This week I attended a meeting sponsored by the European Economic & Social Committee (EESC) in Brussels. The Committee has significant influence over future regulation and law-making within the EU and the topic under discussion was “The 28th Regime – an alternative allowing less lawmaking”.
As we all know, reaching international consensus on any topic is hard. We have a remarkable propensity to believe that ideas which originate from anywhere ‘foreign’ must be bad. Such tendencies are especially strong in areas of law. Therefore, rather than trying to change national laws, the EESC has promoted an approach that creates an alternative. The meeting sought input on the idea of creating commercial terms that would allow contracting parties an alternative to their national regulations.
This idea is not new. The UNCISG is an example of a similar alternative system, but it has struggled to make significant progress in the major trading nations (although this may change as the power of emerging economies grows). And it seems inevitable that globalization will increase the pressure for greater fairness and balance. Today, the nationally-based legal system has become a source of risk and expense in all international trading relationships and research has shown that the non-native litigant is disadvantaged in almost every legal system. This is especially true for consumers or other ‘less powerful’ parties. The law should provide predictability and create trust, thereby encouraging international trade. Increasingly, it does not.
This EU initiative is not the only current push for change in which IACCM is involved. There are also interesting developments in the Americas, with the Organization of American States this month due to debate consumer rights in on-line dispute resolution. One proposal is that consumers involved in cross-border trade could select the regulatory system of greatest benefit to them. Perhaps not surprisingly, the US (doubtless driven by its many international corporations) does not favor such a resolution.
The 28th regime faces many obstacles. And although its stated goal is ‘less lawmaking’, it is hard to see how an alternative system achieves such an objective. Yet the EESC is right to push for debate. If we cannot build formal alternatives, then informal methods will emerge. For example, I recently discovered that Paypal is now the world’s most used dispute resolution mechanism. It is fast and costs the appelant nothing. And it doe snot depend on laws or regulations.
Those of us who are involved in contract management and negotiation become accustomeed to complexity. It is easy to forget that a key part of our role should be to fight for simplification. Contracts should reduce risk and encourage trading relationships. Too often, we resist change or alternatives simply because we do not understand them or lack the time to explore their merits. The law does not belong to lawyers; it is a social asset that must adapt to meet and enable the needs of our times. If it does not, then business and society will find alternative ways to meet their goals – and make communities like ours increasingly irrelevant.
Recently I wrote about ‘The Role Of Lawyers In Contract Management’. The post elicited a number of interesting comments, including one from Gill Felton, which I have re-produced below.
Gill makes a number of important points – but in the end, perhaps the key observation is about the extent to which greater cooperation and understanding between functions and specialists assists us all to achieve better results – and less frustration!
“I speak from the perspective of having worked as contracts manager and later qualified as a lawyer. I mainly work in high tech areas (I also spent 8 year on the coal face as a computing techie.)
The problem with many lawyers is two fold, especially with junior lawyers:
- it’s the training – most lawyers are trained to see a contract from a litigation/risk reduction perspective with little differentiation of the risks for the business, and not as a practical commercial document in the same way that a pragmatic commercial contracting person does (and let’s not forget how few hours most lawyers receive on contracting during their legal training),
- there’s an ‘if I have not done it then I don’t trust it’ attitude, combined with “ if anything goes wrong it’s me who will carry the can and it could affect my professional career, so I won’t risk it being done by anyone not legally trained’ as a follow up. It’s a particular problem for traditional in house departments or private practice lawyers.
If a contracts/commercial person is professionally trained then they should be able to handle most legal issues in the contract too. In one oil company I worked at we, the contracts managers, trained the junior lawyers in contracting and the commercial process allied to the business needs in house. We wrote most of our own contracts with the legal department checking them and inputting a few standard clauses such as insurance and handling international VAT issues.
