Disruption. Apparently that is the number one issue facing CEOs. But what does it mean – both for them and for you?
The challenge for a business leader today goes far deeper than just the nature of competition, the speed of change or the need for agility. Those are symptoms of a much greater challenge of control – of having the time and the data to make good decisions.
So what has changed?
The Economist (Feb 8th, 2020) makes reference to this issue of disruption and provides an excellent outline of what it means in an article ‘Meet the new boss’. Encouragingly, the message it offers is essentially the same as that which IACCM has delivered to its members for several years – the need to adjust to intangibles (for example, services rather than products), to tackle fragmented data flows, to develop stronger and more collaborative inter-organizational relationships and to pay greater attention to social impact and alternative measures of value.
These are demanding changes, but they are precisely what high-performing commercial and contract management is about. Grasping the commercial impact of a shift from products to services; designing technology platforms that capture and disseminate commercial data without a need to replace existing application architecture; changing measurement systems and performance management to drive the right commercial behaviors; rethinking market relationships and selection criteria to demonstrate ethical standards and values.
Preventism has had its day
Last year, IACCM research showed that most contract and commercial practitioners see their role as ‘preventist’ – that is, preventing bad things from happening. While that’s important, it isn’t enough. And indeed, if we are not focused on the key issues highlighted above, we will rapidly become of marginal importance. Already, many in the commercial community complain that they aren’t sufficiently valued. It’s time to wake up and start focusing on the things that business leaders really care about. ‘Preventism’ is inevitably focused on the past, about not repeating mistakes or omissions. CEOs need people who equip them for today and the future, who focus on delivering success.
Recent IACCM research and tools supporting these changes include work on servitization, relational contracting and economics, uncertainty management, impacts of new technology and relationship resource planning (RRP). They are all focus topics at the 2020 IACCM conference series – see dates and details at www.iaccm.com/events
Conventional wisdom is that Sales and Marketing should extol the benefits of a product or service and avoid mention of any possible drawbacks or negatives. Those aspects are covered by the contract, typically in the form of limitations with regard to performance or use, but also in terms of potential recourse. In other words, we all know that sales people and marketing materials tell only part of the story and the contract often conveys a very different message.
Is this approach actually smart or effective? Especially in today’s environment of increased openness, would more overt honesty and transparency be a much better policy? It seems obvious that this might at least lead to higher levels of trust and might reduce the amount of time spent on negotiation, but at what cost? For example, does complete honesty deter potential buyers or cause them to switch to a less transparent competitor?
Recent research published in the Harvard Business School working papers suggests that Sales and Marketing may have got it all wrong and that honesty has multiple benefits – more business, faster business and greater customer loyalty. The paper describes large-scale experiments where a business set out the benefits of their product or service, but also explained the limits or trade-offs. This meant that potential customers were much better informed in making their decision and no longer had to scour the small print in a contract to understand the offering or its limits.
How far can this extend? Right now, the research appears only to relate to consumer and small business markets, but might there be similar benefits in larger scale business-to-business contracts? Recent IACCM research into ‘as-a-Service’ contracting certainly suggests that there could be. IACCM discovered that offerings such as Cloud computing suffer significant delays in adoption due to a lack of clear understanding and unrealistic customer expectations. The advantages of lower prices, greater flexibility and reduced investment require customers to accept some loss of control and very little flexibility in negotiating terms. Perhaps explaining these trade-offs in the initial sales materials would similarly result in faster and better informed decisions as well as greater respect and trust in a supplier’s integrity.
McKinsey, the strategic consultant and advisory firm, has discovered collaboration. At least, they have discovered collaborative contracting – I don’t know whether that translates to McKinsey itself collaborating with anyone!
While welcoming this ‘discovery’, which is outlined in two recent articles. I would be even more enthused if McKinsey drew on – and perhaps contributed to – the extensive body of existing knowledge and experience in this complicated field. Collaborative contracting is not new. There is a wealth of data on causes both of success and failure. It is implementation that is challenging.
‘Collaboration’ takes many forms (a point that McKinsey acknowledge) and it is therefore perhaps an unhelpful term. After all, why would any organization set out to be deliberately non- collaborative with its customers or suppliers? The point is more about working out the degree of collaboration required and how this will be supported through an appropriately structured relationship. Organizations struggle to build collaborative frameworks because internal systems, data flows and performance measures typically stand in the way.
Data shows that many workers find it more difficult to build collaboration internally than externally. Certainly when it comes to contracting, the diversity of those involved creates real complexity. Without a more holistic approach to the lifecycle of contracts and relationships, it is unlikely that external collaboration will occur on anything other than an exceptional basis.
The good news is that market forces seem likely to change this by forcing a reappraisal of how value is created and delivered. The new mantra of ‘purpose and profit’ will only be achieved through fresh attitudes and behavior. New technologies will play a massive role by simplifying data flows and communications. Transparency is foundational in collaborative relationships and, until now, has been extremely difficult to achieve at scale.
