Last week it was reported that Apple were refusing to service PCs that had been returned for warranty repair by smokers. Citing Californian regulation, Applye considered such equipment contaminated and representing a health hazard to the repair teams.
Hot on the heels of that development comes a report from Louisiana where a group of restaurants are challenging the warranty exclusions of a vendor and its reseller because of losses they suffered due to software flaws. The restaurants are claiming that the solution providers were negligent in providing a system that was vulnerable to hackers, causing the restaurants to suffer significant loss.
Writing in Channel Insider, Larry Welch states: “In 2008, the restaurants discovered the Romanian hackers had exploited a software vulnerability in the remote access application and were siphoning off credit card information. According to IDG News Service, the breach cost on restaurant more than $50,000 in remediating customer credit records, audits and security upgrades.”
The lawsuit asserts that the provider of the systems was aware of the flaw and should have taken steps to work around it or to have advised its reseller to take such steps. Its failure to do so resulted in the restaurant systems not meeting compliance standards for data security and credit card handling.
This challenge on the basis of what is ‘reasonable’ has been upheld in other jurisdictions, but not for such generic products. With growing pressure from Federal authorities for increased quality standards in software development, this lawsuit may provide an early warning of far more to come. And arguably the problems could multiply when software is delivered over the Cloud. Will providers be held responsible for ensuring that users are alerted to exposures that might make such applications unsuitable for certain purposes?
This seems to be a lawsuit worth watching. As does the success of Apple in redefining warranty obligations.
Yesterday I wrote about one topic discussed at a recent IACCM executive forum – the use of virtual communication techniques. Subsequently the meeting turned to some of today’s big challenges in structuring deals and forming productive trading relationships.
“Always insisting on competitive bidding and driving for the cheapest means that from day one suppliers have to watch costs. That means we lose the ability to give stuff away and build collaboration,” commented one participant. The group agreed that collaboration is the only way that new sources of value will be uncovered and that the focus of so many deals on lowest cost and risk avoidance condemns many contracts to disappointment or failure.
By way of contrast, the discussion moved to the UK’s Heathrow Terminal 5 project, hailed by many as a great success. Mark David decribed key aspects of that project and the role that ‘contracting culture ‘ played in its results. The contracting authority – BAA – decided to retain risk and not to appoint a prime contractor. It also formed an approach that guaranteed margins, encouraged and rewarded innovation, offered team bonuses and established a pool of money to protect contractors from errors and oversights. This created an environment of cross-organizational teaming and cooperation, because no one had the need to engage in protective behavior.
So why aren’t similar approaches more common? “Because organizations are driven by a Finance / Procurement partnership that is obsessed by short-term savings and a belief that competition is the only way to achieve them”, commented one seasoned Commercial Director. In his view, relationships and value are sacrificed for these short-term goals. He suggested that many executives recognize the problem – but take the view “You are right, but we have to make this quarter’s numbers”.
The contract tools, models and measurement systems in use at most companies have not adjusted to a service-based world. They simply cannot assess the cost of short-term wins over longer term value. Another aspect of this problem is the ability to build ‘commercial agility’ – that is, being able to adapt to fast-changing business conditions. “For us, the Commercial role is to enable agility within the internal ‘regulatory’ framework,” said a commercial director at a major defense and aerospace company. Participants confirmed that they – and their contracts – must increasingly be capable of applying discipline to what may happen in the future. Change is more frequent, driving many to seek shorter term contracts or increased termination rights.
In the end, the issue of short-termism was felt by all participants to be the biggest challenge of delivering more value and innovation in trading relationships. And although they felt that Procurement practices play a major role in this, they also blamed the overall compensation and reward systems that continue to prevail in most companies. Sales behavior is also driven by short-term gain, and the role of contracts / commercial groups must be to offer an objective view unclouded by commissions or theoretical savings – and to identify bad business, but also to advise management on what would make it good.
Most attempts to compare the effectiveness of virtual meetings with physical meetings are too simplistic. That was the conclusion from IACCM’s executive roundtable in London last week. Participants shared hints and tips on approaches they have observed that contribute to the success of virtual meetings – and may even offer advantages over the physical variety.
