Yesterday I was asked to write an article about Wal-Mart and its ‘de-layering’ of supply relationships (another word for increasing the number of direct supplier relationships). In that article, I commented that it is possible to have collaborative relationships even with a giant like Wal-Mart – but it depends on the supplier’s approach. If you cannot demonstrate value and introduce new and innovative approaches, don’t expect special treatment.
So it was timely today when I discovered an HBS Working Knowledge article on exactly this theme and featuring two very different Wal-Mart suppliers, one the also giant Procter & Gamble and the other a small pumpkin farmer. I will leave you to read the illuminating story regarding how they gained Wal-Mart’s attention and kept their loyalty. My specific interest was drawn to the statement that , in the case of P&G, ‘both sides eventually eliminated elaborate legal contracts in favor of Letters of Intent’. This was seen as one of the break-through moments in creating a positive and collaborative relationship.
Of course, the difference between a Letter of Intent and a contract could doubtless itself keep us engaged for quite some time. But that is not the point. I believe we are going to see a steady increase in the erosion of traditional forms of contract because they simply do not get the job done. As this story illustrates, instead of pulling parties together, they often push them apart.
This is not the result of contracts per se – it is because of the way that far too many contracts personnel are hard-wired to behave. Contracts staff must develop the commercial judgment to know what type and form of relationship agreement will be best suited to their business objectives. They must escape the trap of established templates and standard term checklists and instead become the effective synthesisers and documenters of governance and performance frameworks that support success. We need a wider portfolio of tested approaches and we must develop understanding of new remedial techniques – very much like the medical profession. Today, we are faced with far too many patients who do not survive our treatment; we need to expand the range of treatments that we have on offer.
“Best Practices should be extended to cover the initial recruitment of persons for a particular function ( procurement or contract specialist ). I have observed in most organisations these functions are not given the same importance, as compared to for example finance, where the bar has been set for entry i.e CPA ,ACCA certification made mandatory for one to be considered. It is a high time IACCM and other professional bodies engage with organisations to make it mandatory for any practictioner within this function to attain the required relevant certification.”
This view was expressed by a student in the IACCM Managed Learning program, on one of the message boards. I understand his frustration.
Professions tend to go through several phases in their development. First, based on a social need, individuals become specialists in a particular field. They learn either from personal experience, or from a specific mentor. Over time, these individuals may start to network and share some experiences; they may even write occasional books, but often they do not fully agree about the scope or role of their activities. The role remains dominated by personal and organizational perspectives of its purpose and the skills and knowledge needed for performance. Many individuals in fact fear ‘professionalization’ because a) it will create standards they might not meet; and b) it will result in a level of discipline that might make their work less fun. Attitudes like this inhibit the status of all practitioners and make it almost impossible to demonstrate the value or contribution of the role.
Over time, if a job is to become recognized as a profession, consensus builds that this particular field is of such importance that it needs standards of practice and a formal body of knowledge. At this point, it is generally able to offer recognized sources of training and people select it as a career path. There is also a commitment to research and wider sources of education and training (for example, universities and business schools) – all the characteristics laid out in the IACCM best practices module.
Contract and commercial management is still on this journey. We have progressed a long way – for example, the IACCM learning program is the first (and only) effort to capture and spread a global body of knowledge. At present, there are more than 4,500 students who are among the leaders in establishing a group of similarly qualified individuals with a common understanding of their role and value. IACCM is working very hard to push for certification and to do this we must also create executive and public understanding that this will result in business and social value. We are encouraging more publications; we are working to get academic programs at universities and business schools; and we are undertaking large volumes of research and authoring.
Now we need you – the practitioners – to show your excitement end dedication by becoming powerful advocates for the value of contract management and the need for employers to demand certified professional standards. And of course, to set an example by becoming certified yourself!
This morning, the UK’s Radio4 ‘thought for the day’ featured a speaker who was commenting about failure. He discussed the way in which business and government each struggle to deliver the results they promised, or which were expected. He then proceeded to observe that the resulting reports and post-mortems rarely manage to provide the sort of findings and insights that satisfy those affected.
In the end, he suggested, most of these disappointing results – on major projects, large deals, key initiatives – could be attributed to one thing – a failure of imagination. Of course they are sometimes overtaken by events that could not reasonably have been predicted, but mostly not. In general, if the project or deal leaders had thought more broadly, considered other perspectives, they might have allowed for the circumstances or conditions that derailed their work.
