The most read blogs on Commitment Matters in 2009 reveal the uncertainty that surrounds contract management. As organizations increasingly recognise the importance of this discipline, they are researching how best to define and implement the role.
At its best, contract management is delivering significant added value, both in structuring trading relationships and in ensuring they deliver positive outcomes. However, there are few accepted models for how to achieve ‘best practice’, in large part because this field has lacked strong executive support. As a result, the scope of contract management is not well defined and there is rarely an agreed point of ownership.
Contract management practitioners have been at the forefront of those wanting to read more about the way that the function and its role is changing. But senior management has also been researching, to discover how others are approaching this topic. While many organizations are investing in the development of a more skilled and increasingly strategic function (buy-side and sell-side), this approach is not universal. In some cases, centralized groups are viewed as an obstacle to closing business and are being dismantled.
Commitment Matters seeks to offer guidance to practitioners and senior management and the volume of readers suggests some success. This year’s most popular article – on The Role Of A Contract Manager – attracted more than 6,000 readers. Other areas that attract attention include the on-going debat eover the distinction between contract managers and lawyers; and perhaps related to this, there is interest in the way that contract management can deliver greater value – for example through encouraging more collaborative relationships or taking a more balanced view of risk.
So in case you missed any f the most popular articles, here are the Top Ten for 2009.
In recent weeks, I have been hearing frequent mentions of ‘hard’ versus ‘soft’ aspects of contracting. The difference seems to be between those terms that are characterisitic of legal and financial risk allocation, compared with those that have more to do with aspects of contract governance and management.
Historically, many lawyers have taken the view that they focus on the ‘hard’ stuff and that the business concentrates on the soft elements. But this has started to change as all those involved with contracting start to grasp the increased importance that the contract has in the broader aspects of relationship success.
A new thought was introduced to me today by complex project expert Dr Andrew Humphries, who asked what consideration has been given to the ‘symbolic value’ of a contract. His point was made in respect of some work he is doing on a long-term trading relationship in which the parties feel better outcomes could be achieved. He has identified issues of insecurity that are constraining the commitment of one party. Like so many relationships, a core issue is around trust – and in this case, he feels that the absence of a contract is part of the problem.
Contracts can and should offer a basic security, part of which is explaining the conditions under which they may be amended or terminated and the results of such termination. The need for these open and honest discussions has increased post-recession. The last year has undermined many relationships, as the more powerful party has often imposed unilateral changes in the terms.
2010 will see a growing interest in some of the ‘soft’ elements of contracting, as we seek to restore trust in trading relationships that have been battered by recent events. It is an interesting challenge for contract experts everywhere to rethink some of the fundamental terms and the way we approach defining long term relationships.
Supplier performance management has become an increasingly important topic in many organizations and has received a boost from the recession. It was a source of real advantage to companies that could both oversee performance and manage supply relationships more flexibly.
At IACCM’s final executive roundtable meeting in London, participants discussed the characteristics of successful supplier performance management (SPM) programs – and questioned whether it is a role that Procurement groups are equipped to perfrom.
Today, the SPM role is sometimes within the business and sometimes in Procurement / Sourcing. In a few cases, it is emerging as a separate group. Many businesses have struggled to develop the right level of collaboration to ensure a robust and consistent program. Also, for most, it tends to be a highly selective focus on a few ‘key suppliers’, even though elements of performance management should apply across all relationships.
One participant asked the question: “Who is accountable for overseeing innovation, for doing supplier development?” In his view, Procurement groups rarely have the skills or motivation to undertake these tasks. “The commercial aspects of contract and relationship management may be better bundled elsewhere.”
A key problem for Procurement comes from its image and its measurements. The participants – who were mostly from a procurement background – feel that the organization remains tarnished by a view that it is about ‘opportunistic’ cost reductions, rather than about the delivery of value over time. “Can you have strong supplier development AND strong negotiation?” asked one.
There was a consensus that there is a growing divide between relationships that focus on cost and those that focus on value – and that it is hard for a single group to manage both. This divide is currently taking many forms. Sometimes it is through segmentation of procurement groups – for example, direct, indirect, IT, outsourcing as separate specialist organizations. In other companies, we see Procurement with very limited influence on post-award activities, such as relationship or contract management. “Procurement is becoming two tribes,” observed one senior director. “In the complex relationships, they may know far less about supply markets and much more about commercial models, the principles of partnering and financial modelling.”