As a lawyer, once I know that the contract/commercial or procurement people are properly trained and have an appreciation of the legal issues, then I leave them to manage the contracting legal process within boundaries, particularly on the standard/low risk contracts (note: not financial value) and according to the company process. If they don’t know what is needed I train them in the necessary so they know when to shout for help. They can use me as a consultant or involve me in the process according to the contract/project requirements or internal process as required. This is done on the understanding that they keep me in the loop and I get involved in pre-contracting reviews, project reviews, pre-contract sign off and with minimal briefing can seamlessly pick up any issues required in negotiations when requested. Preferably, I also get involved sufficiently with the business to understand their needs in respect of the contract’s aims. A further luxury is involvement with post contract reviews on the bigger/more complex projects and contracts too, so as to improve the contracting process by making use of lessons learned feedback.
On the other hand, I have also seen non-legal staff not call in the lawyer until too late, seeing it as a failure on their part, and then calling me is as the ‘rottweiler’ to sort out the issues when by then it’s difficult if not impossible to do so with a good resolution. I’d much rather be seen as an enabler from day one than as a rottweiler, and participating in the contracting process.
Each professional can learn from the other. In Walter’s case (see comment on original post): if the lawyer didn’t know the procurement process – why didn’t he think to ask? Why didn’t the Procurement department offer an orientation to the lawyer on their department/processes? It works both ways. Appropriate training is necessary for all parties involved in the contracting process.
Unfortunately, for many General Counsel, commercial contracting is way down their priorities and resources. It also has to be said that contract lawyers have a low status perception among the ‘proper lawyers’. Continental lawyers often see in house lawyers as lesser beings anyway (it’s their systems and training again). All parties need to work together in house to achieve a good contracting process. It can and does have a major effect on the business bottom line and operational capability but also requires investment in standards, processes and systems. Whose budget does it come from?
Basically what I’m saying is that a good contracting process requires all departments, not just legal, contract and procurement departments but also finance and the business to use their skills and work together to achieve the aim of a good contract for the business. After all, to use a soccer analogy: you would not expect the goalkeeper to shoot goals would you? But … he may have many useful observations on the performance of the rest of the team which they can learn from (and I’m not saying who is in the goalkeeper role)!
A couple of weeks ago, I commented on an article that appeared in the Financial Times which introduced an interesting conversation piece. It related to the ‘primal motivators’ – power, money or recognition – that drive our activities and decisions.
At the time, I commented that it would be interesting to discover the primary drivers of those within the contracts and commercial community and also how (and whether) these differ between job roles, cultures and age groups.
So what motivates you – and how does that compare with your colleagues, or those in different countries, or with the negotiator across the table? Please take a few seconds to answer this question in our survey at https://www.surveymonkey.com/s/BK5M3NR and we will send you a copy of the results.
Technology is a great enabler. But there are times when we must ensure it does not become a disabler.
The contracts community has been relatively slow in its efforts to understand and adopt contract management software. Even its advocates have been inconsistent in their goals and expectations, resulting in hybrid implementations and confused messages to developers.
One issue at the heart of this confusion is the extent to which the software should focus on compliance, versus the delivery of value. The answer of course should be a balance between the two, but increasingly I am observing how too much emphasis on one (compliance) can actually result in the loss of both.
Contracts are complex instruments and they capture a multitude of commitments and obligations. Armed for the first time with software tools, it can be tempting for management to seek detailed oversight of every aspect of compliance. Yet this is a mistake and risks sabotaging the entire implementation.
While contract management applications should support improved compliance, they must also increase efficiency and reduce operational workload. They must free up the the time of contract managers to add value through better intelligence and proactive risk avoidance. If instead they simply overwhelm the contracts and project staff with action items, they will fail on all counts.
My observations are made because of several recent examples where management did not take time to assess the volume of reminders and ‘ticklers’ being sent out by the system. And more importantly, they failed to grasp the relative priority of these different messages. Some are truly critical to success; others are indicators that should only be accessed on demand, or appear in summary reports.
