Logica has this month published an excellent whitepaper entitled ‘Step Change: Collaborating To Innovate’. The authors are two highly respected experts in the field of outsourcing, past IACCM conference presenter Professor Leslie Willcocks and Andrew Craig. It represents a ‘must-read’ for anyone involved in establishing, negotiating or managing any form of complex or high-value contract or business relationship.
The authors set out to study how organizations maximize value from outsourcing and in particular, how they achieve innovation. Many past studies have bemoaned the failure of most outsource contracts to get past cost reduction and move into true high value partnerships. IACCM’s work in this area has confirmed that disappointment is frequent, and has also described the dependencies for greater success. It is good to discover that Messrs. Willcocks and Craig have reached similar conclusions.
First, they highlight the key role of leadership. Like IACCM, they found a direct link between executive interest and ownership and the ability of the team to deliver good results. But they also saw leadership in the context of the customer’s readiness to embed major suppliers in the planning and development phases, to shape how the future vision would be accomplished. As I have highlighted in previous blogs, traditional sourcing often tends to hold suppliers at arm’s length and to limit their opportunities to engage directly with users, particularly in the pre-award phase (see, for example, A Simple Way To Undermine Procurement Success).
The other two critical areas that the paper examines are contracting and organization. “New forms of contracting are required for collaborative innovation to succeed. Such contracts share risk and reward in ways that incent innovation, collaboration and high performance to achieve common goals.”
This statement could well have been extracted from any number of IACCM research studies over the last few years. Each year our report on the ‘Most Frequently Negotiated Terms” has called for refocusing. Indeed, the most recent study not only pointed to the negative impacts of today’s negotiation focus, but highlighted specifically where future attention should be paid. The areas of the future – which were endorsed by the IACCM worldwide membership – go right to the heart of the Collaborative Innovation message – they are essentially the terms needed to ensure clarity of intent and on-going organization and relationship governance.
There is one other very important finding in the Willcocks / Craig study – and that is their depiction of client behavior (I would suggest they should expand this to also cover supplier behavior, because collaboration depends on trust and that must be driven by mutual actions). They include a chart entitled ‘The Global Sourcing Learning Curve’ and in this they describe four phases of maturity:
- Contract administration or negativity
- Contract management
- Supplier management
- Collaborative innovation
The reason I find this so fascinating is that it is the first time I have seen external endorsement of the direction in which IACCM has been steadily moving. Our research, our executive roundtables and our overall strategic thinking have been pointing to this sort of evolution for our members. Most IACCM adherents have moved past contract administration; but for many, the conversion from contract management to suppplier management remains confused, with internal politics often causing a battle over what exactly the supply management activity includes and where it belongs.
As we continue to debate and steer the evolution of contract management and the contracting process, this paper offers a timely and profound contribution. Read it!
Major corporations have to pay attention to policies on unfair competition and antitrust. Intel knows all about this, having received a fine of more than $1.4 billion in May this year as a result of an investigation by the European Union (Intel is planning an appeal).
Readers of Chris Anderson’s new book ‘ Free: The Future Of A Radical Price’ will be wise to think about the potential for innovative pricing to fall foul of competition authorities.
The theory behind regulation is that powerful players can use unfair pricing to drive out competition – and then exploit their dominance. But the problem is that the criteria for deciding what is fair are not consistent, and the effects of specific pricing actions are often hard to estimate. In addition, such schemes are often encouraged by the procurement specialists, as part of their effort to negotiate lower prices.
In the case of Intel, the accustation was that rebate schemes operated unfairly against rival chip manufacturer AMD. The rebates certainly appeared anti-competitive because they applied only if customers gave Intel 80 – 100% of their business. And the EU has always been relatively hostile to rebate schemes or discounting mechanisms that created some sort of ‘loyalty bonus’.
At the heart of predatory pricing is the determination of whether the cost of production exceeds the price charged. But this introduces another area that is complex to determine. That is when providers of goods and services ‘bundle’ – the aggregation of goods and / or services into a single price package. When buying a bundle, the overall price is typically less than the component parts, so this may work against niche competitors, unable to offer similar bundles. The difficulties with this analysis arise when determining what elements of the package truly are distinct; and it is also hard to say which particular element of the package has been unfairly priced.