‘We tend to see virtual meetings – phone calls, video-conferencing, webcasts – as inferior to physical meetings”, observed one participant. “Perhaps that is because the driver has been largely negative – a push for cost savings, rather than promotion as a positive and perhaps superior alternative to physical meetings.”
Beyond reduced travel expense, how can virtual be superior? One reason is that they can be more inclusive. It is possible to involve a wider range of people, potentially for just part of the meeting. But another more important reason is the versatility they can offer in both the medium and the combination of methods used. ‘Virtual’ includes instant messaging, e-mail, conference calls, webinars, video calls and video conferencing, such as Telepresence. But it is not a matter of choosing just one approach – a well planned meting may use several.
“When we use any of these mediums for negotiation, we also ensure our team is linked to instant messaging,” commented one participant. “That way we are communicating behind the scenes, sending instructions, planning next moves. Those are things you can never do in a face to face negotiation.”
So if virtual methods sometimes offfer advantages, what are some of the hints and tips to make them successful? One interesting comment came from an executive who observed the need to put all participants on an equal footing. He had observed that many virtual meetings have a physical component – a tendency for those based in one location to gather in a conference room or office, with remote participants then joining by phone. “That puts the remote people at a tremendous disadvantage. The meeting inevitably gravitates to those who are together and the rest feel excluded.” He now requires all participants to use exactly the same medium.
In the world of negotiations, a recent IACCM study revealed that the most admired companies are those which excel at planning. And it has become evident that they also plan the methods they will use for communications and meetings and the points at which they will use them. So deciding the right mix and timing of physical and virtual meetings and communication is very much part of the planning agenda.
The roundtable group also discussed recent research findings from Harvard Business School regarding language issues. The research highlighted the alienation that typically occurs in multi-cultural teams, forced to operate in the company language (typically English). Many members of the team feel unempowered and this can be especially extreme in a virtual conversation. Successful leaders recognize this risk and ensure that all participants have opportunities to contribute. They also open a variety of methods – for example, spoken or written – to accommodate different preferences. “In any meeting, I know what I said, but I don’t know what others heard,” said one participant. “By using several forms of media, I may be able to reduce the chances of misunderstanding – and virtual methods certainly increase the options available to me.”
Another Commercial Director – who heads the UK team within a European multi-national – highlighted the fact that language diasadvantages can work in several directions. Although English is the official working language in his company, the native speakers often find themselves at a disadvantage, because non-natives actually understand each other far better than they understand their US or UK counterparts. “If we want to be effective, we must remember to use terms and speak at a speed where they grasp what we are saying. I often observe team members just trying to get their message across by speaking faster and at higher volume – it doesn’t work.”
These thoughts led the meeting to a discussion about the role of the contract as a means of communication – but I will cover that conversation in my next blog. Meanwhile, please share your thoughts and ideas on how to ensure effective use of virtual communication tools.
– inclusive
As in many other countries, until recently the management of contracts in India was seen as a largely administrative task. Large businesses might have a dedicated contract administration department; in others, it was perhaps a duty performed by Sales or Project Management. And for contract drafting or negotiation support, the role would generally fall to lawyers (who interestingly often report to the head of Finance).
Like so many things in modern India, this picture is changing fast and it is reflected in the creation of the new ‘Indian Association of Project Contract Administration and Management”. This title reflects today’s reality – and perhaps indicates that the professionalization of contracting may follow a slightly different path in India. However, its connection with the International Association for Contract & Commercial Management (IACCM) will enable the group to draw from global research, best practice and professional networking.
Many Indian members are already active within IACCM and have been contributing to working groups, the development of training materials and the Association’s overall governance at both Advisory Council and Board level. In addition, several hundred of the ‘new breed’ contract managers have embarked on IACCM Professional Accreditation and training.
So what has caused this rapid change? Mostly it is of course the tremendous success that India is having in penetrating global markets, both through its dynamic domestic companies and also due to its well-educated and highly motivated workforce. This emergence onto the world stage has been accompanied by the need to develop world-class standards – including the ability to negotiate and manage trading relationships and commitments through robust contracts. International operations demand more disciplined procedures for defining and managing business risk and trading relationships – and ‘contract management’ provides a critical component. This shift was discussed recently in an excellent paper by Mr. N. Balachandar of Technip India Limited.
