SURVEY CONFIRMS IMPROVED GLOBAL TRADING CONDITIONS
Europe Continues To Lag Rest Of World
The latest IACCM survey of the global economy confirms continuing improvement in business conditions, with all world regions now showing net positive sentiment.
In IACCM’s last quarterly survey (October 2009), only Asia-Pacific showed a higher percentage reporting improved conditions, versus a continued decline. That optimism was justified, with 38% now confirming that there has been an improvement over the last 60 days, versus 16% reporting a decline (net improvement 22%). The Americas has seen a similar shift in confidence, with a net 16% saying conditions have improved.
Europe / Middle East / Africa is once again lagging the rest of the world. Although negative sentiment has fallen by 9% (to 27%), most of the transfer is to stabilization (+7%), rather than improvement (+2%). A similar lack of optimism affects expectations for improvement over the next 3 – 6 months, with just 49% in the EMEA region expecting that things will get better, compared with 61% in the Americas and 70% in Asia-Pacific.
REDUCED FOCUS ON RENEGOTIATION, BUT PRICE PRESSURE REMAINS
The latest IACCM survey of the global economy was conducted in January 2010 with input from members in all world regions, representing an equal mix of buy-side (procurement) and sell-side (sales contracts / negotiators). Participants reported a shift in the main focus for contract negotiations, with both sides recording a slight drop in the amount of renegotiation and a significant fall in specific demands for price reductions (down 10% overall). However, achieving price reductions remains the dominant issue for Procurement organizations and the fall in renegotiation may be because buyers are now far more active in seeking alternate sources of supply. This would in part account for the large increase in suppliers reporting growth in new business negotiations.
Most – but not all – industries reported improving conditions. For some, the situation is evidently patchy. For example, the Electronics sector saw a major drop in those declaring stable conditions, with many citing improvement over the last 60 days. But the sector also recorded an increase in the number saying that conditions had become worse. Another sector facing tough conditions is the outsourcing / professional services industry and both Automotive and Transport / Logistics were significantly less bullish than in the October survey. This is largely explained by the cataclysmic drop these industries suffered early in 2009; by October, conditions were indeed massively improved, but the rate of recovery could not be sustained.
The top five industries in terms of globally improved business conditions are:
- Manufacturing / Process
- Electronics
- Engineering / Construction
- Healthcare / Pharmaceuticals
- Oil / Gas / Minerals / Utilities
AND WHAT ABOUT ETHICS?
Our final question in the survey relates to the subject of ethics. At the start of the recession, many commentators claimed that the world had changed forever and business leaders would be increasingly focused on ethical behavior. The October study dismissed that theory, showing that those who felt unethical behavior had increased outnumbered by a ratio of 4:1 those who felt they had improved.
So with the heat reducing and recovery on the way, has there been a shift in the way companies behave in their contract negotiations and management? The answer is ‘to a limited extent’. Sell-side participants report a 9% point reduction in unethical behavior. In large part, this is likely to be a reflection of the reduced pressure to renegotiate established contracts. Buyers are behaving better and, in the eyes of the sales contract specialist, the pressure on their organization to make over-commitment has reduced. However, the same is not true for Procurement, which has yet to record any significant change.
A copy of the full survey results is available to IACCM members on request.
The subject of cycle times is – quite rightly – a source of regular debate for our community. After all, one of the most common user complaints is that we are too slow, that the process takes too long.
“Ah yes”, is the regular response, “but the cycle time is out of our control”. A recent IACCM member question gave a couple of excellent examples: “Naturally there are numerours factors to be considered during the process, including but not limited to, should long periods of inactivity from the Supplier be included within the measurement, should scope changes reset the clock”.
Similar comments come from sales contracting groups, with the customer of course depicted as the culprit.
