In the US, those leading the administration’s contract reform initiatives have apparently condemned ‘relationships’ because these are seen as too ‘cozy’. Certainly, recent criticisms of defense procurement (with suggestions of tie-ins between major contracts and campaign funding) are just the latest in a series of events that rightly lead to concerns about the closeness of relationships between key decision-makers and promote a need for improved oversight.
Yet at the same time, we have IACCM members on both the buy-side and sell-side complaining about the weakness of relationships and how this prevents the delivery of value. For example, in last week’s webcast on The State of The Global Economy, one senior Procurement representative bemoaned the problems they have in re-opening negotiations on contracts affected by the recession. “We don’t want to simply push down prices or extend payment terms”, she commented. “We want to have a full discussion on how we can work with our suppliers to rebalance value. But it seems impossible to get most of them to engage.”
I think there is a common problem that underlies these two very different issues. It is not that we lack relationships – but rather that we lack the right relationships, because we tend to see them predominantly in terms of people rather than organizations.
When I ran large business functions, or led organizational change, I was frequently frustrated by the insistence of business units that they must have dedicated and named individuals to provide services. The fact that this drove inefficiency, higher cost and frequently resulted in less skilled service provision seemed to count for nothing. There was a belief that a dedicated interface (ideally physically located with ther teams) would result in better understanding of needs and more commitment to delivery.
This same mentality often pervades the use of the Sales function and its interface to customers. When acting as a coordinator of needs and resources, there is great logic to dedicated Sales resource (though the frequency with which sales personnel are rotated often begs questions over how much they really understand the customer). However, there are many in Sales who tend to keep the organizations at arm’s length – they protect their position and perceived value by limiting direct contact.
And regardless of whether or not individual sales representatives have the right motivation, the truth is that organizations are not good at building relationships at a business level. For example, most contracts define a range of interfaces and contact points for notices, for change management etc. Yet work by groups like Integrity Interactive has shown that in a majority of cases, these are out of date – addresses, phone numbers, e-mails are simply wrong.
So the real challenge, in my opinion, is for us to move beyond relationships that depend on individual executives and sales representatives (and are thereefore unduly subject to behind the scenes and ‘cozy’ agreements) and to move everything into the spotlight of proper interfaces and governance. There are many options on how this can be achieved (groups like Integrity Interactive are specialists). It also demands a wider range of interfaces – for example, between contract managers in the respective companies – so that when the world changes they can rapidly and intelligently discuss how to adjust the existing agreements, as well as providing the ‘independent oversight’ that legislators increasingly view as fundamental to improved corporate goverance.
With modern technologies, we really do not face the stark choice of cozy and unethical versus arm’s length and adversarial. What we should be doing is ensuring personal relationships are balanced by robust and sustained organizational relationships. And embedding these principles into our contracting would be a great place to start.
What exactly is the future of Procurement?
I believe this to be one of the big questions right now. For years we have heard that Procurement is becoming ‘strategic’ and that CPOs are ‘at the top table’. Yet the very fact that this is still so often stated reveals how far it is from the truth. In most companies, Procurement remains highly tactical and its role is largely about achieving low cost, reliable sources of supply. Its performance metrics reflect this.
These are important tasks – and arguably have become more so with the advent of outsourcing and the move towards solutions and services. But it is precisely these trends that raise fundamental questions over the role of Procurement. Acquiring and managing solutions and services requires very different approaches from the acquisition of products and supplies, and traditional Procurement functions are largely struggling to adapt.
It is becoming steadily more clear that concepts such as commoditization frequently damage business results. It is also the case that modern technologies can replace traditional purchasing roles and empower business units to undertake many tasks without the need for dedicated ‘professionals’. Yet many groups seem trapped in these activities and unable to break into the higher value areas that demand focused attention.
The areas that are strategic and have become critical relate to more complex make / buy decisions based on analysis of costs over time (e.g. insource versus outsource; offshore versus nearshore etc); more sophisticated negotiation and risk management techniques; and on-going contract and relationship management, including especially the management of change.
These are areas in which many Procurement groups are struggling to gain traction. In some cases it is a failure of leadership, or because of an absence of necessary skills, and in others it is simply that executives do not trust Procurement to do the job or do not want to risk diverting them from traditional cost-cutting. As a result, there is often fragmentation of roles – for example, specialist groups spring up to handle IT contracting, or outsourcing, or sub-contracts; others are developed to handle post-award contract management and Supplier Relationship Management. While some of these specialists come from the ranks of traditional procurement, many do not. And frequently there seems to be a real lack of cooperation and respect between these groups – indeed, they behave as rivals.
