such as Ian Macneil. We must ensure his ideas are put to use.
Over on the IACCM message board, a member has asked the question: “I am an attorney in the legal department who supports the Contracts Management Group who report to a business/procurement manager. I am trying to find out if most companies have the contracts group separate from the legal group, or if the contracts group is a part of the legal group. And, if the contracts group does not report up through the legal management chain, how do you handle contract negotiations, administration and management with the group?”
Of course, this is not a new question – but it does seem to be rearing its head with greater frequency right now. As I have observed in various articles recently, business conditions are placing real strains on the contracting process in most organizations. On the one hand, there is pressure for greater control and compliance; on the other, there is the need for increasing agility and the ability to remain flexible. And of course, there is the vivid memory of the recession and the scramble to renegotiate contracts, which bruised many and left others feeling exposed when they discovered the types of agreements they had in place (assuming, of course, that they could even find the relevant contracts!)
These factors have alerted executives to the weaknesses in their contracting process. It has caused internal frictions over control and ‘who is the blame?’ There is debate over the reasonableness of terms and conditions and about the time it takes to make decisions or reach agreement (internally and externally). None of these characteristics is acceptable in fast-moving market conditions.
But what change is wise? The problem is that contracts require balance. They must enable internal business goals and objectives while at the same time responding to the needs and expectations of customers and suppliers. They are instruments of governance that are designed to secure economic benefit. With so many stakeholders having a legitimate interest, they can rapidly become a battle-ground for control, with the most powerful function simply seeking to impose its will. On the other hand, few stakeholders are in fact equipped to represent the holistic needs of all affected parties – so often they turn to legal because no one else wants to carry the baby.
So how should an organization decide where contract management ought to belong? Here are a few ideas – and I will welcome additional comments:
- Give thought to the nature of your business and the scope of the contract management role. For example, contract management in a commodity business is very different from the role in a high value project business. Maybe your company has a mix of contract types – in which case it may bneed a mix of organizational answers.
- Who is willing to take accountability for the quality of the contracting process? Make sure that you have assembled the criteria that represent ‘success’ and then determine who is willing and able to commit to its delivery. For example, is the aim to be ‘easier to do business with’. Is it about increasing the quality and outcome from negotiation? Is it about shorter cycle times? I s it about greater business control? Is it about increased competitiveness? Without broad agreement about what you want to achieve, there will be continued arguments and failure.
- Who has the right skills today, or is prepared to invest in their development (and associated tools and systems)? Contracting is complex and in today’s markets it must remain a focus area. If the prospective owner wants to grab control because they think they will have a quieter life, or can suppress workload, they should think again. Contracting is set to remain a dynamic discipline, as more and more deals and relationships require active life-cycle management.
In my experience, world-class contracting depends far more on the integrity and quality of the process than it does on who owns it. So my recommendation is to first focus on ensuring the process supports the goals and relationship needs of the business. Then from this process, the primary skill and knowledge requirements will become evident and potential organizational alignment more obvious. At the very least, whoever steps forward for ownership then has a clear understanding of what they are taking on.
Finally, just because someone owns the resources does not mean they should necessarily own the process. Today’s best performing contract processes operate with a degree of shared ownership where the ‘owner’ is really the first among equals and consults widely and regularly with other key business groups and functions to ensure that contract management continues to meet the needs of the business.
One of the benefits that comes from IACCM’s conference partnership with the Shared Services & Outsourcing Network (SSON) is the exposure each of us gains to different viewpoints. Our commuinities are largely complementary and inter-dependent. That means we have opportunities to gain new perspectives and indulge in different conversations.
An example of that is the lively discussion created by Phil Fersht, who is presenting at both the Americas and Europe, Middle East & Africa events. In a blog entitled “Busting The Innovation Myth”, Phil challenges the idea that outsource providers ever introduce innovation. He argues that they can undertake actions that enable their client to innovate (for example, process improvements, cost reductions), but is asking for examples of actual, provider-inspired business innovation.
In mounting this challenge, Phil has defined ‘innovation’ relatively narrowly, by arguing that it must be market-facing. Therefore he rules out those things that may be simply new processes. Personally, I disagree with this. In a services-based world, where outcomes really matter, the quality of the process is a real market differentiator. I could regale many experiences of call centers, or billing errors, or missed shipping dates to illustrate the point.
But there is no denying that many clients would like their supplier to innovate and are disappointed by their failure to do so. Many providers would argue that is due to failures in teaming and collaboration by the customer. But there is of course another aspect, which is that any provider with innovative ideas is unlikely to want to apply them solely to one customer, because they are its source of competitive difference. So it is inevitable that most ‘innovations’ are rapidly replicated.
We often debate the extent to which the contract contributes to innovati0n – or the lack thereof. Certainly I am not aware of contracts that actually incorporated plans or commitments around ‘innovation’. I am aware of many where the governance and performance management procedures undermined collaboration such that the chances of the parties innovating were dramatically reduced.
But what do you think? Can suppliers introduce real innovation to their customers? Are their examples where strong supplier / customer relationships have resulted in market-facing innovations? I would love to hear about your examples.
An article in The New York Times (China Uses Rules On Global Trade To Its Advantage) illustrates the mounting public relations battle between the US and Chinese administrations, following this weekend’s denial by the Chinese leadership of the need for change in its current economic policy.
The debate centers around the ‘fairness’ of Chinese policy and its impact on trade imbalances, in particular regarding the value of the Chinese currency, the renminbi. There is broad consensus that the renminbi is under-valued and of course this makes Chinese exports more competitive – and has supporrted the growth of a huge trade surplus.