These attitudes miss the point of benchmarking – and represent a lost opportunity for contracts and procurement groups to show their value to the business. The issue here is that time equals lost opportunity and increased risk. As I observed in my reply: “In the end, the factors you mention are part of the process and like other steps, they must be open to improvement. But of course they will not be improved unless they are measured, so I strongly recommend that you treat these ‘exception areas’ as the red herring that they are. The cycle time is the cycle time. If it turns out that supplier delays are making you uncompetitive or unresponsive to business need, you should be thinking how to fix this quality problem, not to use it as an excuse for poor performance. For example, what is to stop you adding a ‘speed of response’ metric into your bid criteria? This is, after all, an important issue; if suppliers really don’t care to be responsive when they are trying to win your business, what will they be like once the contract is signed?”
The issue of scope changes is also very interesting. Who controls scope? In my experience, it is not usually the contracts or procurement groups. So if it regularly changes (and we all agree that is not a good thing), then why is that happening? Our role should be to force an investigation into the causes of poorly defined scope and to promote improvement. We should be assisting the real culprits to improve – or otherwise highlighting the issue to executive management.
If we fail to grasp opportunities to take ownership and responsibility for business improvement, our value will always be open to question. We will always be the victims of claims by others that WE are the cause of avoidable delay – and no matter how loud our protestations, the mud will often stick.
I was reviewing some recent IACCM reports and came across one that looked at ‘ease of doing business’, with specific focus on the contract negotiation process.
Ease of doing business is one of those terms used extensively by senior management, yet rarely with any precision. It is generally seen as a desired state, but few seem to have any particular idea what steps should be taken to get there.
Last year, a leading professional services and consulting firm decided that it wanted to understand the concept in more detail. In particular, they asked IACCM three questions:
- does ‘ease of doing business’ really matter when it comes to contract negotiation?
- And if so, what does the client think of when they consider a company relatively ‘easier’ or ‘more difficult’ to do business with?
- And finally, if it does matters and if there are precise indicators, then how are we doing relative to our competitors?
Interesting questions … and the report details the answers. Firstly, yes – it does appear that contract negotiation practices and process make a difference. Buyers do see ‘ease of doing business’ at this phase of a relationship as an important indicator of how you are likely to behave in future. So especially when you are trying to win new business, or when the opportunity is viewed as ‘strategic’, you will do better if you are easy to do business with.
Secondly, we did find common and consistent characteristics in the attributes that represent ‘ease of doing business’. There were about 12 in total, of course with varying levels of importance. Areas such as communication, speed, respect for the client perspective and needs, understanding of their business shown by approrpiate terms, the right players on the team – these were the types of things that mattered. So we were able to use these to undertake a benchmark of the top 8 competitors in this particular market. And the differences proved to be significant. Of course, our analysis provided indicators against each important characteristic, but we were also able to produce a fascinating summary benchmark – which certainly caught the eye of top management!
For example, Company C met or exceeded client expectations in over 55% of cases – versus bottom of the pile CompanyF that managed just 31%. Indeed, Company F (which has recently announced poor business results and laid off significant numbers of staff) is rated unsatisfactory in its contract negotiations by more than 40% of its clients or prospects. But others on the list should not feel smug – Company A, for example, is also negatively rated by 33% of the respondents.
Equipped with this information, the contract management leadership team had the material they needed to grab management attention and to get the remit to drive serious improvement. That process in now under way, with a series of targetted projects to reengineer areas of the organization, establish new approaches to sales empowerment, better define the interface between the contracts team and the review and approval process, review contract structures and terms and explore automation.
It is projects of this type – relatively simple, relatively cheap – that transform the role and status of contracts groups. Of course, they may also originate from other areas of the business – for example, Sales may feel such frustration that they demand improvement, or Legal may want to get a better handle on workload and more efficient deployment of legal resources. But whatever the driver, why wouldn’t any professional group want to know how well its activities were perceived in the market? Why wouldn’t they wish to drive improvements and be valued contributors to company success?
The answer certainly eludes me; but unfortunately, studies like this tend to be the exception rather than the norm. And perhaps that helps to explain the issue raised by a contracts director in another recent blog ‘A Disappearing Breed, Or Just A Hidden Breed?‘
“Why aren’t there more contract management leadership roles available in the market place (even when the economy has improved)? If anything the need should be greater when the economy is as it is now in much of the world. The role is needed in many companies, yet I am thinking most companies believe that law departments typically cover this responsibility. I believe most law departments do not address this need. What are your thoughts?”