The overall picture is therefore one of real uncertainty. Threatened by technology in the performance of its traditional role and threatened by new, specialist groups in the roles of the future, is Procurement in fact in danger of being squeezed into steady and continuing decline?
IACCM’s recent study of the global economy revealed growing concern about the impacts of the recession on business ethics. In particular, many commented on the extent to which sales representatives were over-committing or overstating capabilities.
A report by CSO Insights on sales compensation and performance management offers useful perspectives on why this may be happening. Based on input by more than 1,000 companies, the research reveals growing pressure on sales teams from higher quotas – in many cases up by almost 40%. As a result, the percentage who make quota has fallen – down by more than 10% in the last year, to just over 50%. When combined with delayed deals and longer sales cycles caused by the recession, it is not surprising if many sales people feel a sense of desperation.
There are many problems associated with over-commitment. Most obviously, it undermines trust – both by customers and by those who support sales. This tends to make negotiations far harder and causes both sides to push for protective terms.
Interestingly, the biggest single reason identified by sales as the cause of losing business is ‘the competitors price and terms’. This was highlighted by 79.6% of those responding. Product superiority comes a distant 4th, with just 22% citing it as a cause. So again, our community may well be at the forefront when it comes to observing overcommitment – and perhaps we should also be at the forefront when it comes to driving change.
If this is something that Procurement, Sales Contracting and Legal care about, what can we do to fix it? The CSO Insights report is blunt about the problem. “Companies elicit the behaviors they reward”, it states, commenting that “Compensation plans typically track three or fewer metrics”. Not surprisingly, those metrics have no connection with ethics or terms and conditions.
Sales compensation schemes are generally believed to be relatively effective in driving sales behavior, but they cause focus on new accounts, new products, farming existing customers and cross or up-selling. Utilizing the established sales process comes 8th on the list of behaviors – with just 22% adherence. Sales also show little interest in sharing practices or accurate forecasting, because while these are declared priorities, they are not rewarded as practices.
Many complain about the narrow metrics of Procurement groups, focused strongly on driving price reductions and claiming notional ‘savings’. This is the direct counterpart of revenue-driven sales activity. Far too often, neither side is directly interested or motivated by outcomes, beyond getting a contract signed. While this continues, the contract inevitably becomes a battleground for honesty and protection – and meaningful collaboration (internal or external) is a victim.
In an ideal world, those involved in negotiating and managing contracts would push for more balanced and appropriate performance incentives and metrics. Certainly this is an area where we should seek to exercise greater influence. But at a more immediate and practical level, we should also consider ways that we can facilitate better deals with more appropriate terms and processes.
For example, one key pressure for sales groups is the amount of time they spend overcoming internal barriers to higher productivity. In many organizations, up to 25% of sales time is spent on contract-related issues. Perhaps if we tackled those inhibitors and freed up more sales time, they could afford to be more honest. And second, if indeed price and terms is the most important reason for losing against competition, what are we doing to address that concern and ensure the terms we offer equip us to win. Indeed, how often do we even know what terms our competitors are offering?
So before we cast too many stones at our colleagues in sales, it is perhaps time to examine whether we are truly doing all we can to assist their success – and the prosperity of our company.
The recent award of the Nobel Prize for Economics to Elinor Ostrom and Oliver Williamson should be a source of excitement and pride to those in the world of contract management. It endorses the critical importance of good contracting in the delivery of business value – and confirms the need for professionals to focus more on finance and economics.
Both of this year’s winners drew their inspiration from the work of Ronald Coase, oft-cited by IACCM for his contribution to understanding the economics of trading relationships. Williamson in particular has continued that work, by seeking to understand when it makes sense for companies to in-source versus outsource.
Professor Coase established that economic logic would suggest that companies should be less efficient than markets – and therefore purchasing goods and services would cost less than providing them through internal resources. However, this theory depended on the costs associated with determining the market price and engaging an external supplier. At the time he was writing (in the 1930s) these costs could be prohibitively high.
The growth of networked technologies changed the cost equation. Searching and transacting has become much simpler and quicker, leading to two massive changes in recent years. One of these is the dramatic growth of outsourcing (and the resulting break-up of traditional enterprise organization); the other is the drive towards ‘commoditization’ and the endless search for lowest cost sources of supply, regardless of geography.