These thoughts struck me as very apposite to the contracts and commercial management community. In assembling, negotiating and managing contracts, we sit in a unique position. For many of us, the fascination of our role is the insight it offers to the many stakeholders involved in any complex deal or project. For some, that acts as a springboard to wider ‘stakeholder analysis’ which insures we have considered all perspectives and potential risks. I was also reminded of another comment that I read recently, related specifically to contracts: “Failure is usually not from ignorance, but from ineptitude – a failure to apply what we know”. The commentator this time (Rees Morrison) was highlighting how good lawyers and contracts professionals use checklists to eliminate the chance of ‘ineptitude’ and to free their time to think outside the box. Indeed, for some organizations this is leading to more and more outsourcing – have others manage the checklists and focus your best talent on ensuring there is no ‘failure of imagination’.
I was reminded of a previous manager, a past CEO at IBM UK who always challenged us to ‘think the opposite’. By this challenging of our own assumptions and prejudices, we would often arrive at new realizations, new solutions – or simply avoid stupid mistakes.
So what does this ‘failure of imagination’ mean to us? At its simplest, I suggest to anyone in contracts, legal or procurement that we should ask ourselves a simple question: in assembling a contract, in pulling together all the stakeholder inputs, is our primary task simply to integrate and ensure we have a consistent document; or should we instead be focused on ensuring that there is reconciliation, that we have developed creative answers to conflicting viewpoints so that all participants can work in harmony?
Last week, I attended a meeting held by the International Centre for Complex Project Management (ICCPM) in London. IACCM has been working with ICCPM and is curently leading a joint working group on complex project contracting.
Most participants at the meeting were from the defense sector. They described complex projects as those which had three specific characteristics:
- uncertainty, ambiguity, dynamic interfaces and significant external influences
- usuallly run over a period that exceeds the technology life-cycle
- can be defined by effect, but not by solution
Improving performance on these projects is important, because they tend to be of major social and political value. Today, they are fraught with cost overruns and time delays. The extent of these ovverruns is increasing on a year by year rate (which is interesting, given the investments there have been in the professionalization of project management and the range of tools and systems now available). The three factors listed above all represent risk – and can either generate collaboration, or defensive behaviors. There is a tendency for procurement, legal and contracts staff to react to risk through defensive approaches that protect their own company or organization, rather then expose the risks and seek shared solutions.
Perhaps part of the problem is that we are steadily becoming more ambitious in the projects we undertake. But another key aspect is that we are not structuring such projects the right way, in particular how we define and manage relationships. And that, of course, is where the contracting process should be offering some answers.
Contracts and contract negotiation at their best offer a forum for disciplined discussion and interchange. At their worst, they stifle such exchanges. This is where having the right personnel with the right motivations in the room or in the team becomes critical. Indeed, from their analysis of the ‘big issues’ that undermine success, ICCPM highlights a wide range of areas that ought to be addressed by the contracts process:
- unaccommodated / unaligned stakeholder views of ‘success’ – an alignment that the sponsor and the commercial team should together be ensuring
- tension between product success and project success (product versus outcome) – a key problem for traditional purchasing groups
- lack of understanding of non-technical risks – because they tend to be suppressed and handled through risk allocation terms and confrontation
- use of competition as a weapon – again, a procurement technique that often is not appropriate for complex projects where teaming is essential
- institutionalized procurement practices – their words, not mine!
- current tools and decision processes are unsuitable for analyzing uncertainty – contracts rarely deal well with uncertainty
- inevitability of scope creep (cost and scehdule) especially if the contract is entered into too early- or perhaps if the governance process did not anticipate and enable required changes to be undertaken in an open and disciplined form
This fascinating list of findings is of course being considered by our working group, but it clearly raises questions about contracts and contracting skills that must be answered. Interestingly, it also raises questions about the nature and role of project management in such situations. One issue certainly seems to be that too many project managers are drawn from a technical background and lack the commercial and relationship skills upon which most complex projects depend.
I have found most contract and commercial staff are supremely uninterested in supply chain management. Especially for those on the sell side of contracting, few see it as having direct relevance to their work; most view it as ‘something to do with logistics’. I think they are wrong and that supply chain should be a key area for focus by any self-respecting commercial organization.