This was a recent question I received from a (clearly frustrated) senior manager from the contract management world. So here are my thoughts – and I would welcome the opinions and experiences of others.
“I agree with your observation (about the lack of openings). I suspect you are to some extent right about the fall-back to law departments. Certainly they are not in themselves adequate to deal with contracting, although we see a growth in more enlightened GCs who take an interest – and responsibility – for overseeing the development of market competitive terms and ensuring that there is a program to develop ‘commercial competence’ across the organization.
But in many places, that enlightenment has yet to strike; and in others, there are still significant contracts groups. So who leads them? Often, we find it is by appointments from within. I guess one of the key issues for such groups to be effective is the need for people who really understand business process and organization. It is hard to step in to the contracts organization in the top spot without a solid understanding of the specific business and firm relationships with key stakeholders. When there are exceptions to this, it is usually because of the need for dramatic change and reengineering.
However, as an ancillary observation, I must refer back to a blog I wrote a few weeks ago, highlighting the challenge for our community in producing leaders. Leaders are people with vision and belief, people who want to execute change and who can inspire others to support them. Part of the problem for contract management is that too many senior practitioners are focused on the status-quo, they concentrate on individual deals, not the broader areas of contracting strategy and value. So unfortunately, when the chips are down and cuts are to be made, it doesn’t seem like contract management groups would be a particular loss.
And without a contract management group, there is no need for a leadership role.”
In the end, contracting competence is critical to any company. But there are various ways that the competence can be established – and unless there is evidence that contract management professionals are truly leaders, it may be executed elsewhere.
Recognition is more important than money for contracts and commercial practitioners – and power trails a poor third as a motivator.
That is the finding from a survey undertaken by IACCM. And it resonates with much of what we hear in job satisfaction surveys – our community is driven strongly by its need to feel valued. This result also explains why morale is often low, because unfortunately many contracts and commercial staff feel that their work and contribution is under-valued.
A key reason for this is that it is often hard to describe our contribution in specific terms. As a community, we have lacked a vision and we have limited data to demonstrate the value-add that we bring to the business. One thing about which I am sure is that we will only alter this situation through collective action that develops agreed standards of practice and enables the creation of consolidated data, around an agreed mission and goals.
And that is why IACCM was created -to help us all define who we are, why we are here and what vision we have as a professional community. We now have more than 15,000 members. Our research is helping many to demonstrate how we improve the management of risk, deliver increased revenue and margin, and cut costs. But what makes us different? Here is the view of one senior staff member – and I think it is a great reflection of values not only for the Association, but for the contracts and commercial community as a whole. I would welcome your comments.
- We are non-profit, and as a group of practitioners ourselves, we do this because we want to raise the game of all professionals, both buy side and sell side, in adding more economic value for stakeholders on both sides, with all the economic and social benefits that follow (e.g. increased trade = increased wealth = increased tax contribution = better taxes and hospitals). I don’t believe any other competitor can claim this. They are generally in the game to make money or to defend the narrow interests of their established profession. Even the trades unions have mostly spotted that they need to work more in the national interest than narrow trade interests, if they want to keep jobs and pay!
- In terms of values, now is a great time to emphasise that financial reward as a primary driver, to the detriment of other values, may not be sustainable long term. Greed was never good (Gekko was wrong!). Generating sustainable value creation is good. I think there’s a difference! It’s hard to imagine us arguing for the position taken by bankers, for example. There was an interview with a young banker in the paper at the weekend, who had moved from UK to Switzerland, because the tax regime generated a few thousand extra income for her per year (on a vast salary). She travels home to UK at weekends. She said that she is primarily motivated by money, aims to make her fortune then get out.
- I regularly find myself debating short-term versus long-term with people I speak to. If you are a CEO in the job for 2 years, and you are paid huge bonuses based on a few financial KPI’s, you may choose to meet those KPIs to the detriment of the business in the longer term. As a profession, we advocate being the ones who are able to provide longer term perspective. Long-term value creation requires long-term sustainable relationships, and for leaders to care about trade in companies in ten and twenty years time, not just in two years. The questions arises; ‘how can we change this short-termist system?’, driven by boards, shareholders, CEO’s? I love the Gandhi quote ‘you must be the change you wish to see in the world’… leadership is saying ‘it starts with me, my attitudes and my communications with others’.