Professor Williamson’s work has sought to define the limits of this new efficiency and he has confirmed that the savings from a ‘spot trade’ mentality are steadily lost when transactions become more complex and when they depend on the parties forming a meaningful relationship. These findings are important for several reasons:
- We must become better at recognizing when it is more efficient to use an external contracted relationship than to do something internally.
- We must understand the limits of ‘auction’ behaviour and the extent to which a focus on the market price may obscure the true cost of acquisition.
- As The Economist recently observed (Reality Bites, October 17th), “writing and enforcing contracts which take every possible eventuality into consideration (is) difficult, or even impossible”.
Contracts (and therefore the jobs of those who create and manage them) exist to bring discipline to trading relationships. Smart contracting understands the nature and the scope of the contract required and also its limits in defining and managing the required relationship. For our job to bring value, we must be adroit at shaping the relationship with an appropriate form of contract and then applying the right resources to its management, to deal with the level of uncertainty.
Most importantly, this Nobel award confirms the fundamental economic importance of contracting decisions and the need for contracts professionals to focus primarily on economic value and only then on the containment of business and legal risk. If we ignore the economic imperative, we will frequently end up in the wrong relationship.
At IACCM’s recent meeting in Boston, Colleen Gallagher of the Huron Consulting Group outlined eight reasons why contract management is becoming a ‘top of mind’ issue for many in-house law departments.
Colleen attended the Association of Corporate Counsel (ACC) conference, also held in Boston earlier in the week. Her comments – based on extensive conversation with delegates – confirmed that there is growing pressure on in-house groups to increase their efficiency. She observed widespread interest in actions that would help reduce costs and empower the organization.
“Law departments understand that they need to get better alignment of resources and to get them involved at the right time. At the moment, they appear more driven by the need for efficiency than they do by concerns over risk,” said Colleen.
As law groups study their workload, the amount of time spent on contracting is one area for urgent review. IACCM research has found that in many organizations, bid and contract support can account for more than 40% of the legal budget. The more sophisticated groups – according to Colleen – have recognized that a problem with bringing contract management under control is its distributed nature. It is ‘owned’ by many different functions with in the business and the overall budget for its support is therefore fragmented; indeed, few organizations have any consolidated understanding of the costs associated with the development and management of their contracts.
As the law department explores this area, there are eight topics that are increasingly on their agenda:
- Consistency of operations: the need for improved definition of workflows and better understanding of what is needed and what is agreed.
- Development of ‘self service’: the need for better standards and greater empowerment of negotiators.
- Understanding of contract value: the need to apply resources where they are making the greatest difference.
- Bundling of work: the need to better analyze where time and cost are being incurred; make more effective use of outsourcing.
- Defining end to end process: the need to recognize contract lifecycles (pre and post award) and to ensure approval activities involve the right people at the right time.
- Using technology: the need for greater use of technology to provide compliance oversight, especially post-award.
- Alignment with business objectives: the need for contract terms and related legal and contract metrics to reflect current business objectives.
- Addressing global requirements: the need support shifting business and market models with appropriate contract terms and structures, legal knowledge, language and regulatory variations.
“The key question for in-house lawyers is how to deliver value and enable good business”, concluded Colleen.
These observations follow on from the interesting debate by academics that I reported last week (see ‘Should Lawyers Become Contract Managers?‘) and reflect the pressure on traditional business functions to become more integrated and collaborative in supporting business goals. As trading relationships become more complex and more outcome-focused, the contract and contracting process has assumed a new significance. Law departments must adjust – and in many cases, the most successful are leading that adjustment through the types of thinking and reengineering that Colleen’s list reflects.
My expertise is not in training. Indeed, I must confess that I generally tried to avoid training courses because I found ‘real work’ more interesting. During the course of that ‘real work’, I discovered many fascinating things and people – and I learnt a lot.
Yesterday’s Financial Times carried a supplement on business education. Under a headline ‘Applicants flock to the global village’, it explained that demand for multi-continent Executive MBAs has increased during the current recession – against a backdrop of falling demand for all other EMBA programs. In interviews, candidates highlighted the importance of learning across cultural and political boundaries. They also described the tremendous value of seeing questions from other perspectives – and how this not only challenges their own views, but often leads to different and better answers.