Another reason why contracting competence has become so urgent for India is the fact that so much of their development is in the area of long-term services. The strength in outsourcing, contract manufacturing, application development and professional services must be mirrored in the ability to craft and then manage reliable commitments and obligations with their trading partners. Recently, this need for internal contract management expertise has also become the backbone of a new outsourced service offering, with several providers of both Legal Process and Contract Management Process outsourcing now competing for business. This is in addition to a number of ‘captive’ centers of such expertise.
So far-sighted Indian management has already moved on from the reactive role of contract administrators and is advancing the professional status and competence of a new breed of contract managers, who engage in all aspects of the contracting formulation and post-award management. Like business leaders elsewhere, they understand this competence is critical not only to ensure success in their trading relationships, but also in the delivery of sound bottom-line performance.
Contract Management is an exciting place to build a career right now – and the creation of a local network that can spread knowledge within India is a very positive development. Its connection with the worldwide IACCM community ensures that the group has access to world-class training and accreditation and will be exposed to global ‘best practices’. Given the ingenuity and enthusiasm of the Indian people, I have no doubt that they will rapidly be among the leaders in the development of the best practices of the future.
Wal-Mart is determined to offer low prices and instant availability. And so, it seems, is Amazon. Hence the two are increasingly locked in a batttle.
An article in the New York Times describes the nature of the price war that has emerged, with Wal-Mart’s enormous buying power pitched against Amazon’s low-cost distribution model. The story is interesting because it illustrates the growing influence of technology on market competition and the extent to which these new models also rely upon commercial capabilities and influences.
Amazon – with a mere $20bn in on-line sales – cannot compete with the tremendous buying power of Wal-Mart. But it can perfect an alternative and lower cost distribution model. As the article describes, in the US market, Amazon is able to take advantage of the fact that on-line purchases are frequently not subject to sales taxes (representing a typical saving for the buyer of 6 – 8%). For larger items, the Amazon offering obviously includes delivery. And in the larger metropolitan areas, Amazon has now designed a sophisticated distribution network that often allows same-day delivery. They have invested heavily in their supply chain management capabilities.
For all its size in terms of spend, Wal-Mart coveres thousands of product areas, many of which Amazon may not choose to replicate. At present, its great strength is that most people still buy in stores, rather than on-line. But whether Amazon can continue making inroads to shopping habits is the big question. And moving forward, there are many businesses that need to be wary of the impacts that new technologies are starting to have – and ways that these might enable competitors to erode significant areas of their business.
Earlier this week I was invited by TPI to participate in a small discussion group for a feature in CIO magazine. The conversation was based around recent research conducted by TPI that looked at today’s major challenges for IT service management and governance.
I am not about to reveal the details of the research or of the very interesting discussion that took place. What I am going to comment on are the remarks made by CIO Magazine editor Martin Veitch.
Martin started the meeting by outlining the ‘top of mind’ issues that he is hearing from his extensive CIO contact base. He briefly discussed the old ‘image issue’, of CIOs as techies who fail to appreciate business goals and the need for technology alignment. This he dismissed as no longer valid. CIOs are well aware of the need for business alignment – and they are increasingly focused on some of the issues that make this hard to achieve.
Among those issues are the dramatic changes going on in technology. For example, the impacts of Cloud Computing are only now being grasped and it will raise a wide variety of strategic and governance challenges, as well as opportunities. Among the implications is the need to review existing and future contracts. Emerging technologies will revolutionize the relationships with some existing suppliers; in other cases, it will mean forming relationships with brand new suppliers. Terminating, renegotoating and new sourcing will be a major effort and fundamental in its impact – especially with regard to getting good alignment with business needs.
So the role of Procurement will be critical to the CIO’s success, but so will the way that suppliers respond and offer creative new commitments. The dependence on contracting and commercial competence goes much deeper than in the past – and many CIOs have realised that it is a core dependency for their performance (echoing the views recently expressed by Professor Leslie Willcocks of the London School of Economics).