In one case, contract managers on complex deals were receiving up to 40 system outputs per day – with the result that the system itself lost credibility. Staff were inevitbaly ignoring the outputs and reverting to previous manual methods of management. Far from being a tool, the software had become a burden.
Business intelligence is a great thing – so long as we use our intelligence in its design!
So Walmart is embarking on a fresh round of globalization ‘to cut billions from supply costs’ (Financial Times, January 4th, 2010).
The plan is to consolidate purchasing across national borders and increasingly to deal direct with manufacturers, eliminating third parties. The expectation is that costs will be cut by 5 – 15%.
In many ways, the most surprising element of this news is that it has taken so long in coming. Buying cross-border is certainly not new, nor is direct sourcing (though interestingly the FT observes that direct sourcing is today far more common in Europe than it is in the US).
So why have Walmart managemet waited so long to make this move? The answer is most likely because of the organizational disruption that it involves and the challenge it represents to existing skill sets. Walmart simply lacked the imbedded commercial competence to oversee global supply chains.
An article in the current edition of Industry Week (From Managing The Supply Chain To Orchestrating A Global Operational Network) co-incidentally sums up the challenge – by no means unique to Walmart: “Rather than managing the supply chain, companies need to deftly ‘orchestrate’ its many interconnected resources and participants. The classic concept of the supply chain is fast becoming obsolete … a far better image for the 21st century is a global operational web or network.”
This is a concept that IACCM has been arguing for several years, along with leading academics such as Professor Rob Handfield, head of the supply chain program at NCSU. But success will depend on a number of key attributes. Among these are:
- An holistic approach to market management.
- An ability to understand and manage relationships.
- Integrated supply chain technology.
Traditional Procurement behavior and metrics will not address these issues. Successful management of global supply chains demands the ability to understand and respond fast to shifting market needs and competitive actions (so a strong connection to the market). Developing loyal, responsive and innovative suppliers demands a readiness to understand values beyond the lowest price and to factor relationship cost into the buying decision. And global operations demand sophisticated applications that links supply and demand with excellent performance management.
Developing capabilities such as these requires major investment in systems and skills. Industry Week summarizes seven success factors:
- Involving partners early
- Transparency via technology
- Networking across the network
- Modeling for momentum (business intelligence)
- Relationships really matter
- An adaptive infrastructure
- Global product lifecycle management
There is perhaps an eighth characteristic that will be critical for Walmart – and that is to find suppliers capable of matching its commercial design.
Once more, this story illustrates how developing and managing the right commercial model is key to business success. Our community should be watching Walmart to observe whether it truly has developed the systems and skills that will enable ‘orchestration of a global operational network’ – or in other words, the emergence of true commercial competence that embraces both buy-side and sell-side operations?
As a footnote, if Walmart’s primary objective is to leverage spend purely to drive down prices, it should beware of growing political resistance. For example, the UK’s Office of Fair Trading has recommended the creation of an Ombudsman to oversee abuses by major supermarket retailers – and it appears probable that Government action will be taken to put this in place.
As the name of this blog implies, I believe that commitment matters. The nature of the commitments we make, and how we then go about performing them, are fundamental to trust and reputation. I think it is time for the contracts community – Legal, Procurement, Contract Management – to engage in debate over the ethics of contracting and our role in safeguarding trust and reputation.
Contracts represent an interesting dichotemy in the commitment process. Clearly they contain commitments, but at the same time they limit the extent of obligations or potential recourse. This dual purpose results in some confusion about the role of contracts professionals. Should they be advocates for ethics and fairness, or should they be seeking to minimize the effect of promises offered?
In many organizations, there is a divide between sales and marketing (who make promises) and the contracts staff (who write conditions that limit any resulting obligations). Indeed, this habit of protection can be so ingrained that even the intentions of executive management may be undermined by the terms and conditions that appear in the contract.