An article in Strategy+Business, entitled ‘Virtuous Connections’, illustrates this point. It tells a story that demonstrates the impact on customers of poorly managed supply networks. It also shows how a failure to properly understand and segment customers lies at the root of the problem. Here is an extract from the article:
“(The supply chain manager) began to implement (his) concept by tackling Chem One’s customer segmentation problem. At that time, the company didn’t prioritize its customers. Good customers, bad customers — large, small, loyal, or intermittent — all were equally important. If any of them asked for a product with rush delivery, Chem One’s service representatives would simply agree to it, without first considering the cost or the value to their own company. These rush orders upset the planning schedule and required manufacturing to shorten its production runs. The orders that had been delayed as a result of these sudden changes then became “rush” orders themselves, perpetuating planning instability and suboptimal manufacturing. Service levels declined, and costs increased.
To mitigate this situation, West and his team dug deep into Chem One’s sales records, analyzing each customer by its size, needs (for example, did it have a just-in-time system?), and strategic importance to Chem One, along with a few other variables. After this assessment and discussions with salespeople in the field, the team gave each customer a priority code. This code, in turn, dictated how its Chem One customer service representative would respond to its requests for rushed or changed orders. Immediately, unplanned deliveries were reduced significantly and customers were given a more realistic picture of product availability and shipment schedules.”
As contracting experts, is this not the sort of analysis we should have at our fingertips? As the people evaluating and making commitments, should we not be making decisions based on the relative value of customers? We enter into contracts to achieve mutual economic gain; how can we make risk and commitment decisions without visibility into the relative economic contribution of each customer or prospect?
I know that many contracts groups do attempt to segment the customer base, but I would suggest that the basis for segmentation is typically very rudimentary. It tends to be based on deal size, or the ‘strategic opportunity’ that the business perceives, rather than on any structured performance data. As a result, we often finish up offering the best terms to the lowest margin customers. We build in system disruptions for business that has relatively low value, and fail to understand how this will impact our more valuable customers.
The problem – in my experience – is that sales contracts and commercial groups operate on a deal to deal basis. They rarely have wider insights or understanding of customer portfolios. This distorts our understanding of the true impact of term and condition variations as well as our appreciation of risk. Through that wider understanding, we would do some things more often and others much less often. Supply chain insights and discipline would be an excellent way to start handling business opportunities and markets with greater sophistication – and to increase the value that we bring to the business.
An IACCM member wrote to me today to say “I am looking at contractual flexibility/agility and am keen to understand whether it is an area where the IACCM has undertaken much research? Customers increasingly (push for) long term partnering, combined with the ability to (make fundamental changes) at short notice. If there is any research in this area I would be keen to understand more”.
There is no question that this has become an important issue in many negotiations. In part because of experiences in the recession, and in part due to the overall increase in the speed of change, more and more companies want to have their cake and eat it; they want the benefits that come with committed relationships, but they want the flexibility associated with more casual encounters.
Clearly, suppliers who can offer greater flexibility will be at an advantage. Yet since most successful relationships require investment, how can this be offered without damaging profitability?
On one level, the question is of course simply a risk assessment. In reality, how much flexibility will customers actually require? And taken across a portfolio of customers, might the gain in competitiveness (and hence customers retained or won) outweigh the costs associated with greater flexibility?
At another level, while many sectors are experiencing growing pressure for more flexibility in contracts, the precise sources of pressure vary and that means the specific terms under pressure are also variable. Among the most frequent that I am observing are:
- IP rights
- Termination
- Revision of services
- Revision of service levels
- Options for additional services
- Volume adjustments
- Right to deal direct with sub-contractors
- Price renegotiation and benchmarking
- Delivery / shipment
- Delay / suspension
- Contract review
- Escalation procedures
Approaches that I am observing to handle this uncertain environment include the creation of shorter and more specific contracts; the use of milestones to trigger formal contract review / renegotiation; the use of ‘buy out’ clauses to enable investment recovery in the event of reductions or termination; and more specific understandings regarding IP rights, the management of confidential information and the exploitation of innovation etc.