At last, CIOs are looking at a world where the latest technologies and the methods of service delivery allow them to re-think budgets and operate with dramatically reduced up-front costs. They can begin to move IT expenditure from a capital expense to operating expense. They can ‘gain revenge’ on many of the suppliers who they feel have ‘for years, taken advantage of them’ (in particular some of the major software suppliers).
CIO thinking is that they increasingly need to multi-source and to enter into either shorter term or more readily terminable agreements. Again, this has massive implications to the resources they need at their disposal – and it will also have major impact on suppliers and their business economics, plus the way they interface with and manage customer relationships. Not in itself new news – but potentially revolutionary for the world of contracting and contract / relationship management.
At this point, many CIOs apparently despair of obtaining the right resources within the business and take the view that they must develop commercial and contract skills within the IT department. They see a need for core skills in negotiation; they know that they must raise legal and financial awareness within their staff. They must become ‘masters of outsourcing and offshoring’, understanding the impacts of culture and business practices on their projects and deliverables. Governance is another major issue, requiring appropriate contractual protections and the ability to oversee supplier performance.
So with technology now becoming the great business enabler, contracts and commercial professionals must step up to the challenges and opportunities that are being created. This new world calls for more creative relationships, supported by commitments and performance metrics that safeguard contractual outcomes. And the message from CIOs is clear – our community on both buy-side and sell-side must either step up to the plate and deliver against business needs, or the CIO community will acquire for themselves the skills needed to safeguard their success.
Why does it take so long from the inception of a deal to getting it signed? And why is it that final negotiations always seem to be rushed, leaving many open items still to be resolved by the implementation team?
This was the gist of questions raised by IACCM member Mark Hope in a recent note. He went on to say: “I wonder whether you have or could research data that identifies the ratio between thinking time and doing time, as I think this would be fascinating and actually get to the nub of delay. There is a part of me thinks we as a community are accepting too much criticism for the overall delay and that we should focus on speeding up the buying decision and selection process more than the execution process”.
Mark’s comments relate to relatively large and often quite complex acquisitions, often related to technology or outsourcing. I am sure they resonate with many. We see initiatives kicked off with a great flurry, only for interest to dwindle as new priorities intervene. Then suddenly, an executive somewhere wakes up, or starts demanding to know the status of ‘their’ project – and suddenly reaching closure becomes urgent and everyone is seeking scapegoats for why it didn’t happen already …
Does this sound familiar to you? And does it seem unfair that often the convenient scapegoat is Procurement, or Contracts / Commercial, or Legal? We know we are innocent victims – don’t we?
Well, perhaps sometimes we contribute to that delay. But even if we do not, isn’t it time that we recognize reality and do something about it? Because in answer to Mark’s question regarding research data, we do have some very interesting facts. For example, we know that complex contracts require the coordination of multiple stakeholder perspectives and the responsibility for orchestrating those (and then reconciling the results) is often rather vague and inconsistent. We also know that the quality of executive sponsorship is key to project speed and almost certainly a major factor in its success. And we know that the lead-times to which Mark refers are highly variable – some companies have typical closure times of 5 – 7 weeks on projects where others take 25+.
Mark is absolutely right to imply that much of the delay in individual transactions is outside the control of the contracts / commercial / procurement organization. However, I would contend that we are at fault, because we know this is happening, we know that fingers will point at us, yet we do little or nothing about it.
Most executives understand the value of time. They would like faster execution on projects. They realise that ‘panic’ action frequently results in corners being cut and a loss of quality in the results. So why are we not responding to those issues by proposing a more rigorous and measured business process, aimed at improving review and approval quality and cycle times? Why are we not collecting and collating the data to find out what causes these recurrent delays? Why are we not benchmarking our company’s performance with that of major competitors or like industries? And why are we not then reporting to executive management on the steps needed to improve cycle times and generate better negotiated agreements? Some of course are doing precisely this – and helping their company to competitive advantage (se for example the results of IACCM’s ‘Most Admired Companies’ surveys and interviews). But many are not; they are simply waiting for someone else to fix the problem.