“I need people who will help me understand the implications to existing and future relationships – what I must think about, what I can and can’t do.”
These were the words of one CIO I spoke with recently, commenting about the type of support she would like from her commercial / contracts staff. She was talking about the emergence of Cloud Computing, but her frustration with broader issues was evident. And it is reflected in many of the executive conversations that I have.
“When I ask specific questions, I often receive a good answer – eventually. But I have to ask. No-one ever comes to me and says ‘You know about this trend in your industry, it really means you need to re-think some of your relationships’.”
The point of these comments is that many executives today want a far more proactive service from their contracts, procurement or legal staff. They want to be alerted and briefed on the commercial and contractual implications of shifts in their industry, or in broader economic conditions. What must I do? What are others doing? What will the impacts be for my business or area of responsibility? And if they do not receive this proactive service, they question the value of support organizations, which often seem more focused on enforcing compliance with the past than on helping to prepare for the future.
Much of the frustration that executives feel with contracts and procurement support is that it does not help them anticipate and manage problems or opportunities. If they are going to perform well, they must be aware of trends and innovations and how those impact existing and future contract terms and relationships.
That means we must gather market intelligence and analyse it, to alert our internal clients to the opportunities and threats of change. Then we become a source of real and indispensable value to the business.
For several years, IACCM has been promoting the idea that a networked world will transform the way that trading relationships are formed and managed. Events are proving that true (see, for example, my blog last week on Risk Management and the effects of the recession).
As with all change, there is an impact on the skills and knowledge that are required and last week, I discussed this with Harry Dunstall, who is Chief Counsel to the CEO of the Australian Department of Defence. Harry took up his current post (in which he oversees contracting and legal affairs for an A$12 billion budget) about 2 years ago – and quickly recognized a need for fundamental overhaul of the way that contracting was undertaken.
As in many organizations, contracts and commercial staff were scattered across the various divisions and operating entities. “They received little attention, their skills were varied and inconsistent. Recruitment and retention were a problem because there was no professional standard and no clear career path.”
This environment created problems for trading relationships. Suppliers complained about the inconsistency they found in the positions taken by different groups, the procedures they followed and the way that rules were interpreted and applied. This caused delay, increased costs and created risk.
Harry knew that the answer was not simply to create standards and impose compliance. “Of course we needed clearer rules and procedures,” he said. “But rules and policies quickly become an impediment if you don’t have people who understand when and how they need to be varied.”
So he quickly consolidated the contracting officers and built a central Contracting Service, which today has about 250 dedicated staff. Like many of today’s commercial leaders, he then undertook an assessment of training availability and gaps – and discovered a highly fragmented picture. One major problem was that trainign was not directed at any consistent set of goals. “In looking at the value from contracts staff, we had to move away from endless arguments over things that may be unimportant or inappropriate to the deal in hand. My goals were to get into contracts quicker, based on reasonable positions, and to drive greater savings through improved outcomes. These benefits depended on improving organizational and individual skills and in ensuring their consistency.”
An early initiative was to undertake a more thorough assessment of the relationship types that were being contracted. With 112,000 contracts last year, it was essential to ensure resources are deployed effectively. Procedures, tools and support models differ depending on the type of agreement to be formed. This segmentation is also enabling ‘broad-based agreement with industry on the methods that will be used – for example on how risk assessments should be undertaken’. This, Harry believes, changes the nature and duration of negotiations and helps ‘reduce recurrent conversations’.
Harry agrees with the position taken by IACCM – that real progress and real value depends on both sides of the table talking the same language and having similar goals and aspirations from a professional perspective. Key to real progress, in Harry’s view, is the development of greater contract and commercial skills in both suppliers and buyers.