I was delighted to read this, because it endorsed my view that so much of my learning has come from being open to outside influences and recognizing that good ideas and innovative thoughts come from anywhere, without regard to geographic boundaries. And of course, this is one of the underlying philosophies for IACCM, which has created a true ‘global village’ for those in the world of contracts and relationship management. Through its website, members can network with their peers and counterparts around the world. They can dwell in ‘communities of interest’, to discuss topics of mutual concern. And they can enrol in Global Managed Learning – interactive web-based programs of training that include participation with multi-cultural students from around the world.
Over the years, I have realized that I did not like traditional education and training because it was something that was ‘done to me’. What I did enjoy was participative programming that enabled me to engage with other students with different and distinctive experiences and viewpoints. So I can understand why these multi-continent MBAs would be interesting. And I can see why participants can gain so much from IACCM Managed Learning. Of course, an EMBA combines virtual and physical classes, whereas the IACCM program is entirely virtual. But the IACCM experience costs just 0.75% (yes, I do mean less than one percent) of the price of the average EMBA – so I guess when it comes to practicality and value, it is not surprising that we too are seeing such strong growth!
Today I attended the 1st European Proactive Law Symposium, organized by the IACCM Proactive Think Tank in partnership with the ICN Business School in Nancy, France.
Among a host of interesting topics and papers, there was a panel discussion featuring academics from several Law schools that addressed “Proactive Contract Management as an Evolving Academic Discipline”. Based on wide agreement that contract management is an important business discipline, in need of a common language and established techniques, the panel discussed whether contract managers should be lawyers and / or whether contract management should be incorporated into legal training.
There was agreement that lawyers would benefit from the inclusion of contract management content in law school programs. It was felt that holistic case studies would assist the development of wider skills. “Today’s programs are rule-based and testing is based on those rules. It is a deductive discipline and the belief is that wisdom and judgment will come from on-the-job experience,” observed Tom Barton, a professor at California Western School of Law. He went on to explain that case studies from the world of contract management could assist in developing wisdom and also teach lawyers in areas such as gathering and analyzing information, coordinating ‘teamed’ resources, active listenting skills and greater behavioral understanding.
There was wide consensus that contract management will increasingly be an attractive path for some lawyers, but that it is not necesssary to be a lawyer. Indeed, the cross-disciplinary nature of contract management was emphasized as one of the reasons why it is so difficult to build academic programs for this community. However, all the academics present believe that it is important to develop contract management as a discipline in its own right, as well as making it an element of other programs – for example in law, finance or marketing.
In responding to this enthusiasm from the academic community, I commented that we must work together to build executive understanding of the importance of this role. While dedicated undergraduate and business school programs will be welcomed, uptake will be limited unless students are confident that the discipline offers a career path. However, we already have initiatives under way with several universities and business schools to offer internationally applicable programs for the contracts community.
We also discussed how content would be developed and I suggested that we should utilize the existing, practitioner- developed body of knowledge that is managed through IACCM as a base, and then have academics build from that syllabus to include more refined techniques and methodologies that would bring greater consistency and value to the contract manager’s output. One critical aspect of this is that everyone involved in contracting must have improved understanding of the economic outcomes of decisions. Many contract issues are resolved by functional owners who have little understanding of the potential market impacts. Many decisions have interdependencies with other terms and conditions; contracting must become more holistic and disciplined so that it can offer increased value and innovation.
It was heartening when earlier this year President Obama acknowledged the key role of contract management in delivering successful acquisition and project outcomes. As apart of that acknowledgement, he announced a contract reform initiative.
Now, the indications of where that reform may be headed are deeply worrying. They appear to be headed in completely the wrong direction.
- I am told that the word ‘relationship’ has been almost banned by those leading this work. They take the view that a large part of the problem has been that ‘relationships are too cosy’ between Federal acquisition staff and suppliers. That may be true and it is certainly legitimate to question the way that relationships have been formed and run. But it is fundamentallly wrong to beleive that relationships do not matter and that they should be fully arm’s length. What is needed is good relationship segmentation adn the implementation of approrpiiate contracts and contract management techniques. Cutting communication and limiting information flows is fundamentally the wrong way to go; what is needed is rigor and discipline in the way they are managed.
- I am also told that the new mantra is to go with fixed price contracts and let suppliers suffer if they fail to deliver. The idea is to pass yet more risk to the supplier. Once again, history should tell those behind such an idea that it simply does not work. Critical projects require competent, collaborative management, not adversarial relationships. The real answer here is to introduce improved economic governance through high quality contract management. Maybe the real problem is a lack of the necessary skills.