According to a recent article in The Economist, US anti-trust experts proposed a method that would apply the entire discount to a low-margin element and then see whether that element failed the price / cost test. But this ignores the fact that the costs for a bundle may well be lower than the costs for their component parts (e.g. distribution, marketing etc may become cheaper).
The difficulty for competiton law is that an overly-protective regime may frustrate innovation, or undermine the benefits of increased efficiency, by preventing large companies from cutting or restructuring prices. And this, of course, would be contrary to their role of protecting consumer interests.
On one level, the fact that competition authorities appear to be acting with increased judgment (rather than applying rigid rules) is to be welcomed. But for companies wanting to establish sources of competitive difference, the unpredictability of such a system can represent significant risk.
IACCM members were asked recently to express their opinions about the value of conferences (in particular, IACCM conferences) and the likelihood of funding to attend events in 2010.
The good news is that the value was seen as high – more than 85% of respondents rating IACCM events as valuable or extremely valuable. But relatively few (less than 20%) were confident that there would be funding to attend events next year.
I think we will have to explore new models. The networking and thought leadership of a conference can be inspiring. But we must find new and more effective ways to achieve these goals, at lower cost. IACCM is already working on an increased number of executive roundtables; more frequent roadshows in more locations; sub-regional events to reduce travel and other costs. We also have our dynamic networked training which allows mentoring and information sharing between members. And next year, we will explore more partnered events, so that IACCM members can network with other key stakeholders in events that expand their contact base and knowledge.
The next few years will see more experiments and more creativity as we all wrestle with new ways to deliver valuable content and build communities. If you have ideas on how this could be done, please share them.
In the overall list of risk management concerns, information security has been a topic for increasing focus. With Internet usage forecast to grow 45% globally over the next four years, the web has become ‘a paradise for cybercriminals’, according to Andrea M. Matwyshyn, professor of legal studies and business ethics at Wharton and the editor of a forthcoming book titled, Harboring Data: Information Security, Law and the Corporation .
In an interview, the authors explain why this is happening and the reasons for concern. In the context of businesses and large organizations, they highlight studies by PriceWaterhouseCoopers which reveal that a large proportion of corporations admit to having no comprehensive information security policy.
According to the authors: “The biggest mistake … is not having a clear handle on where the information lives. The design of large systems calls for a lot of redundancy. Data is copied, duplicated, backed up, sometimes sent to different partners, data warehouses, shipped off site in case some catastrophic event destroys your data center. So data has a tendency to replicate itself. And one of the big challenges is when companies lose track of where the information is. It’s very hard to point to a particular computer or a particular rack and say, “This is where all the credit cards live.” …. The problem is that the more spread out they are, the more points of failure you have to worry about…. The first challenge [arises by] not having an inventory of what you’re collecting, even if you know where you collect it, not knowing where exactly you put it.”
Over and above this challenge of tracking, there is of course also the concern over internal process and practice – for example, employee actions that may compromise data or increase vulnerability to cyber attack.
Many business-to-business contracts now contain provisions related to information security undertakings. They frequently seek indemnities and may demand rights of audit as well as detailed access to the supplier’s information security policies.
However, are such measures adequate? Probably not. In some cases, it seems probable that companies are signing up to commitments with which they cannot in fact comply. They simply hope that a significant exposure does not arise. If you read the book you may feel that a wish and a prayer are no longer sufficient protections from the major exposures that exist.
IACCM will invite experts to comment on recommended contract terms and monitoring procedures. In the meantime, please share your ideas and experiences by recording your comments below.
Contract managers from around the world (and some users of their service) were brought to life by the challenge of defining their role.
More than 2,000 clicked through to read the definitions proposed in my earlier blogs (The Role Of A Contract Manager). Some posted their comments, many more took the chance to write (we will add those inputs to the overall comments).