Compliance has always been an important principle within business. Any social organism needs rules that govern aspects of its behaviour and of those who are part of it. Some of those rules are internal and relate to things like authorities to make decisions or procedures to be followed. Others are external and are imposed through regulations, laws and broader social standards or voluntary codes.
Over the years, the range of rules has increased. Within business, managers have bought in to the idea that internal compliance raises efficiency and in many cases adds to organizational effectiveness. External stakeholders have increasingly felt a need to define rules and principles which are designed to ensure ‘socially desirable’ behaviours and ‘beneficial’ outcomes.
Rules-based systems require monitoring and new rules generally become accepted and effective only if there is a rigorous system of control. However, over time there is a danger that rules will generate a bureaucracy with no real purpose except to oversee compliance. Not only does this result in additional cost (potentially to a point at which it erodes the benefits of efficiency and effectiveness), but organizations run the risk of losing flexibility and the ability to innovate.
This balance between compliance and innovation is a major concern for senior managers – and it must also be a concern for a community like ours. To many, we are the bureaucrats, the people who police the rules. They do not automatically see or accept the need for centralized procurement of everything, or of standardized froms of contract. In their view, any benefits that might once have flowed from the creation of such ‘expert’ groups have been outweighed by the extent to which we delay decisions, we stand in the way of opportunities, we prevent spontaneous or entrepreneurial initiatives.
Our community tends to suffer more than most from swings in our power and influence, including whether we are centralized or decentralized. This is because we have failed to achieve balance between compliance and creativity. And one result of this is that we are rarely able to describe the economic impacts of our work, beyond perhaps putting a theoretical value to some aspects of cost reduction or cost avoidance.
Examples of such compliance-based activity include the elimination of ‘maverick spend’ or the collection of service level credits. On the sell-side, they may include the percentage of agreements reviewed and approved, or the extent to which standard terms and conditions are utilized. The problem with so much of this is the fact that we cannot actually be sure that the results of our work generate value.
Rules are inevitable in any complex organization. It is right that we then monitor adherence to those rules. But the real value of compliance is the recognition that it represents a base from which deviation can be measured and managed. And it is through those deviations that we may discover new rules, new standards that generate additional benefits and may become a source of competitive advantage.
High value contracts, legal and procurement groups are not focused on compliance as the core of their work. Indeed, they seek to automate such activity, because their focus is on innovation and change. They are spending time observing shifts in the market, influencing internal and external stakeholders, monitoring competition and researching new ideas. Their internal clients do not see them as an unwelcome police force, but rather as a source of solutions that will help the organization to win.
I must admit that I do not understand why those in the financial services industry need such large bonuses. I am not alone in struggling to grasp what they do that offers such tremendous social benefit (indeed, a report in today’s Financial Times claims that “Top Bankers Destory Value” for society). No one has explained what unique talents or education these financial experts bring to their work. I am unclear what loss there would be if they were no longer bonused in this way and felt ‘obliged’ to move to alternative careers. Indeed, if they are so talented, then perhaps those alternatives would be of greater social benefit. And if they are not so talented, perhaps they would simply remain in their current jobs anyway.
I am steadily becoming more convinced that bonus schemes cause undesirable distortions in many areas of our economy – including the world of contracts. It will come as little suprise that, in IACCM’s survey on ethics earlier this year, one of the main concerns expressed by members was the extent to which sales staff are incented to exaggerate commitments. Many contracts and purchasing professionals wrestle with the mismatch between sales’ promises and contractual limitations. This is often the cause of mistrust and of the battle over risk allocation that distorts many negotiations.
As a specific example, last week I was talking with a senior governemt official about the public procurement requirement to avoid direct discussion with individual suppliers. We discussed the fact that open forums prevent suppliers sharing new ideas and describing possibilities for differentiated solutions – a factor that some of my senior contacts suggest is significant in the frequency of project failures. The official agreed, but explained that the policy cannot be breached due to the propensity of suppliers to take legal action when they lose. And he suggests a major factor is the distortion caused by short-term bonus schemes – the severity of personal loss that results from failure to win a major bid.
In a simpler world of product sales, where force majeure was an accepted principle, bonuses perhaps made sense. But today, in a complex global environment, they cause distortions that generate unacceptable risk. For all of us in the world of contracts, perhaps the time has come when we should consider becoming advocates for a new approach to reward systems – an approach that would be more consistent with the ethical standards of contracting and the delivery of value.
A good start would be for us to start sharing information about some of the distortions we observe that result from the behaviors induced by bonus and other incentive schemes. Any initiative for change must start by illustrating the damage that is done by the current approach. Do you have examples?