Hence the key point is not that increased collaboration delivers benefit. That has been understood for years. What matters is how to achieve it as an innate and sustainable capability – and this is the question that serious researchers such as IACCM, Kate Vitasek and others have been exploring. Recent work has focused on how to better analyze the type and depth of relationship needed, thereby ensuring an appropriate commercial model and contract terms. We are past the point where proof of concept is needed. It’s time to operationalize.
As social expectations grow, organizations are increasingly focused on defining ‘purpose’. This was a major theme at the 2019 World Economic Forum and momentum has continued, most notably with the recognition by 181 top CEOs that ‘business needs a purpose beyond profit‘.
The challenge with developing purpose is in part how it is defined, but even more how it is then measured. The social value movement is clearly a major contributor to this realization of purpose. As a concept it considerably pre-dates the awakening of the CEO community, but the last year has seen a surge in interest.
Contract for Change
I am delighted to be leading a working group within an overall initiative that’s operating under the banner ‘Contract for Change’. The purpose of the initiative is to bring social value to life, to develop guidance and methods that make it real. My contribution is to gather data and insights from around the world on how different countries and regions are defining and implementing social value, in particular within public sector procurement. But my interest extends also to private sector initiatives since we know from IACCM members that there has been substantial progress in tackling environmental, social and governance issues. Late last year, I also gained some exposure to the field of Relational Economics, where academics are exploring ways to capture and measure intangible value.
Overall, this is a truly exciting field because it offers the prospect of the sort of innovative thinking that will drive the changes we need to address sustainability, inequality and social cohesion. It is core to the mission of IACCM and its members – and we are in many ways uniquely positioned to drive this agenda forward. But the overall ‘Contract for Change’ initiative needs volunteers, willing to contribute to its various working groups. Equally, my particular working group needs people who are willing to explore direction and progress within their specific country or industry. If you are interested in being part of this important movement, please let me know!
My recent blog on the current approach to negotiation reported that 70% of business-to-business negotiators never meet their counter-party. Still worse is the fact that email is the most frequently used mechanism to support those negotiations. Working with my friend and expert Keld Jensen, we will shortly issue a much more comprehensive report on our findings and their implications.
Such an approach is alien to Asian culture, where evaluating the integrity of a potential partner and building a relationship with them is seen as being of paramount importance. “How can you know someone you never meet?” was one of the questions thrown at me in conversation with a cross-cultural expert. “Social and behavioral cues are fundamental to a negotiated agreement. Email is acknowledged as just about the worst medium you can use”.
As IACCM’s research showed, in a high proportion of negotiations there is not in fact any intention to negotiate. The interaction is positional and power-based, seeking to impose ‘compliant’ terms on the counter-party. Many negotiations in the Western world are formulaic and process driven. There is little or no effort to understand the counter-party, to seek sources of added-value or to build a relationship. Indeed, until recently, many procurement groups have been trained in such thinking, to ensure their laser focus on savings and compliance.
For many in Asia, such an approach is a mystery. How can you do business with someone you don’t understand and where communication is so limited? Isn’t it obvious that this will result in disappointing results, missed opportunities, Increased disagreements? Hence, if it is obvious, it is a stupid thing to do; and if it isn’t obvious, perhaps it’s the negotiator who is stupid.
While such a conclusion may be rather extreme, it is certainly worth questioning the impact of today’s negotiating methods. There are better, more intelligent ways – and that will be the focus of our imminent report.
Effectively managing suppliers is not easy. In many cases, the tools and systems that support supplier management are at best rudimentary. Indeed, a report released this week by the Supply Chain Research Council reveals that Excel spreadsheets ‘remain the most commonly used analytical tool’. Not an especially powerful way to gather, analyze or act upon data.
Visibility into supply ecosystems has rapidly become more important and, in some industries, a regulatory requirement. An imminent report from the IACCM Research Forum will outline these pressures – and also the challenges businesses face in responding.
Having the ability to control and manage your supply network takes on an added urgency when that network is interfacing with the end customer. That is why controls over distribution channels are typically far more detailed and comprehensive than those with suppliers in general. Though even here, if end customers experience a problem, the ability to make a complaint or secure recourse is often slow and time-consuming, perhaps even to a point where it is virtually impossible.
Companies spawned by our networked world have often come in for criticism and Uber has definitely been one of those. Today, I ordered an Uber. I stood at the appointed pick-up point. I could see the driver circling, but he did not arrive. I texted him to ask what he was doing. For a moment, ‘I have arrived’ popped onto my screen. Clearly he had not – at least, not where he was meant to be. And within a few minutes, I received a message from Uber accounts telling me that I had been charged for my no-show! I walked 50 yards and found a conventional taxi.