There is a big dividing line between contracts for commodities, where buyers want to have flexibility on volumes, shipping, market pricing etc., versus higher value relationships where the goals may be directed more at innovation or collaboration over time, yet need to similarly recognize either that market conditions may change, or business goals may alter. Another factor influencing this is the relative size and power of the firms involved.
IACCM will most likely conduct some more formal research in this important area and is already interviewing a few major corporations about their experiences, but in the meantime it would be great to hear your thoughts and experiences.
There are, of course, many reasons why business relationships fail. And failure is itself relative. For example, if measured in terms of those that end up in court, the proportion is very low. It is more that the percentage where satisfaction is very high is also quite low – meaning that the majority are sandwiched somewhere in the middle – with emotions ranging from mild disappointment to outright frustration.
Proportionally, services relationships tend to have higher levels of disappointment than those covering products. In part that is because services may be harder to define and measure; they ae also more subject to human interventions and therefore error rates tend to be higher. But during my years at IACCM, there are several characteristics which I have noticed frequently causing problems.
- Service users are often remote from the process that defines requirements and drives supplier selection. Indeed, Procurement processes often create deliberate barriers between potential providers and the user community because they fear the ways in which this might compromise the selection process. This places a tremendous burden on Procurement to undertake effective analysis – and when they fail to do so, or overrisde the results for cost reasons or because it does not fit with their preferred sourcing methods, the supplier often bears the brunt of user dissatisfaction.
- Too many suppliers and customers display a fundamental lack of trust. Staff groups in particular make assumptions about the other side’s motives or behavior and make few attempts to validate them. These often lead to actions that are adversarial or dishonest and result in each side seeking to gain advantage over the other – for example, through exploiting change procedures or the use of liquidated damages clauses.
- Some organizations have a culture that simply does not lend itself to healthy external relationships – and their trading partners either fail to recognize these attributes or decide to ignore them. The key warning sign is when there is internal contention and evident antipathy between departments or functions; if they cannot collaborate with each other, they will certainly not be able to work consistently or cooperatively with their external partners.
- A failure to appreciate the impact that operational rules or metrics will have on the relationship. Public procurement rules are one obvious example; sales incentives are another. Trading partners need to explore and assess the effect that such issues will have on the competitive framework, the ability to have open discussion, the extent to which disclosure or behavior may be compromised. It is surprising how rarely bid, negotiation or implementation teams ask the other side to explain their operating rules or measurement systems in detail and use these in their bid / no bid decisions.
- Building on issue #3, organizations should be more honest about whether there is good cultural fit between them. This isn’t a case of right or wrong – it is just the need to admit that successful long term service relationships require an empathy and concern for each other that will not be achieved if there is a cultural mismatch.
- There is frequent failure by one or other party to allocate resourcves (or the right resources) to on-going oversight and performance. This is particularly true of client organizations. Even if the contract has good governance procedures (which they often do not), there is frequently a failure to use the mechansims it established, to hold reviews, to allocate accountable / empowered contract owners to address problems, dicuss improvements. Contract administration is NOT contract management!
- There are many pressures on supplier teams to close the deal and avoid ‘unselling’. Too often, sales organizations are reluctant to avoid the right people, or involve them at the right time, or to enable open discussion of value-add possibulities, because they fear it may delay sign-up or could create bigger questions that would derail the deal – even if the result is actually a bigger deal. So getting a deal is better than getting the right deal.
This list is certainly not exhaustive, but it reflects some common problems that should be on any deal-makers shortlist of things to consider and explore.
What would you add?
Jason Busch produced a timely article last Friday, acknowledging the importance of proficiency in contract management both in reducing cycle times and in realizing expected benefits.
His comments were timely, because just the day before I had interviewed Lee Coulter, former Senior Vice President of Operations at Kraft. In this role, Lee was the executive responsible for many of Kraft’s outsourcing and managed services initiatives – and he formed strong views about the need for greater focus on contract management skills.
“In most complex services engagements, there is lots of conversation on what can be done and the value that can be achieved,” observed lee. “But the contract often fails to capture this.”
“You can liken the range of business relationships to human relationships,” he commented. “We may be looking for a something casual, something that is convenient for the moment. Or maybe we want something that is closer to serial dating. And sometimes we need a real business partnership.” In Lee’s experience – echoing so many others – Procurement is very good at establishing ‘the pick-up’, a transactional relationship with no real commitment. It is generally equipped to manage serial dating. But it is lost when it comes to a long-tem, high value relationship.
