Anyone who wants to study the effects of regulation might start with public procurement. It is a sector apparently fraught with failing contracts and massive project overruns. It is also a sector surrounded by rules and procedures designed to ensure open competition and ethical standards. Is there a connection between these two characteristics?
First, of course, we must establish whether the public sector does indeed suffer a disproportionate number of failures. The fact that public money is at stake, plus the level of transparency in democratic societies, means greater scrutiny and more publicity for government-funded projects. So far as I am aware, there is no specific evidence to show that the proportion of ‘troubled projects’ is higher in the public sector than it is in the private sector. But given the scale of many such projects, the level of failure and the resulting waste of resources is unacceptably high.
Second, there is evidence that public sector procurement policies carry a cost. A recent Rand Corporation report on EU public procurement (supported by research from IACCM) suggested a 28% price premium due to the risk-averse nature of public sector contracts.
And Governments themselves clearly believe that their procurement and contracting capabilities leave much to be desired. The Obama initiatives in contract reform are not the only example of growing government interest. Australia, Canada, New Zealand and the Scandinavian countries have all focused on this topic in recent times. In the UK, work has been led by the Office of Government Commerce, until recently largely depending on its powers of persuasion, but at last perhaps being given the resources to drive real improvement.
One issue with regulation is that it tends to drive out judgment and broader organizational competence. Those charged with managing the process become administrators rather than managers. To this is added the natural inclination in public sector agencies to avoid accountability – everyone (from the top down) wants to be able to point fingers elesewhere, so roles and responsibilities often remain vague and there is little incentive to build personal skills (except to achieve a higher salary).
The Institute for Public Policy Research recently illustrated this point when it highlighted the reasons for public sector underperformance: tolerance of underperforming staff, lack of training in specific skills, hostility to change.
In an era when so much is changing so fast, when success increasingly depends on the ability to manage collaborative projects, the rules surrounding public procurement must be updated. Rigid procedures are not the only way to enable proper scrutiny and rules are not the only way to establish and manage principles.
It is time to place greater demands on public sector employees, forcing them to develop professional competence in contracting and project delivery. For those that have the right talents (and many do), the introduction of more rigorous performance management will be welcome – especially if these are accompanied by criteria that enable objective oversight of ethical and moral principles and enable greater professional judgment.
Politicians are right to be focusing on this aspect of government performance. Major suppliers are right to make noises about the inefficiency of today’s practices. Taxpayers should be demanding rapid improvement. And those who question the wisdom of regulation should be pointing to the problems and weaknesses it has created in the public sector.
As a company that has built its success around the internet, it is perhaps not surprising that Cisco leads the way in thinking about the power of networks and network technologies. That thinking permeates the way that its people think – and also how they organize and perform their work.
A recent article in The Economist (‘The World According To Chambers’, August 29th) describes the Cisco strategy “to become the main supplier of the essential elements of an increasingly connected economy, and to be a shining corporate example of how to use them”.
The product and acquisition strategy is itself interesting and should be studied for insights to how our working lives and roles may change in an increasingly networked world. But my comments here will focus more on the innovations that Cisco has introduced to its organizational model.
Of all the companies that I deal with, Cisco seems to me the most advanced in developing a model for the future (other contestants please step forward). First, when the dotcom bubble burst, it eliminated traditional lines of business and moved to a set of centralized business functions. This eliminated much of the confusion for customers by transforming the way that markets were segmented; but of course strong business functions often become bureaucratic and fail to cooperate with each other. These tensions lead most companies to move back and forth between centralized and decentralized organizations.
Cisco took a different path and has built a system of cross-functional committees that handle different markets or business processes. It is a structure that seems to be working. Such an approach relies on collaboration between the various stakeholders, which in turn may depend on the right performance measures that incent teaming behaviors. Apparently individual performance in teams determines 30% of a manager’s bonus; and failure to work well with others leads to much diminished career opportunities.
For groups like Legal, Commercial Management and Procurement my observation is that there is a real sense of ownership, an understanding that they exist to serve the greater good. I see no evidence of territorial disputes. Instead, time seems to be spent challenging traditional assumptions or methods and a determination to understand market and stakeholder needs. A collaborative committee results in a sense of shared ownership for results; and peer pressure ensures that each function is anxious to perform.
Of course, I have never worked in Cisco so I can only comment on what I have seen and the experiences that IACCM has had in its conversations with Cisco members. I am sure that its contracts and contracting practices still have room for improvement – but I suspect that its staff would themselves be the first to acknowledge this and to be asking what it is they need to do.
The new organizational model – which I see as the most mature version today of shared service concepts – depends on using Cisco’s network technologies to support internal networking. According to The Economist, the annual travel budget has fallen by almost $300m due to the use of Telepresence and other virtual meeting tools. Cycle times have been slashed and the cost of inclusion is so low that reasons to exclude participants from decision-making almost disappear.