Normally, for the sake of $5, I would simply write off an event such as this, but I was annoyed because not only had I been charged, but I would now also be late for my meeting. So while sitting in the taxi, I searched for how I might complain to Uber, little expecting to find an answer. But yes, there is now a ‘Help’ button and it worked. It even offered an ability to send a complaint – which I did. It made me feel better, even if I wasn’t optimistic about receiving a response.
Within two minutes, I had a reply. My charge was being refunded. The tone was apologetic and thanked me for getting in touch. Instantly, my trust and appreciation for Uber increased. And yes, I will now continue and expand my use of their service because I now know that if it fails, I have recourse.
Managing your supply ecosystem really does matter. And Uber have grasped the point – but more important, they have developed a system that is fast, efficient and user-friendly. Well done Uber!
Speed matters. So why do so few organizations take steps to reduce contracting cycle times? A few are achieving improvements of 20-30%. Most are not even looking.
Margins matter. Among top performers, a focus on contract and commercial management has yielded margin improvements as high as 2.5% in the last two years. That’s measured, verified improvement – not just wishful thinking.
How do they do it?
Quite simply by making CCM a business discipline with accountability for delivering value. These top performers apply business intelligence; they segment their contracts and relationships; they apply standard models and techniques; they undertake analysis at several levels, to spot opportunities.
And not surprisingly, they invest in skills.
They assess their CCM teams, they educate and equip key stakeholders. Management demonstrates its understanding of the importance of CCM.
It’s interesting to note, many of these leaders make limited use of technology – yet. Only now, with sophisticated understanding and a coherent, integrated process are they thinking of investing in tools and systems. Thats because they plan to stay ahead.
As for the rest ….
Most organizations remain blind to the cost of weaknesses in contract and commercial management. Many are distracted by endless internal debate over who owns what, who is to blame for poor performance, complaints that senior management doesn’t care or that staff lack the authority to make change happen. Plus, of course, there’s always the ‘we are too busy’ excuse to fall back on.
IACCM research consistently points to the sub-optimal results, the missed opportunities. But more important, it offers answers and indicates how improvements can be made. Capability assessments, skills profiling, benchmarks, training, analytical frameworks – the answers are available and some are benefitting. But it could be many more.
it was (I think) a McKinsey report that once observed the leaders and long-term survivors in any industry represent only about 15% of the total. That certainly seems true in the field of CCM. But maybe 2020 will be different …. I hope so.
The nature of negotiation is changing. Today, approximately 70% of negotiations are ‘virtual’ in their entirety. 36% of negotiators never meet with external counter-parties – and that percentage is even higher in the United States. Worldwide, only 2% of negotiators say that all their negotiations involve at least some face to face interaction.
IACCM surveys of contract and commercial managers from both sales and procurement show that negotiation skills remain high on the list of important personal and organizational competencies, yet the changing nature of how and when those skills are deployed is often not understood. Indeed, the increasingly programmatic nature of many negotiations lends weight to the idea that they will increasingly be conducted by machines.
Among the findings from a December 2019 study are:
- E-mail is the most common alternative to face to face, closely followed by conference calls (41% and 38% of the time respectively). Video is used just 21% of the time.
- Although the most common, email is also recognised as potentially the least effective / most damaging medium (33% view it negatively, versus 14% for conference calls and 25% for video). Conference calls are judged the most effective medium by 55%, with 45% seeing video as effective and 31% email.
- Decisions on whether to have face to face meetings are primarily based on value, complexity or whether the agreement involves a new relationship. Geographic distance is a less influential factor.
- Internal negotiations are commonly conducted face to face, but closely followed by conference calls and email. Again, video lags well behind, used only around 17% of the time.
- Negotiation approach and strategy is most commonly framed by case to case approvals (81%), followed by policy /authority documents (53%) and templates with pre-approved fall-backs (43%). Playbooks are used by just 36%.
- Are negotiating parties sincere about negotiating? 57% say that half the time or more, they are not. Only 5% feel that their counter-party is always truly entering into a meaningful negotiation, versus seeking to impose a position.
- For 68%, the consequence of ‘non-negotiation’ is an unwillingness to ‘go the extra mile’ and it makes nearly 40% either uncooperative or distrustful. For 12% it results in feelings of anger or wanting revenge.
- 50% say that they endeavour to start negotiations ‘whenever possible’ from a balanced position. 47% say that the other side is the main barrier to this approach; 39% acknowledge it is their own organisation’s policies and culture that stand in the way.
Do these findings accord with your experience? Share your thoughts!
IACCM’s survey was conducted in December 2019 and gathered international input from 230 organizations.