Social networking sites and their application in the world of business have been receiving a mixed press recently. In theory, our ability to build new contacts with such ease should be a powerful tool to support information flows, knowledge development and personal advancement. But to what extent has that happened – and do the drawbacks outweigh any advantages?
It seems to me that one of the major problems with most on-line networks (except those within the workplace) is that they grow in a relatively unregulated fashion. We have little idea of the credentials or motivations of many who join. This limits the willingness to share information and the value of seeking ideas or opinions. Who knows whether those who answer are qualified?
Another issue is the way that networks proliferate. Anyone can start one – and soon groups splinter or are replicated with something similar, but slightly different. This is sad, because it undermines the power and influence that such groups could have. But so many people are determined to focus on what is different, rather than on what is the same. This rapidly adds to the complexity of belonging – because most of us can find multiple groups with which we have potential affinity, but the time required to participate becomes overwhelming.
My personal experience leads me to believe that most of the senior people who were once part of such networks have been leaving them, in part because of all the unsolicited requests they receive. And this is the challenge for many groups; they are taken over by people with something to sell (these are in any case the most ardent networkers and always have been). Hence the message issued by one LinkedIn administrator recently: “Dear Valued Members of Sales/Marketing VP’s & Directors – Software & Technology group,
I want to thank you for your active participation in this group on LinkedIn. I hope you have received an added value from your participation. The active exchange of best practices and ideas among like-minded peers can be extremely valuable. In the last few months, unfortunately, many posts have surfaced that are little more than ‘spam’ and I have received a lot of feedback that this is diluting the value of this forum.”
So this group has now introduced guidelines for participants and appointed an administrator to oversee postings. And before long, no doubt, they will recognize that creating value requires oversight and qualified resources – so they will perhaps start charging for membership!
I guess the real point is that sustained value does not come free. When we created IACCM as one of the first on-line networking professional groups, we knew that it would require active management by qualified personnel and practitioners. Because in truth, most working adults are not desperate to receive more e-mail; they do not have time to check their LinkedIn or Plaxo or Xing etc. sites on a regular basis. Few of them will actively join discussions or post their latest best practices. They need an active overseer / editor to ensure that quality standards are maintained, content is reliable, and they are contacted only when material is relevant to them. Within the IACCM site, this has meant we need to create sub-groups, but ultimately we maintain a consolidated global community which has far more value and potential influence as a result.
So if I want a new job, I might follow the postings on the social / business network sites. But otherwise, I generally find them a relatively low value intrusion.
“A business is a network that allows us to make offers”, according to Fernando Flores, entrepreneur, politician and innovator.
Mr Flores has led a fascinating life, including at the age of 27 a brief period as Finance Minister in the government of Savador Allende. Following several years of imprisonment by the Chilean military junta, he was able to start a new life in the United States, where he quickly started to apply his fascination with computers to innovative business process and management systems. Today he is once more a politician and Senator in his homeland of Chile.
Out of these interests and experiences, he developed ideas that are highly relevant to all those involved in contracting and business relationships. This quote, taken from a recent edition of Strategy+Business, illustrates my point:
“Spend any time with Fernando Flores and he will assess you. He may make an offer, which you are free to accept or decline. If you accept, he will make a commitment to fulfill his promise. These simple words, or “speech acts,” form the vocabulary of a set of practices that he has deployed across three continents. Their purpose is to help organizations realize improvements in productivity, coordination, and culture — by codifying and making effective the directives and agreements at the core of business conversation.”
One of the terms that Mr. Flores uses to describe his philosophy is ‘commitment-based management’. At its core is the principle that words are cheap; generalizations are easy; value is introduced when commitments are specific and measurable. “Most communication between individuals consists not of pure information, but of prompts for action”, he observes. But of course we have a choice as to how we respond to that prompt – for example, do we say we will ‘make best efforts’ or do we promise that functionality will be delivered? Do we say that delivery will be ‘as soon as possible’ or that we will have the project complete by Friday?
Underlying this work is the point that organizations exist to produce value, but that value is undermined if the organization cannot make and honor commitments. It is through commitments that we bgenerate trust and loyalty.
Turning to the world of contracts and negotiatiosn, we can immediately see how they influence these critical characteristics.
- Through the initial phases of the contracting process (the selling / supplier selection phase), we should be generating the discussions that are required to establish needs, their alignment (or misalignment) with capabilities, and the sort of commitments required (by both organizations) to support success. A key danger here is that the parties exaggerate their capabilities and create expectations that cannot be met.