There have been some great additions; but perhaps more importantly, the community showed a real hunger to reach common definitions and to advance the role in terms of its business contribution. There was enthusiasm to position the strategic value and financial impact of competent contract management and an understanding that this demands greater rigor in measurements and more proactive intervention and leadership.
So where next? We will consolidate all the input and then be looking for senior representatives of the community to join us in developing and agreeing an overall role scope and definition. It is likely that we will want to segment this, to show how industry or business complexity may affect the overall definition of tasks to be performed.
Our goal is to establish clarity over the content of ‘contract management’ and to validate this against the body of knowledge that was developed and maintained by IACCM members over recent years. I suspect that this working group will also wish to promote the importance of international professional accreditation and again we will welcome their review of the existing professional standards.
Overall, it is an exciting time and we have the opportunity to be among the first with truly global standards of practice. With so much investment already made, this project is not daunting, but demands some of the best minds in our community. If you are one of them, and if the worldwide professional status of contract management matters to you, please step forward!
There is broad acceptance that successful, long-term business relationships depend on trust. Increasingly, there is specific evidence that trust also plays a key role within business negotiations, especially if they are to move beyond a positional (price / risk) focus. Recognizing this point is important for any organization that wishes to build more collaborative relationships, where trading partners work together to create value and to achieve innovation.
In a short series of articles, I will highlight recent research that points to the methods through which trust is created, but this first article will focus on the major factors that in recent years have undermined trust and some of the immediate consequences.
Globalization has had a massive influence. The opening of international markets rapidly led to a belief that there were endless supplies of cheap labor and caused buyers to apply constant pressure on prices. Traditional supply relationships were cast aside; local partnerships were discarded in favor of global agreements; long-term suppliers were threatened with replacement if they failed to match low-cost providers. But having destroyed trust in its traditional supply base, organizations did not rebuild it with their new low cost suppliers. Indeed, they often made clear that they had no intention of remaining loyal and took few steps to understand the challenges of building trust across cultures.
Research increasingly demonstrates the challenge of managing in multi-cultural environments. This ranges from social research, exploring multi-cultural housing environments, to organizational research, such as multi-cultural projects. These studies have shown that developing trust and cooperation requires significant investment in understanding, in communications, in developing harmonized goals and reconciling interests. In the absence of that trust, each side remains suspicious of the other and is committed to the relationship only to the extent that their narrow objectives and self-interests are being met.
Lack of trust also becomes evident in the way that the parties perceive risk. Because they have not established the sort of relationship that inspires loyalty or understanding, they rightly see the potential for added risks. In the business world, this has led to increased emphasis on contracts and in particular on the risk allocation terms – confidentiality, non-disclosure, IP rights, liabilities and indemnities. The Legal community in major corporations has promoted ‘one size fits all’ contract and compliance models which, through their cultural insensitivity, have further eroded any sense of trust or goodwill.
As complexity grew, traditional functions and business organization struggled to keep up. Workload, together with concerns about internal knowledge levels, resulted in increased use of third party advisers – sourcing consultants, external law firms etc. But this trend often made the problem worse, because many groups abdicated responsibility to an intermediary with a distinct and typically incompatible set of motivations. Therefore the chances of trust developing between customer and supplier have been further undermined and, far from increasing the chances of successful outcomes, such interventions are more likely to increase the chances of failure.
Another reaction to complexity was to reign back empowerment and to impose compliance standards. Functions like Procurement and Contract Management are frequently measured on their ability to eliminate deviations, especially in contract terms, regardless of whether such standards make economic or business sense. Judgment is actively discouraged in the name of perceived efficiency and a mistaken understanding of risk management.
Today we find that supply risk has become one of the top concerns in large corporations. Massive investments are being made in acquiring the skills and capabilities to manage in global markets. Spend management, CRM, supplier relationship management and risk and compliance applications are just a few of the software tools. Added to these we see rapid growth in ‘interface’ or coordination functions such as project management, contract management, supply management, relationship management etc. Some are recognizing that the extra cost of these added resources may soon outweigh the savings that come from reduced prices.