Aspirational visions such as eliminating hunger, poverty or child mortality are often dismissed as unrealistic. Yet while they are certainly challenging, progress towards these goals has been remarkable. Over the last four decades, the proportion of the world’s population living in extreme poverty has dropped from 42% to 10%. Since 1950, the percentage dying during childhood has dropped from 27% to 4%. Major challenges remain – but history suggests we will succeed in addressing them.
There are those who see IACCM’s vision – ‘a world where all trading relationships deliver social and economic benefit’ – as over-aspirational and unrealistic. Yet if such progress can be made in reducing the intractable problems of hunger, poverty and child mortality, surely we can succeed in overcoming some of the problems associated with improving the results from commercial relationships. Much of the answer depends upon belief, shared determination and concerted action.
Grasping opportunity
Winston Churchill once observed: ”An optimist sees the opportunity in every difficulty, a pessimist sees the difficulty in every opportunity.” In 2019, IACCM research highlighted the critical importance of optimism and the fact that, while not exactly pessimists, the behavior of a majority of those responsible for contract and commercial management is ‘preventist’. In other words, the CCM community often operates with rules or practices that stand in the way of its own success.
This behavior is not deliberate. We all live and work in an uncertain and difficult world. Many find this threatening and a cause for concern, at both a personal and business level. It is understandable when this leads us towards measures that we believe will reduce uncertainty – for example, through rigorous risk management, through a focus on compliance, through longer and more exhaustive contracts. However, far from controlling uncertainty, measures such as these impose levels of rigidity and inflexibility that may increase risk and constrain adaptability or innovation.
The 2020s can be different. CCM is the critical discipline that balances risk and opportunity – and this requires innovation, a readiness to challenge and change the rules. It is here that the future lies for our community. This decade provides an opportunity to start operating as a true discipline, with a shared sense of mission. To do this, we need not only self-belief, but also to operate with more scientific, research-based methods and a commitment to work as a community in reducing the number of contracts that fail or under-deliver. We already know many of the answers – simplifying and standardizing contracts, adopting advanced technologies, training ourselves to common standards, making use of the extensive research that is available.
IACCM’s commitment is to provide the forum that will lie at the heart of change. Working together, its diverse membership can truly make a difference and, by 2030, be able to reflect on a decade of remarkable success. Let us begin the decade with a resolution to seek the opportunity in every difficulty.
A report card for Commercial and Contract Management over the last decade would note several key developments:
- The increasing need for CCM competence in handling the challenges of volatile markets, more complicated trading relationships and more varied forms of contract
- Growth in the number of people with a contract management or commercial management job title
- Greater global recognition for the CCM role
- Growing distinction between ‘commercial management’ and ‘contract management’, though confusion about the difference persists
- Steady adoption of CCM job titles within traditional Procurement organizations
- Disappointing results from CCM technology deployments
- Slow adoption of professional standards and emergence of CCM as a formal discipline
- Early moves towards the development and adoption of contract standards
A decade of growing complexity
The Global Financial Crisis was a wake-up call and proved a significant factor in changing the attitudes of politicians and the public to many aspects of trading relationships. It ushered in a decade of increasing regulation, some global, some regional, some national. ‘Compliance’ became a major issue, yet at the same time trends towards outsourcing continued apace and commercial innovation became increasingly critical to survival. An accelerated shift away from products and towards services and solutions steadily changed customer / supplier relationships and led to many longer-term commitments, with suppliers accepting greater responsibility for performance and outcomes.
Contracting in this environment became more complex and required on-going oversight and management, resulting in growing recognition for the CCM role and the numbers employed with either commercial or contract management job titles (LinkedIn currently shows more than 16 million with one or other of these titles).
Tackling, but not eliminating, problems
Yet for all that growth, the CCM community has often been deployed to manage complexity at a transactional level, rather than to understand and reduce it. Most CCM practitioners have no formal training and therefore no standardized methodology for their work. Indeed, this lack of consistency and clarity is reflected in a community that complains about its unclear roles and responsibilities. This has in turn contributed to disappointing results from technology deployment. Only now, it seems, are technology solutions evolving to the point where they can meaningfully contribute to reducing complexity and streamlining processes.
As we reach the final days of the decade, there has been a noticeable upturn in the numbers calling for simplification and standards. The length of contracts, the obtuse language, the confusing structure are all causes of delay, errors and value loss – and each is avoidable. The need for a more professional approach to contract and commercial management is also better understood and for some, especially in Procurement, these are seen as opportunities for re-branding and expanding their role.
So where are we now?
Relative to many jobs, contract and commercial management has had a successful decade. Growing numbers, growing appreciation of the need, positive movements in role definition are welcome signs and provide a platform for the future. But as a truly respected discipline, a role with real status, there is still some way to go. Hence, I suggest our report card should read: ‘Making progress, must do better.’
Over the next decade, I have every confidence that progress will not just be sustained, it will accelerate rapidly. And that will be the subject of my next blog.
Commitment Matters 