While it is right for those in Legal, Procurement and Contract Management to protect their business against unreasonable loss, I believe they must think in bigger terms than individual deals. Surely we should be considering the reputational impacts of our contracting practices and the extent to which these cause others to be reluctant or wary when doing business with us? Regardless of any ethical implications, have we at least understood the potential financial consequences of our trading terms?
Over the last year, the recession gave rise to many examples of declining standards. Companies used power to impose unilateral changes in contract terms. There was a decline in readiness to justify policies or negotiating positions and a growth in the ‘because we can’ attitude. This erodes relationships – and as relationships weaken, there is a knock-on effect in the quality of performance.
It sometimes seems that we are caught in a trap where the criteria for winning business have reduced to unit price and risk allocation. In such an environment, both buyers and sellers are constantly watching out for opportunities to gain advantage or limit losses, rather than worrying about the quality of their performacne or the value they are delivering. And this leads to dissatisfied end users who rightly question the effectiveness of those who prepared and negotiated the contract.
End users are not the only ones who are paying attention. In our networked world, there are growing opportunities for both government and non-governmental organizatiosn to observe what is happening – and to take action. If companies cannot find a better way to self-regulate, then we must expect more pressure from outside – including a tougher regulatory regime.
IACCM has become stadily more involved in these debates. For example, we are active in debates over ‘fairness’ in payment terms (the European Union has already stated it will legislate in this area). We also joined the Business Travel Coalition in its efforts to shift airline policy in the United States regarding hours that passengers could be held ‘on the tarmac’ (the US administration announced new rules will come into effect in April 2010). And this year, we will be participants in a global initiative for consumer contracting principles, seeking to develop more consistent approaches to the way that businesses deal with consumers (the US State Department, the Organization of American States and UNCITRAL are all pushing for changes in this area).
Change will occur. Once more, our community has a choice. We can be by-standers, waiting for others to define the policies and procedures that represent acceptable ethical approaches to the negotiation and management of commitments; or we can be active participants in the debate, within our organizations and beyond.
The global economy demands new standards. I hope that we will contribute to these by working together to propose codes of conduct, both for ourselves as a body of practitioners and as a recommendation for the way that business should operate.
What do you think?
As we start 2010, there are many encouraging signs that contract and commercial management are on the ascendancy. I have always been hesitant about claims that the function / profession / process has ‘made it’ onto the executive agenda. I have observed the regular assertions by the Procurement media – as well as functions like Project Management or the CIO community – that they have now ‘reached the top table’, when quite evidently they have not.
Whether those in contracts or commercial make that top table will depend a lot on future organizational design and decisions. And to be honest, a Board position is not necessarily the accolade we should be seeking. It is far more important that we drive understanding of the role and contribution of contracting and commercial policy to business and organizational success.
My optimism is not simply because at last there is widespread academic acknowledgement that contracts and the selection of terms and conditions matter (though certainly that helps). Nor is it because we are starting to have tangible measures of the value that comes from superior contracting (though that will be key in gaining management attention). My optimism is because I am observing a community that is at last ready for professionalism and the demands that places on us as individuals.
For 10 years, since the inception of IACCM, I have observed many talented individuals, yet few believed in the possibility of becoming a true profession. They were not ready to work together to agree a core and consistent ‘body of knowledge’ or establish the professional standards and practices that are fundamental to status and recognition. Without these commitments, it was not possible to create the hallmarks of a profession – training programs that would support a career path from graduate entry onward; recruitment specialists that would promote excellence; substantive peer review bodies that would define the ethics and standards of practice for our community.
Steadily, the situation has changed. IACCM itself has grown to a membership of almost 15,000 and is adding more than 100 new members a week. It has off-shoots in countries around the world, all subscribing to the central standards of certification and training set forth at the global level. And last month, when I went to a group of experts from the field of contracting and commercial management, more than 80 immediately volunteered their time to work on confirming the worldwide ‘body of knowledge’ for this community, to support publication of a book series later this year.