Mark has asked an excellent question and makes a very pertinent observation. Because in the end, is the answer not to ask ourselves ‘Do we want to be victims, or leaders?’ Is this not a key example of where we have an opportunity to add value to the business and be instigators of change? And just remember what happens to those who fail to lead; in general, at some point, the accusations that they are ‘the problem’ start to stick – and suddenly the group or function faces massive reorganization and loss of power.
So be proactive. Don’t wait for others to find their answers to the question ‘Why does it take so long?’ If you need data to support you in this initiative, then you know who can help you …. it is IACCM.
Innovation, risk, leadership …. these are topics that retain our interest across time because they lie at the heart of human progress. On the radio last Saturday, I listened to two programs that shed some interesting light on these subjects.
On the question of leadership, there was an interview with Sir Stuart Rose, Executive Chairman of British retailer Marks & Spencer. He commented on ‘being equipped with an extra battery’ and how similar sustained energy was something he observed in other leaders. The interview also revealed the interesting combination of self-sacrifice and selfishness that is involved with getting to the top – especially as it relates to family life.
But the part I found especially interesting is that Sir Stuart is a cultural hybrid. Although born in Britain, both of his parents were recent immigrants (one of Russsian origin, the other from Egypt but of mixed European blood). And while he was still very young, the family left to spend almost 10 years in Africa. I don’t know what proportion of successful business leaders have strong multi-cultural influences, but I suspect it is relatively high. I think the reason for this is that such exposure to other ideas and cultures is for many extremely broadening and opens our minds to new influences and new perspectives. For while leaders must be focused, they must also be open to wide understanding of the world around them.
Perhaps the experiences associated with ‘being different’ also change attitudes to risk. I imagine that the impacts could go either way, but for those who lose the fear of non-conformity – and perhaps realise that there are always new places to go – concern about failure also reduces. The second program was exploring innovation in the food industry and cited the fact that some 95% of new product ideas come from individual entrepreneurs. As in many industries, the source of innovation is rarely the large and dominant corporations. Ultimately, tehy may fund the development of successful products, but they rarely invent them.
The venture capitalists and executives being interviewed were agreed that the corporate world stifles innnovation because there is little incentive to take risk. Unlike the entrepreneur who is driven by a mix of personal dedication and perhaps substantial personal rewards, the balance of risk for a corporate employee is too strongly weighted towards the negative consequences of failure. ‘There are too many people with a long list of problems’, observed one, describing the obstacles that internal innovators usually face.
So a few thoughts come from this, a few questiosn that we might ask ourselves on a Monday morning:
- Do I have the ‘extra battery’ that might propel me to leadership? Have I the energy and selfishness that it takes to get to the top?
- Am I open-minded, curious about other viewpoints, tolerant of new or contrary ideas?
- Do I leap to identifying the potential problems and reasons why something will fail, or am I naturally looking for ways to overcome those problems and enable innovation and change?
I am sure you may think of other key questions that we should ask ourselves on our personal journey to improving our contribution (and indeed, in answering how far we really wish to progress) – because of one thing I am convinced. The level and quality of our contribution, whatever it may be, is significnatly enhanced by the honesty of our own self-awareness.
IACCM has today published an exciting and challenging report that highlights the role of contracts in delivering business value (or alternatively, the role that poor contracting plays in destroying value). The Executive Summary states:
“Sustained investment in contract and commercial management disciplines will occur only when it is possible to demonstrate that they create and deliver value. The necessary evidence is now available – our choice of contract terms has a direct and major influence on the financial results of the business. Economic value, innovation and cycle time improvements can be radically influenced by contracting strategies.
Benchmarks and research show that employing the right contract structure and terms is not simply about containing unpleasant risks; it is also – and predominantly – about achieving superior economic value from trading relationships. However, realizing this value depends on a shift in the way that contracting is managed and measured.
This report illustrates how contracts have become critical weapons in today’s highlycompetitive global economy. When properly structured and negotiated, they provide a framework for business and relationship management that significantly increases the probability of mutually successful outcomes for all parties, as well as containing the consequences of failure.