- During the contract formation and negotiation process, we should be documenting the results of this first phase and turning generalized offers into specific commitments. Where things often start to go wrong are that either the commitments are left vague, or that the negotiators actually seek to limit the implied commitments that were offered. This may be because the promises made in the bidding process simply were not true, or because the standard practices, policies and risk appetite of contractrs staff are not aligned with those of their colleagues in Sales or the business unit.
- Assuming that a contract is established, the critical test is whether commitments are then met. In the post-award phase, we have not only the challenge of meeting what was offered, but also of managing changes to business conditions, capabilities or requirements. IN the real world, nothing remains static, so organizations must have the ability to reassess and re-open their commitments. The critical issue – fi we are to retain trust and cooperation – is to do this overtly and to avoid surprises.
Emphasizing this point about managing change, Flores believes that individuals and organizations are never fully trapped in any situation, even one as drastic as imprisonment — if they remain willing to change the way they think and talk about it. “We human beings are linguistic, social, emotional animals that co-invent a world through language,” he says. “That means that reality is not formed by objects. That opens a different world of possibilities.”
Flores argues that the obligations people create for themselves are stronger and more psychologically binding than the directions they are given by someone else. Hence we can assume that contracts, by capturing and recording ‘speech acts’ and embodying commitments, fulfil a critical purpose in binding organizations together. For those who question whether contracts have value, Flores’ work has led to an interesting statisitc. When companies assess the percentage of the time that promises are met: “In the best companies in the world, they say about 60 percent will be fulfilled. In normal companies, it’s around 30 percent”. So just imagine if we improved the process of ‘commitment management’ to a point where, as a matter of course, all those involved with delivery felt bound by their promise. And in that world, a contract would become the charter of commitments, rather than a charter of aspirations, surrounded by caveats and exclusion clauses.
Contract management software is struggling to make its mark. In spite of continued promotion by the analysts, it simply has not achieved the traction that was expected.
The disappointing uptake is not simply down to a reluctance to buy. It is also due to a failure to achieve widespread internal adoption within many organizations that have bought. So is this due to fundamental misjudgment of the potential value and need for such applications? Is it because the software itself has failed to deliver? Or might it be because of the spoiling tactics of the big ERP players and the inability of the small CM suppliers to overcome them?
While the answer to at least two of these questions might be a guarded ‘yes’, I do not believe these are the fundamental reasons. I am convinced that the failure of contract management software is in the greatest part due to the lukewarm support of the user community. It is because far too often, there is no powerful executive sponsor and there is a distressing lack of vision and understanding among senior management of why contract automation is so important.
Most business processes today are well defined and have a clear point of ownership. Not so contracting. Even though contracts are themselves understood to be important instruments of business management, the activities that lead to their creation and management are generally fragmented. Finance, Legal, HR, Product Management, Marketing, Procurement, business unit management, Sales – all of them have an interest, yet none feels responsible. Often it seems there is more fear of someone else gaining control than there is of the business exposures that are resulting from this lack of control.
As a result, contract management continues to be a football, today owned by one function, tomorrow another; today centralized, tomorrow decentralized; at one moment an instrument for compliance, at the next a source of empowerment. And what about the lawyers or contract managers who you might expect to be desperately making the case for improvement? Sadly they are often the worst culprits, claiming every deal is different and that ‘judgment’, not process, is the critical characteristic of good contracting. In addition, today’s vague and imprecise allocation of responsibilities means that when things go wrong, it is no one’s fault; when things go right, everyone can claim credit; and overall inefficiency ensures continued workload and protected jobs.
No wonder the contract management software suppliers are confused. No wonder that their attempts to implement are often frustrated. No wonder that users then claim that the software fails to meet their needs – because their needs are so varied, frequently contradictory and change so often.
What is the result? Without contract management software, companies are harder to do business with. They commit themselves to added risk because of limited knowledge and visibility of their commitments and obligations. They struggle to react to market trends and improvement because they have no data. The real issue with contract management software – the guilty secret about which no one talks – is the sad failure by top management to understand the importance of contracting in 21st century business; and the complicity by middle management to hold on to what they have, rather than push for a key area of business improvement.
Contracting excellence can deliver substantial bottom-line improvements. Everyone – consultants, analysts, professional associations – is agreed on that. The only people who fight it are the very ones who should be its champions.