Trust has been steadily destroyed and many businesses are struggling with how it can be restored, without sacrificing all the benefits that flow from a global economy. That is the question that my next article will address. (Subsequent articles will also detail an extensive reading / reference list of further sources and academic papers.)
Today more than ever, businesses hunger for innovation and creative thinking. Functional leaders often bemoan the absence of such skills within their teams and claim at least that they would like to inject these capabilities into the organization.
My experience leads me to question how sincere many managers are when they say they want more innovators. Creative thinking involves challenging the status-quo and in fact many managers are not comfortable with such challenges. One pre-requisite of innovation and creativity is an environment that welcomes such thinking and encourages its discussion.
I don’t know whether the lack of innovation and creative thinking is because most people have limited capability for it, or whether they lack the environment to encourage it. But whichever is the case, I was interested to discover an article by Evan Woodhead entitled “The Root of Active Learning: Boosting Creative Thinking and Innovative Capacity“. In it, he highlights the four big enemies of innovation and creativity and I repeat them here:
As I look at the contracts, procurement and commercial community, I see these characteristics far too frequently. The reluctance to challenge assumptions and to change habits is endemic. For example, the majority do not want to hear the results of research that suggests they are doing the wrong things. They continue to apply the old, familiar solutions and achieve the old, familiar results. It is a community that exhibits blind confidence in its strengths (for example in managing risks or delivering savings) and uses these to dismiss and ignore its fears (for example that someone will challenge these strengths and prove them to be largely illusory).
So much around us has changed. Global markets and networked teechnologies have thrust the quality and contribution of trading relationships to the forefront of any successful business. It is an area screaming out for innovation and creative thinking. Examples abound. For instance, just yesterday I interviewed Peter Brudenall, a partner at law firm Hunton & Williams, on the subject of agile development and the need for new contract models. IACCM is working with a wide array of companies on the question of ‘contracting excellence’ – what is it, how do you measure it? The Obama administration has initiated work on contract reform in the public sector. A growing number of companies worldwide are focusing on areas such as post-award contract and relationship management.
The list of desired or potential innovations goes on and on. Yet in truth, we find that only a small minority are actually interested in discovering answers that do not fit their existing assumptions, strengths, fears and habits. Creative thinking is frequently suppressed because of the challenge that it might represent.
“The bottoming-out of trade reflects a slowing of the decline in the world economy,” according to a recent article in The Economist. “Destocking may have run its course. Given its responsiveness to output, a lively rebound in trade is not inconceivable. Meanwhile, protectionism has not run riot.”
The article contains some useful data and makes a number of important observations. For example, it points to the relative resilience of trade in services – an area where destocking is not an option. In the year to April, the US cut imports of goods by 34% and exports by 27%, but the figure for services was only 10%.
As the recession started to bite, one fear was that national protectionism would grow. While there have been some moves in that direction (the US and the EU have both increased farm subsidies; several countries have raised tariffs), in general protectionist behavior has been relatively mild. The World Trade Organization has monitored a sharp increase in the number of anti-dumping cases and potential for litigation in other fields appears to be growing. For instance, the US is making increased noise about violations of labor standards as a source of unfair competition. Such litigation could constrain progress on the Doha trade talks, which otherwise show signs of revival.
In the view of the World Bank, “Countries realize that open markets cannot be taken for granted and few of them want to be seen to fall foul of their international commitments”. However, there are still threats around the corner. Recession has been eased by the collective action of several major economies to expand fiscal and monetary policy. This injection through borrowing cannot last – and when it reduces, cuts in spending and employment are bound to follow. At that point, trade barriers may once again prove tempting and become an issue for politicians facing local discontent.
One feature of such protection is of course through ‘buy local’ provisions and to date, such principles have already been attached to the trade stimulus packages in the US and China. These are obviously of greatest effect in areas of public procurement, where cuts in spending are inevitable. In the face of such cuts, reduced competition should of course be the last reaction, because that guarantees reduced services.