The New York Times suggests that Chinese manipulation is expanding to the way it uses world institutions, such as the WTO. It emphasizes how, in the last 12 months, “Beijing has filed more cases with the W.T.O.’s powerful trade tribunals in Geneva than any other country complaining about another’s trade practices”. While this is strictly true (China filed 4 of the 15 cases, versus 3 filed by the US and 2 each by the EU and Canada), it is an example of the selective reporting that undermines meaningful discussion. For example, if we select a period starting on January 1st 2008, rather than just the past year, the United States filed 10 complaints, compared with just 9 by China and 9 by the EU (out of a global total of 36). So when the U.S. files, are we to conclude that it is never doing so ‘to gain advantage’, yet when China uses the same institution, it must somehow represent an attempt to manipulate?
As this week’s Economist points out, (Yuan To Stay Cool), upward appreciation of the Chinese currency is desirable and is in all interests, including those of China. But rebalancing of the negative trade balances that have been allowed in countries such as the U.S., the UK, Greece, Spain, Ireland etc is also necessary. The problem is that the imbalances have grown to a point where action can only be gradual; the economic shock of rapid action would be too much for these countries (and their population) to bear.
The real point of this debate is that as with any trading relationship, all parties are ultimately in this together – and need to work together to make things better. This requires careful judgment over how public to make their debates and what arguments they should use to assist a successful conclusion. The tactics of this negotiation are important for us to observe – both as a learning experience and also because their outcome will have a substantial effect on the living standards and career prospects of us all.
The subject of IT Procurement has been a real hot button at IACCM this week. I am not sure precisely what is going on out there, but it seems we are back to some fundamental battles over whether IT Procurement should be within Procurement or within the CIO organization. The water appears to be further muddied by the question of where supplier relationship management should belong – and many CIOs are clearly pushing to have both, at least in respect of their suppliers.
I wrote about this some weeks ago, following a session with CIO Magazine, and I can certainly understand why CIOs are concerned about having high quality commercial and contracts teams, given all the change they face. However, this post is not about the organizational or skills question (on which I am happy to share my advice and views), but actually about a report that one of the IACCM research team brought to my attention.
This report is based on a survey of some 200 CIOs in UK local government (state, district or city governments in other countries). It is probably no surprise that these CIOs do not welcome the thought of more central control over their projects and related spend (something that current budgetary conditions make more likely). The article criticizes the performance of “central government in procuring IT, citing a string of major IT project failures and quoting media reports of the cost to the taxpayer due to abandoned central government computer projects, which was most recently estimated by the Independent to be in the region of £26 billion during the last three Labour governments”.
It goes on to recommend that “service-related government IT projects should have a timeline of no more than 18 months and that the framework for selecting suppliers should be restructured to make it more flexible, fairer to small suppliers and more conducive to innovation”.
I think this has the makings of a fascinating debate that is likely to take place in many countries in the coming year or two, not least because of the fundamental role of IT in managing the delivery of public services, plus the fundamental questions raised by the advent of cloud computing. There are certainly challenges associated with central decision making and the political considerations which undermine many projects. But interestingly, the report is most damning about the issue of central government skills and argues that local authorities are better at defining, procuring and project managing their acquisitions. Given the relative lack of trained procurement and project management personnel at a local level, this raises some massive questions over the investments that have been made in training and ‘professionalizing’ such staff in central government.
Of course, another reason for better performance (if indeed performance is better) could be that local projects are smaller and far less ambitious. Perhaps many national projects are simply too big and too complex. This might suggest that central government needs to do more to create enabling agreements (gaining the savings from consolidation) and to become more prescriptive regarding required outcomes, but less so regarding specific solutions.
Overall, this makes for a fascinating debate in which the contracts, commercial and procurement community should be involved and from which it should learn. Our interest should be both as professionals and also as taxpayers.
Dustin Mattison pulled together some interesting comments on Toyota and its ‘silo-based organization’.
It is of course remarkable how quickly people, institutions and companies can switch from ‘hero’ to ‘villain’ status. So recently Toyota was hailed as such a successs story, yet now everyone appears to have known that this was just based on … what, a myth, good luck?
Business results prove that Toyota did a lot of things very well for a considerable period of time. What it perhaps did not do so well was adjust to changing conditions – among them, its own successful growth (but it shares that fault with most industrial Leviathans). I have commented in previous blogs that the warnig signs were there (for example, the reports issued by Professor John Henke). Based on my contacts, it is certainly true that the highly devolved organizational model, on which Dustin comments, prevented strong business functions from developing. I believe that in the field of contracts and relationship management, there was virtually no central oversight. Yet let us not forget that many suuppliers loved this model and felt strong loyalty to Toyota. Before the cynics observe that this lack of central control meant higher margins for the supplier, let me say that there is no strong evidence of that, and even if they did, I suspect the overall relationship costs for Toyota were much lower.
The problem with Toyota’s organizational design is that it depended on the competence and insights of a small executive team. The model appears to have lacked appropriate checks and balances and this deficiency became more severe with rapid growth. I agree with comments by Forrest Breyfogle that modern technologies allow very different and better balanced structures, supported by high quality information flows that enable insight and decision making in a far more collaborative way. The old ‘centralization versus decentralization’ see-saw through which most of us have lived is now anachronistic. A matrix that brings together the relevant expert groups (business units and support functions) to have joint and several responsibility for key business activities and processes appears to be the way forward.
Silos always accompany any sort of specialism and to some extent are desirable (for example, ‘professions’, by their nature, are exclusive and therefore create both progress and conflict). Rather than seek to eradicate silos, we have to ensure that the contention they generate is creative rather than destructive.
Commitment Matters 