In a recent post, I posed a question asked by an IACCM member, regarding why it takes so long to conclude many contract negotiations. One answer came from Colin Jacobs, and I have reproduced it below because I think that Colin offers not only an answer to the original question, but also relates it to another very lively dialogue related to ‘the purpose of a contract’.
I agree with Colin’s observation that many contracts take a long time to conclude because there is so little agreement or understanding about what ‘the contract’ really is. We still have a school of opinion that the contract goes into the drawer. This school tends to see attachments, statements of work, service level agreements, schedules etc. as somehow independent of what they deem ‘the contract’. For this group, the business terms and the legal terms are separate.
As Colin comments, few organizations approach contracting in any holistic way. There is a tendency to have relatively independent teams, with little contract knowledge or experience, preparing a series of documents that may or may not fit together. Eventually someone has to try to make sense of these and hopefully may have time to do so before signature.
“As an IT negotiation professional, I’ve found that executives of mid-sized organisations are generally receptive to advice about the time it really takes to construct and negotiate a commercially and legally robust outsourcing contract. Too often in larger organisations, time to agree the contract is perceived as being of the essence and getting the stakeholders focussed in a contract-related task that many do not enjoy (or feel confident in their abilities to perform) are both very real issues.
In complex outsourcing transactions, there may be misguided executive belief that lawyers are miracle workers and that putting more of them on the case is the solution to aggressive time limits. In outsourcing and other complex transactions, the legalese is a ‘common framework’ that can be applied to any number of different transactions. Schedules appended to the legalese define in great detail the particular transaction that is being contracted for; because they are unique to each transaction, and that’s the biggest single reason why such contracts take more than a little time to develop and negotiate. They are authored within the business rather than by lawyers and may well comprise >90% of the final contract documentation.
Most schedule authors, I suggest, lack adequate understanding of the legal framework to which their schedule is subject, often working in isolation from others who are concurrently drafting related schedules. So, in order to produce contractually robust schedules, the original author’s drafting usually needs substantial rework by specialists within the procurement team. Much can be done to educate the schedule drafters before they commence their task; there will still be rework but, likely, not as much.
In IT, outsourcers often bid low initially in the belief that they will later be able to improve margins by exploiting the contract’s or customer’s deficiencies. The obvious point to make is that once the contract is signed, it’s set in stone unless both parties agree its variation. So, if contract development or negotiation is rushed, it’s guaranteed that many unpleasant and costly issues will arise after the paperwork has been signed.
Robust contracts simply take time and commitment to develop and agree; there are no short-cuts, but starting early with an informed team, good planning and effective project management sure helps! Perhaps the answer to Andrew’s question vests in the sales adage “Tell them what you’re going to tell them; tell them; tell them what you’ve just told them” as a reminder to those executives that ultimately, it is they who will shoulder the burden of a rushed contract.”
Almost all of the observations we have made and received confirm a core problem – that in most organizations, no one has ownership of contracting. As a result, there is no consensus within the organization over the role or importance of the contract and the right (or appropriately trained) resources are not involved at the right time. This means that there is insufficient oversight of the two key characteristics that make for quality contracts: 1) that they have integrity (complete, consistent, understandable); and 2) that they support business goals and are likely to lead to a successful outcome.
We all communicate … but to what extent are we understood?
Today’s professionals increasingly operate with a variety of media and across a wide range of cultures. We deal with people from different professional backgrounds, from diffferent industries and from different countries. We regularly participate in calls and meetings where a proportion of the participants have a different native langauge. So we write and speak … but do we give sufficient thought to using terms and language that will be readily understood?
Of course, in some instances, people use ‘jargon’ quite deliberately. Traditional professions have all developed terms and language that aid efficiency in internal communication, but excludes outsiders. Alan Greenspan apparently confessed to the use of obscure terms whenever he testified to Congress.
The question that is raised in an article in Strategy+Business is whether we are good at separating ‘bad’ jargon from good. Some jargon can assist efficient and lively conversation, but we must ensure that we have considered our audience before we start to use it.
What are some of the things to watch out for?
- Industry-specific terms and expressions
- Terms and expressions specific to a particular profession
- Cultural expressions
- Generational terminology, slang etc.
Increasingly, we see the development of ‘new’ languages, such as abbreviations used within instant messaging, which again exclude those who are not users of such tools.
If we do not communicate effectively, not only do we run the risk of misunderstanding, but research shows that team members, participants and audiences become alienated and potentially negative to the speaker’s goals.
So communication matters – and ensuring you communicate in a way that suppports understanding is even more important.
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