“I need to be sure that we are spending our dollars on building the Australian defence capability, not on paying for an inappropriate risk allocation. So our strategy has been to simplify through consistent templates, policy framework and basic training. We monitor compliance while ensuring regular update to the standards. And we are doing this by driving professional status and ensuring the right skill sets are available.”
What is your change and improvement agenda for 2010?
Recently I participated in a planning workshop with one of IACCM’s Corporate Members and, after I had provided an outline of the trends we are observing, the meeting moved into the detail of their priorities. I thought it would be interesting to share much of this and to see whether their agenda strikes a chord – and hopefully you might add some comments to outline your 2010 projects and goals.
Things to do:
- Based on this groups use of the IACCM Maturity Assessment, they had input that there was confusion among their internal customers over their precise role. So they needed to 1) improve communication; 2) focus on tools that empower service users, while collecting oversight data (become a true ‘center of expertise’) and 3) ‘do less, enable more’
Things to stop doing:
- Stop focusing on unit cost at the expense of understanding value
- Stop hiring people without real subject experience
Overall priorities and goals for 2010:
- Improve integration with line management / business units. Improve on perceptions of being ‘too remote’ and ‘not enough consultation on issues such as change management’
- Address internal sense of leadership weaknesses
- Raise quality of contracting disciplines and skills – escape perception of being driven solely by ‘the rules’ and compliance
- Create more flexible service delivery model to address perceptionsof slow response times
- Ensure a smaller number of initiaitves and that those which are announced are seen through
- Improve functional learning – look at areas of excellence and seek to replicate
- Simplify processes and make results visible to all
Of course, this list led to robust debate over the methods and the metrics that would be used to acheive these goals. Those plans are now in place and the clock is ticking. IACCM will be back next year, to measure progress and provide a score sheet to management.
So tell us what improvements are on your agenda and how you will ensure they are delivered.
The Financial Times last week carried the story of a remarkable report by Mactavish, “an entrepreneurial research business acting as a risk analyst and catalyst for change in the insurance industry”.
Under the headline ‘Risks Taken In Recession Threaten Business’, the article proceeds to detail eight categories of risk that have resulted from the pressures of the recession. Most of these risks relate to commercial decisions that were driven by two tactical imperatives – the need to maintain revenue and the need to cut costs. But in many instances, it appears that the tactical responses had little oversight and there was limited review or understanding of their consequences. The resultant extra risks include:
- Moving into unfamiliar product areas and territories (including taking on new and untested contractual commitments or trading / distribution partners)
- Speeding up product launches (creating unknown quality or liability issues, internally and with suppliers)
- Weakening supply chains and increasing vulnerability in order to reduce costs (for example by cutting the number of suppliers and distribution centers, or by relying on lowest cost suppliers regardless of their reliability or capability to sustain claims)
- Increased outsourcing to unknown or high risk locations (pushing down unit cost at the probable expense of quality and reliability)
- Acceptance of extra contract liabilities in sales bids and negotiations (warranties, recall costs, indemnities etc.)
- Reducing supervision in key areas such as health and safety or contract oversight (driven by ‘suicidal’ bidding practices)
Although this report was based upon a study of UK companies, the list will be familiar to many of us across the globe. I had the chance to discuss it with Bruce Hepburn, CEO of Mactavish (who we will shortly interview on an IACCM Ask The Expert program). I made the point to Bruce that management has to weigh up the immediate risks of going out of business versus the longer term risks of building new capabilities. Therefore, the downturn has left many with limited choice about the incremental risks they have taken on.
Bruce accepted this point, but suggested that there was often far too little awareness in the Boardroom about the nature or extent of the risks being adopted and there is a naive assumption that these will be covered by a third party insurer. He highlighted several examples where sales or procurement has followed approaches that put the company at severe risk, yet those commmitments were not even included in the risk register, let alone actively managed. He also made the telling point that many times management is relying on an insurer to protect them when things go wrong, but based on the undeclared risks he is observing, he believes it is highly questionable whether the insurer would pay against the policy.