This week, I will meet with two European business schools to finalize the development of university and business school programs in contracts and commercial. These will build from IACCM training programs and enable practitioners to achieve externally recognized qualifications at diploma, MSc and MBA level. Similar developments will follow in other world regions.
IACCM’s research is also another bedrock of the change that has been happening. No practitioner is a professional unless they can point to robust and on-going research that both validates and improves their work. Now, with so many studies undertaken on a regular basis and many more commissioned by our Corporate Members, we can point to the fact that contracts and commercial management are no longer areas of personal opinion and judgment, but have a solid basis in global research, both by the Association and by a growing academic community.
So the year begins with real confidence that we are indeed ‘getting on the map’ – and the reason, quite simply, is because we now have an enthusiastic and excited group of practitioners who want to get there, who want to achieve, and who are united under the worldwide banner of IACCM.
There are of course days when even an enthusiast like me stops and wonders whether it is all worthwhile. Contracts and Commercial Management have been a feature of my life for almost 30 years and somewhere along that path, I became convinced that these disciplines contribute not only to operational and tactical results, but also to business strategy. As a commercial or contracts professional, we gain insights to the way that policies, procedures and offerings inhibit business performance. This insight represents an opportunity to become an agent of change within the organization. But does anyone really care?
Before answering that question, I will illustrate the opportunity we face with a few examples:
- In my early days in the technology sector, increased competition led to the development of volume discount agreements. These became increasingly complex, resulting in a heavy administrative burden, frequent incorrect billing and a regular source of dispute with customers. As if these problems were not enough, it was also obvious that volume discounts are typical of a commodity supplier – and yet my employer at that time was trying to escape the commodity trap. The contracts group was in a unique position to observe these problems and push for change.
- Later on, I saw many organizations struggling with the impacts of globalization. Large multi-national companies could not coordinate their resources to meet market or competitive needs. Management systems, measurement systems, resource allocations, pricing and revenue policies – all of these prevented the types of contract offering and terms and conditions that were needed to address market trends and requirements. Once more, the contracts group was probably the only place with visibility across the business and an understanding of the priorities for change.
- Distribution and partnering relationships are critical to most businesses. Frequently, individual business units have relative freedom to develop their strategies and determine the channels to market or to establish sub-contractors. Many of these relationships fail to perform. They are often costly to administer and may create internal conflicts, as well as external confusion or dissatisfaction. The involvement of a central contracts group can lead to greater discipline and rationalization. It should also offer ‘best practice’ insights, drawing on market and competitive intelligence on effective offerings and terms.
There are many examples where the contracts and commercial teams can observe opportunities to improve and should be offering market intelligence to business unit owners and to executive management. The real hallmark of contracting excellence is when we offer contracts and terms and conditions that represent competitive advantage, not only by better meeting the needs and aspirations of our trading partners, but also in reducing internal costs of operation. This is true whether we are supporting sales or procurement; and it makes Contract or Commercial Management an exciting and rewarding career.
So why do I occasionally wonder whether this is worthwhile? First, within a business it is often hard to gain attention. It requires tremendous perseverance and usually depends on finding an executive sponsor. So those within the contracts and commercial community who want to be agents of change must not only collect the data and build the business case, they must also be sufficiently determined to gain top management’s attention. And even then, success may take a long time to achieve and is not guaranteed. It always seems easier to carry on working at a transactional level and wait for someone else to change the rules.
But that is not the reason why I sometimes have doubts. The thing that most bothers me is the shortage of leaders within our community – those who have the resilience to grasp these opportunities and the desire to build the function’s status and reputation. Many individual professionals enjoy their job; they gain satisfaction from their transactional successes and support on individual deals. They are aware of the things that are regular issues or inhibitors, but do not feel that it is their job to seek changes. They impose the rules, they may even find creative ways around the rules – but rarely do they challenge those rules and cause a fundamental shift in the business. And all too often, we learn that such groups are being taken over, broken up, pushed aside – because they are seen as offering little business value and someone else has successfully argued that they could do the job better.