- A key goal is to save money, though part of this is of course to ensure that projects succeed. As IACCM research has shown (eg the joint study with Rand Corporation in 2008) risk averse public procurement policies and rigid approaches to contracting cost Government (and the taxpayer) dear. The study revealed that such approaches lead to price escalations of 28%. That represents a massive potential for saving – and a much more intelligent approach to its realization.
- It is said that the Obama initiative has been translated into ‘no more outsourcing’ – and in fact reversing some exisiting initiatives. Again, not a smart move. The Government should be looking at ways to consolidate services and to break down the separations between government departments. The fact that existing contract processes have not always been appropriately skilled to manage outsourced relationships is more likely the real problem. Bringing things back in house will not fix the problem and is likely to add further to costs.
- Apparently the Government will hire thousands more contract managers. Unless they think again about the role of these staff and the training they need to flourish in a 21st century economy, this too is unlikely to bring relief to the problems.
I hope that the stories I am hearing are not true. But if the above ideas are even being considered, it is time to think again. Our world has changed. Contracting must be used as a tool to drive quality outcomes. Contracting can only be effective if it supports required relationships. Those relationships must deliver economic benefit to both sides and must be based on a reasonable sharing of risk. And supporting this new world, there must be appropriately skilled individuals who understand ethics, who have imagination, who are ready to innovate and who recognize the critical role of information flows and proactive risk management.
INSEAD, one of the top European business schools, has released its ‘Top Ten Articles’ for the third quarter. Heading the list is ‘A Practical Guide To Innovation’.
Author Professor Robert Goldsmith starts his commentary with: “What does innovation mean? It used to relate mainly to products, and that’s still important. But over the last decade or so, businesses have been putting more and more emphasis on innovating new services and business models as well. In light of this, it’s time companies take another look at how they manage innovation.”
His comments echo several articles on this blog, highlighting the implications of the shift from a product-based world to one where solutions and services dominate. When Goldsmith calls for new ways of managing innovation, he confirms the opportunity for those who are engaged in contracting. If you study his examples, many depend on forming the right alliances or negotiating rights from third parties.
His observations include: “Most of the information about managing innovation available today is siloed, addressing specific issues such as technology or finance. But as the boundaries of innovation expand, more managers will need practical knowledge and tools that transcend these functional silos.”
Once again, the experience of the contracts community in taking cross-functional perspectives and reconciling their differences provides the potential for a key role in the innovation process. But this demands a readiness to move beyond the transactional and to become far more embedded in product development and product lifecycle management.
A few of the most admired contracts groups have made this transition – som eby design, others by accident. But whereas a transactional focus slows the business and makes contracts appear negative, a product lifecycle focus ensures that offerings are brought to market with the right value-add capabilities.
It is true that in theory this efficiency would require less contracts staff. But the reality is that the groups providing value are the groups that find themselves growing. Innovation should be a keyword for anyone in contracts if they want a career.
I was speaking this week with my friend Rene Henschel, who teaches law and economics at the Aarhus School of Business in Denmark. He drew my attention to a UK website which is starting to hold companies to account for their payment practices.
Rene believes that the time has come for regulation to address the creeping disease of prolonged and late payment. Sadly, I have to agree that once again, many corporations are damaging the business environment with their behavior. When a supplier incurs costs and provides goods or services, it is not OK that they have to wait 4 or 6 months to receive payment. And it is even less OK that they have to tie up resources in endless chasing of payment.
Recent input from members, as well as the experiences here at IACCM (we deal with many of the world’s largest companies) have indicated that there really is a problem. Some companies have at least been public in their intent to extend the payment period and then honor their terms. Others are doing it through subterfuge. They find nebulous reasons to reject invoices. They alter addresses without notice. We even had one example recently where they sent a check to the wrong address and then told us they had not issued subsequent payments because the first check had not been cashed!
I suspect this problem with payment periods may have been exaggerated because of outsourcing. I wonder about some of the metrics and financial arrangements that may be driving this behavior. The companies that are top of my list of bad payers are among the elite of the Global 100. I cannot believe their executives really wish them to behave this way.
Many of the companies in the Hall of Shame are in the retail sector. They have powerless customers, so they feel they can afford to upset the businesses that supply them. At least many in the b2b sector are influenced by the fact that many of their suppliers are also their customers.
I am tempted to start a Global Hall Of Shame at IACCM. I don’t want legislation. I am hoping that we can address this problem through pressure on reputation. But is it too late?
Please share your experiences and thoughts.
Commitment Matters 