Other protections to date have come in the form of sectoral subsidies, of which the most glaring have been in the banking and automotive sectors. In automotive especially, there are some signs of a temptation to protect local jobs at the expense of international production or suppliers.
The overall volume of trade is of course fundamental to the security of those in the world of contracts and procurement. And freedom to establish the most rewarding trading partnerships is key to the competitiveness of our organizations. Therefore we must hope that recovery will occur soon and that it will not be accompanied by protective measures that undercut competition.
Meantime, we should be undertaking a thorough review of our own trading policies and practices, as reflected in our contracting standards and capabilities, to ensure that we are an attractive and efficient trading partner. When the upturn comes, we should be aiming to be the best.
So is Procurement a strategic function, or just carrying out orders?
On the Spend Matters blog, Jason Busch is asking ‘what will it take to turn Detroit purchasing around’. He features an article by John Campi, former CPO at Chrysler, in which poor supplier relations are acknowledged – and blamed on culture and complexity.
John’s points are not unreasonable. He suggests that Japanese competitors have innately more collaborative approaches and that they always involve suppliers from the earliest stages of design. He also highlights ways that they simplify manufacturing and move optionality to the customer interface. But neither of those points is new news – the Japanese approach has been well understood for years. It was always open to the US manufacturers to change their ways.
Essentially, this strikes me as a traditional ‘not my fault’ article. Were the heads of procurement at the major manufacturers really oblivious to the impacts that their company’s behavior was having on supplier performance and loyalty? Since so many of those concerns were aired publicly over recent years, I cannot believe this was the case.
I would make three observations on this story.
1) I could see no evidence that Procurement in the major US auto manufacturers was seriously attemtping to change the behavior of their staff. The complaints from IACCM members never changed; they felt they were battered, bruised and abused by their dealings with the industry.
2) Even internally, there was strong pushback on Procurement behavior. Groups that understood the value of supplier relationships tried to minimize their dealings with the Procurement function.
3) So we can only assume that either a) Procurement behaved as it did because that was the only way they knew how to behave and their leadership failed to address the need for change; or b) the CPO in the major auto companies was in fact powerless to infuence change and had no meaningful input or influence on corporate strategy.
Once more, I think the real point here is the warning it should be sending out to those in many other companies where Procurement continues to beat up its suppliers. Simply writing about how important Procurement is, about how strategic their role has become, will not alter the truth. A strategic role is something we earn by driving positive change in the business. For Procurement, this means rising above the transactional focus on savings and challenging the behaviors and methods that damage trading relationships and erode the loyalty of suppliers.
If the US auto industry is to survive, someone must become a champion for the supply base and understand economic value in relationships has to be mutual for them to work.
Recent research suggests that it costs between 4 and 10 times more to obtain a patent in Europe compared with the US, China or Japan. That is because, even though there is a European Patents Office (EPO), patent owners must then validate, translate and renew in each country in which they want protection.
And of course, when it comes to enforcement, the process is similarly complex. In an era when intellectual property has become of such importance, this issue is rightly attracting growing attention.
Overall, today’s complexity works against the interests of each national economy, argues Bruno Van Pottelsberghe, fomer chief economist at the EPO, in a recent paper. The European Commission agrees with him – and sees this onerous process inhibiting the growth of small and medium-size companies, especially those in the technology sector. For such companies, the cost of registration is itself extremely high, but in addition “the system makes it effectively impossible for us to defend them”, according to the co-founder of a Spanish technology company.
There is a wide range of obstacles to a unified system. Individual countries do not yet agree on precisely what is patentable. Many insist that any patent must use local language. It is also suggested that some countries that are weak on invention do not want to limit imitation or copying by their local firms. And of course, national patent offices want to protect jobs and income and in this, they are supported by local legal firms and translators.
According to The Economist, the next few months will be critical in resolving this issue. Politicians are becoming increasingly interested, but the divide is still significant. Spain, next to hold the EU Presidency, is against a unified system. But soon the EPO is to appoint a new head – and the candidates take differing positions. If a pro-unified system candidate is appointed, we may see progress towards a pan-European patent.
Commitment Matters 