In the end, my moments of doubt are few and they generally last for just several minutes. Because as I think back, I am inspired not only by the changes that I – together with my colleagues at IACCM – have been able to achieve in some of the world’s largest companies, but I also hear with increasing frequency about the impacts and the inspiration that IACCM is offering around the world. With each year, the momentum increases and the stories of success grow. We are seeing quantifiable and irrefutable results – contract and commercial excellence really does make a major difference.
As we enter 2010, I know there will be many opportunities for us to assist our community in raising its profile and business contribution. Whether you are a practitioner or a provider of services or solutions to the contracts community, I hope that your resolution for 2010 will be to believe in the possibility of radical improvement and to commit yourself to become an agent of change. And don’t forget, you are not alone on that mission; IACCM is a committed and enthusiatic partner.
Together, I have no doubt that we can make 2010 a year to remember. Happy New Year!
There is often lively debate over the role of in-house lawyers. To what extent should legal services embrace commercial policy, deal structuring, negotiation and post-award contract management?
A lack of clear definition frequently results in discord and adversarial internal relationships between lawyers, contract managers and procurement groups. In some organizations, there are complaints that the lawyers are too remote; in others, they may be seen as intrusive. Often, the absence of an agreed scope results in highly variable service levels that depend on the experience and interests of the individual attorney.
The legal role is not always easy to define and this is perhaps nowhere more apparent than in the area of contracting. To some extent, lawyers make thier own problem. Many are not good at sharing knowledge and information. They perceive the law as a matter of individual judgment and are reluctant to entrust others with making good decisions. They are of course right that generalized advice can be misused; but is the risk greater than that which is created by an absence of documented guidance (or perhaps that their clients use the internet as an alternative source of advice)?
As trading conditions have become more complex, law departments have reacted to the growing workload through a variety of approaches. These include a drive for more standardization and compliance and, in some cases, a push to develop (or absorb existing) contract management resources. Recently, there is also evidence of reluctant adoption of contract management technologies that can assist efficiency – and also a readiness to consider outsourcing to low-cost providers.
All of these trends and the associated debates are captured nicely in Rees Morrison’s excellent blog, Law Department Management. A recent example is where Rees discusses the need for pre-legal vetting teams. In another, he highlights an article by the General Counsel at Carillion that calls for greater discipline in defining the role of the law department.
There is no doubt that legal resources are under strain and there is little prospect of early relief. As at all times of stress, it is easy to react either aggressively or defensively. As we enter 2010, I hope we can see more organizations encouraging constructive debate over how best to develop their contracting and commercial capabilities. Procurement, Contract Management, Commercial, Business Development and Legal groups need to work together to understand the true scope of contracting and from there, to develop a process and role allocation that leads to increased competitiveness and greater success. Lawyers are generally in a powerful position and can easily frustrate attempts at change or improvement. I hope to see more of them taking a lead in driving positive re-thinking of their role – and in particular, the best way to support successful commercial policies and trading relationships.
Writing in the Financial Times, Luke Johnson reported on a parlor game that is apparently favored by a leading entreprenuer. He asks his guests to choose their personal ranking of three primal motivations: money, power and recognition.
In itself, I can see that this would create interesting thought and discussion. But as I pondered my answers, I realized that it might be even more interesting to test this across professional communities. These motivations tell us a lot about issues of leadership, sharing, collaboration. To what extent do these characteristics relate to the relative power of different business functions? How much do motivations vary between groups like Procurement, Contract Management or Legal? Do motivations shift over time – might our drivers alter depending on our phase of life?
So for now I leave you to think about your personal motivators and perhaps to share this with your family and guests during the holiday season. In the new year, I will have it issued as a survey to the IACCM membership and perhaps we can discover something about ourselves as a community.
Best wishes to all readers of Commitment Matters. Thanks for all your comments and support throughout the year. Blogging will take a rest for a few days; I will be back next week.
Commitment Matters 