There are many implications to this story. Among them is the question of the role of commercial staff in the risk process. Based on Mactavish’s findings, groups like Procurement are adding to risks by their unilateral focus on unit cost reduction (if you don’t believe me, listen to the examples that Bruce Hepburn will discuss in the interview). But more broadly, if executive management is unaware of the extent and nature of the risks being adopted, then where were we during this process? In my view, Commercial Management is not only about alerting management to risk; it is also about enabling the business to find ways to accept and manage more risk. But in this case, it seems that we were not only often silent, but that we have not been taking steps to prevent or protect against unpleasant outcomes.
I know this situation is not universal. From IACCM’s work in benchmarking commercial process, we can list a range of companies that are generally handling market and commercial risks extremely well. But the gap between those leaders and ‘the rest’ appears to be growing. It is time for commercial, legal and procurement groups to wake up and realize their broader responsibilities – and opportunities – in generating good and responsible governance. Otherwise, we may find that the insurance industry starts to make those decisions for us. Indeed, in their comments on the study, PwC made the observation:
“Insurers and insurance intermediaries need to fundamentally rethink how risk is assessed, how companies are insured and how to keep pace with an increasingly complex, uncertain and fast-changing risk landscape”. Sounds familiar? Perhaps it is time to look back at your mission statement – because this is precisely the role that any high-value commercial group should be performing.
Can contracting be outsourced? That was the topic I discussed this weekend with Henrik Lando, Professor of Law & Economics at Copenhagen Business School and David Karabinos, co-founder of EquaTerra and a leading expert in outsourcing.
David made the following observation about corporate outsourcing strategy: “Imagine a two-by-two matrix with core and non-core activities on one axis and Do-Well and Don’t-Do-Well on the other. If you do a true and accurate analysis of what your company does, and plot them in the matrix, then you have a better feel for what you should outsource.”
Our discussion was driven by my response that, if you believe outside observors (The Economist, miscellaneous governments etc.), most organizations don’t do contracting very well. So on that count, it should be a candidate for outsourcing. Yet if you believe academics like Leslie Willcocks, Kate Vitasek and Oliver Williamson, then the growing uncertainties of a global economy mean that contracting is fast becoming a critical area of ‘core competence’. So that would imply it should be kept in-house.
In reality, relatively few companies have undertaken extensive outsourcing of their contracting process. And one reason for this is that very few have grasped that it is a process. In most places, it remains a relatively disjointed set of activities – which is of course why it is done so badly. Roles and responsibilities are frequently not well defined; stakeholders work to different agendas and objectives. Risk is not well communicated or managed. And things that are not understood make very poor candidates for outsourcing, because no one has any real idea of the underlying cost and it is almost impossible for the outsourcer to deliver services when there is no clear point of internal ownership.
Henrik Lando recently had the chance to discuss the role of contracting with Nobel prize-winning economist Oliver Williamson. Their conversation confirmed Prof. Williamson’s view that a ‘well-governed contract’ may do more to deliver results than a heirarchical relationship – hence supporting the idea that contracting competence is increasingly ‘core’. So does that mean we should not consider this a candidate for outsourcing?
David, Henrik and I all agreed that some areas of contracting can be outsourced. David cited the extent to which it is already happening with the Legal role, but admitted that other areas have been slow to follow. “Elements of complex contracting can certainly be outsourced (legal, financial monitoring, performance monitoring, contract administration). We tried to sell this as something third-parties could do for our clients at both TPI and EquaTerra. However, only legal is something that our clients (buyers) really accepted as legitimate to give to a third-party.”
In my opinion, the reason for this is largely due to the poor definition of process and the fact that this leaves affected resources hard to identify. “Because virtually no one sees it as a process, there is no definition of activities that allows intelligent division between what should be retained and what could be outsourced. And it is this lack of definition that results in the fact that companies are generally ‘not very good at contracting’.”
Companies incur heavy costs because of this failure to develop robust contracting procedures. For contracts and legal professionals, it means we remain overwhelmed with tactical support and cannot readily drive strategic change because of poor visibility into data and because we lack the time. Selective outsourcing is the right way forward. Leading the changes needed to make it happen is a great way for contracts and legal professionals to be seen in a new and more strategic role by executive management.
Commitment Matters 