Jason Busch similarly observes the need for much greater sophistication in the contracting process. Like Lee Coulter, his article implies that providers are actually much better at this than most of their customers – and are frequently frustrated by the traditional approaches followed by many customer Procurement and Legal functions.
“This is a real leadership challenge,” said Lee. “It is hard keeping organizations aligned”. And in his experience, far too many procurement and legal staff are inclined to find probelms and reasons why things cannot work, rather than exploring new directions. This, of course, is why it is often tempting to exclude the ‘contracts’ people until late in the process; and this, in turn, leads to delays and risk-averse behavior.
At Kraft, Lee did his best to drive inclusive teams and to create excitement around innovation. But success depended on radical new approaches to the contracting process and the roles and measurements of those who worked within it. The full interview, in which Lee Coulter explains his approach, is available in the IACCM library. Lee will also be a presenter at the next IACCM conference.
For many of us, if we think about the law at all, we associate it with principles of equity, fairness and predictability. It offers a foundation for social interaction at both individual and organizational level. The rule of law – and hence respect for the law – is fundamental to social integration.
Yet in reality, the law has also favored and been the tool of those with power. Lawmakers (typically drawn from, or representing, the powerrful) have often created rules that reflect or protect their interests, at both national and international level. Shifts in power are typically accompanied by changes in the law – and it has often been the case that attempts by ‘the old regime’ to use laws as a means of enforcing compliance have resulted in rebellion or revolt. There comes a point at which laws must have some level of social acceptance for them to work. And in addition, people must feel that there is broad equality of access to the law, that the possibility of recourse is real.
Contracts – as in some respects an extension of the law – follow similar principles. Most of us would agree that they should deliver clarity to relationships and the responsibilities of the parties, and predictability to the consequences of specific actions or inactions. Many of us would hope that they also represent principles of equity and fairness, in order to bind the parties together as willing partners, rather than some form of master / slave relationship. And it is here, of course, that contracts are coming under growing pressure, because far too often they are being used as instruments of power. Dominant companies and dominant cultures frequently impose terms and conditions that are clearly self-interested (and reject those that they did not invent, do not understand, or feel may shift the balance of power – for example, UNCISG). Emerging nations flex their muscles by acting selectively in their attitudes to contract terms, justifying their actions because they see these as unfair and reflecting power imbalances – for example, the readiness of some countries simply to override contractual rights (think Venezuela, Russia), or to turn a blind eye to areas such as breaches of intellectual property rights. These attitudes are compounded by a very real inequality of access, driven by the costs associated with litigation. There is no question that in most societies today, the law favors those with money and power.
Establishing greater balance is important not only because it is morally right, but also because the interests of both parties to a contract must be respected if the system itself is to survive and trade is to flourish. Just as the law has to adpat to changing social, political and economic realities, so must contracting. That is why debates over issues like the purpose of contracts is important. Those discussions must also extend to cover other topics, for example:
- contract standards (is it right that individual big corporations can dictate terms and conditions, or should there be industry standard frameworks, with freedom to negotiate certain principles?)
- access to the law (is it right that lawyers remain dominant in the contracting process, with the implications this has to cost, understanding and special interests?)
- principles of dispute resolution (already we see a trend to move away from the courts. How far should this go and what alternatives should be established to ensure that the system is not simply hijacked by other – or even exisiting – special interest groups?)
Today’s system of contracting is not yet broken, but it is clear (to me at least) that it is in relatively urgent need of reform. At present, aspects of that reform are occurring, but in a relatively unplanned and piece-meal fashion. We have entered an era where the ability of individuals and companies to engage in trade across jurisdictional boundaries is demanding a contracting system that supports clarity and ensures equity, fairness and predictability. For many engaged with the law, this is threatening – it challenges their core knowledge, their sources of income, their instincts to protect familiar institutions. At times, it may also involve questioning the perceived interests of their masters (the large corporations, the politically powerful and wealthy). Yet at some point change will occur – surely it is better that this is through consesnus and planned debate, rather than a result of suppressed frustration?
I am excited that these debates are beginning. I hope many more will become involved and put their weight behind the development of new contracting principles and methods that support a code of trading standards and practices fit for the 21st century.
Commitment Matters 