The report concludes that transition to ‘strategic contracting’ is achieved only through executive support, demanding new appreciation of the role of the contract and the resources associated with its creation and management.”
It is our hope that this report will be read not only by the community charged with oversight of contracts – Legal, Commercial, Sourcing and Contract Management – but that they will ensure it is more widely circulated an discussed with executive management. As we continue to wrestle with the cosequences of the economic downturn, it is time for leadership and change. We can drive better business results and ensure the security of our jobs and role. Get your copy of Contracts As A Source Of Value.
Today I attended a presentation on ‘quality by design’, delivered by Rebecca Vangenechten of Siemens Life Sciences.
The session got me thinking about how we would embed quality by design principles into contracting. And I realized that there is no consensus on what ‘quality’ means in terms of a contract. Is it to do with design and layout? Completeness? Legibility and clarity? Its effectiveness in protecting the drafter? The extent to which it generates successful results? And without knowing quite why we are doing it, how can we be sure that what we are doing is of real value and quality?
So I have a challenge for you. Without any sense of what is ‘good’, we cannot determine whether a contract – or the contracting process – is ‘fit for purpose’. And that seems to me a serious omission. It also explains why we struggle to demonstrate and describe the value of the contracting process. I need your help in fixing this problem.
It is time for the contracts community – contract managers. lawyers, sourcing professionals – to define what ‘quality by design’ means when it is applied to contracts. To get us started, I posed the following question to some of IACCM’s senior members:
“I am listening to a presentation on quality by design and it strikes me that it would be very helpful to apply that concept to contracts.
However, to do so we must define what we mean by ‘quality’ in the context of a contract. In most cases, quality is determined in the context of outcomes or outputs. What do you think these are in respect of a contract; for example, the avoidance of unpleasant consequences? The enablement of a successful trading relationship? …..
If we can agree quality indicators, we will be able to determine appropriate measurements that in turn could drive benchmarks and improvement.
So what are the quality indicators for a contract, in your mind?”
I received a couple of answers and they illustrate why this should be a key issue for us. I share these inputs with you – but please add your comments so that we can consolidate the thoughts of our community and develop an answer to the very important question ‘What is the purpose of a contract?’
“Quality contracting results in no surprises for either party. The customer requirements and vendor commitments are fully aligned and both parties have one and same expectation of what contract compliance or fulfillment looks like. The outcomes or deliverables for the contract (flowing both ways) are objective and measurable. There is no gray area or white space to be debated at a later time. New players coming into the engagement mid-stream can read the contract and understand clearly what the obligations and expectations of the parties were at signing and are going forward.
Well over 80% of the disputes and disconnects I see are due to poor scope language. And that is not just referring to the SOW, for scope requirements can be in any number of documents. The standard I use is a six sigma concept (at least that is where I was introduced to it) of goals or deliverables being SMART. SMART stands for deliverables that are
- Specific criteria for success or compliance — not vague, but focused and clear
- Measurable — measures that result in any 3rd party, not familiar or close to the deal, can determine objectively whether a requirement has been met or not
- Aggressive but achievable
- Relevant to the strategy or goal
- Time-bounded (there is a due date)
Certainly, most contracts have these characteristics imbedded. The biggest issues, in my experience, are around S and M of the acronym. ”
And a member in Italy suggested that: “Thought it is really difficult and it is even down to how we do measure the success of a negotiation.
I’ve been pondering what could be an objective criteria of a good quality, though I couldn’t find any applicable world-wide. For instance, let’s consider the number of disputes once a contract has been signed. I’ve been engaged to negotiate a 3-yrs agreement of ca 7$75M USD ending up with terrible Ts&Cs (anyone on earth would have considered of poor quality) though we didn’t have any issue w/ the customer for more than 5 yrs. At the other extent we had a smaller value agreement (ca 25M over 2 years) that was almost including standard T&C for my ex-company: after few months we were close to go to court. In fact the attitude to use contract and to be litigious it really varies from culture to culture….
So if anyone has some bright ideas, I will be happy to implement them in my team.”
Please add your thoughts. And thanks, Rebecca, for inspiring the question!
Commitment Matters 