I will continue to observe Cisco’s progress, but for anyone wishing to explore new organizational models, this is certainly one of the company’s to study, especially given John Chambers’ goal of making Cisco “the best company in the world”.
The idea of commission-based pay structures for those involved in negotiating and managing trading relationships certainly is not new. Indeed, there are examples within the contracts and commercial community where deal-based bonuses have been introduced (though I believe most were subsequently abandoned).
I find the timing of the call by Procurement Leaders for more commission-based incentives quite remarkable – and the antithesis of the direction that any group aspiring to status and leadership should be taking (“Taking A Fair Cut”, Procurement Leaders magazine, 2009). At a time when there is such public and political hostility to the distortions that are created by a bonus-based culture, why would anyone wish to emulate such compensation systems?
The article in Procurement Leaders magazine makes comparisons with Sales and argues that if they can achieve bonuses for closing deals, Procurement (as their opposite number) should be bonused for savings. One of the key reasons advanced for such a shift is that ‘Procurement will finally get the salary it deserves, the kudos in the business and a presence on the board’.
Fortunately, not all those interviewed for the article share this muddled thinking. Among the difficulties highlighted are those which apply generally to deal-based bonuses for the contracts and commercial community – the difficulty of accurate measurement, the threat to objectivity and ethics, the negative reaction by other business functions.
There are several fundamental points that I would add to these:
- Commercially astute, high-value groups are rewarded for their objectivity. That means they must make judgments over the desirability of a deal, not just its closure. Sales are frequently divorced from this level of judgment; Procurement and Contracts groups should not be.
- Driving savings, just like driving sales, is indeed a critical aspect of business. However, it is not typically a high-status professional talent. Indeed, it is interesting to note that Sales is one of the few unprofessionalized fields of business activity. To the extent that their is status for Sales people, it tends to apply to those in senior account management roles – people whose rewards tend to be based more on performance over time and whose skills are directed at sustaining relationships and ensuring growth. If it really wants status and influence, this is the direction that Procurement should be taking (yet interestingly in many organizations is being denied).
- Given the debates within the G20 over bonuses and corporate risk, together with continued examples of the ethical challenges in Sales motivation (see Ethics Take The fiz Out Of Pfizer), any leadership function should be engaging in the debate over how to rebalance motivation systems and drive more collaborative business structures – not how to grab its share from the feeding trough.
Performance-based bonuses remain a legitimate component of any pay structure and the IACCM community (Lawyers, contract managers and procurement) all benefit from some form of incentive. Interestingly, (based on our annual salary surveys), the levels of those incentives were similar, but in the last two years there has been a trend for larger bonuses within procurement. However, in the majority of cases the basis for the bonuses remains a mix of overall company performance plus functional or group achievement of specific KPIs.
The subject of salaries and incentives is certainly important and it is one in which our community should be much more actively engaged. But where we should be spending time is in devising an approach that supports honesty, integrity, ethics and good business judgment. High-status professionals and business leaders are those that build value and reputation, not those who place it at risk.
The news that Pfizer has been hit with a $2.3bn fine by the US Government is just the latest in the continuing dilemma over governance and ethics.
According to ABCNews “The main whistleblower, a former company sales rep, said in a statement, ‘at Pfizer, I was expected to increase profits at all costs, even when sales meant endangering lives. I couldn’t do that.'”
The charge against Pfizer is that their sales reps. consistently misrepresented the qualities of certain drugs, deliberately encouraging unauthorized use to boost sales.
In the end, the issue here is not dissimilar to that which caused the collapse of the financial system. The pressures for growth and increased profits lead to the creation of bonus and incentive schemes that generate undesirable behavior and reckless risk-taking.
Once again, I turn to the final communique of the April G20 Summit, assembeld to consider the fiancial meltdown. World leaders concluded: “Staff engaged in financial and risk control must be independent, have appropriate authority, and be compensated in a manner that is independent of the business areas they oversee and commensurate with their key role in the firm. Effective independence and appropriate authority of such staff are necessary to preserve the integrity of financial and risk management ….”
The Pharmaceuticals industry – like financial services – is among the most regulated, yet despite (or perhaps because of?) that, it continues to struggle with these fundamental governance problems. In part, the challenge is endemic to the role of Sales and its continuing bonus culture. Yet other industries appear able to achieve greater balance and to control the inclination of the Sales organization to exaggerate product or business capabilities.
One way that control is created is through the use of contracts. Sales statements are constrained by the specific commitments contained in the terms and conditions. A feature of large-scale, ethical misrepresentation appears to be that it occurs more frequently in the business-to-consumer market, especially where there are intermediaries (brokers, car dealers, doctors etc). These intermediaries are also often swayed by incentives – in the Pfizer case, it was claimed “in exchange for hearing company sales pitches, doctors were paid up to $1,500 to attend meetings, and were treated to conferences at lush resorts, given air fare, hotels, meals, even massages.”
Once again, this case points to the fundamental role and value of an organization that oversees commercial practices and policies and ensures appropriate vehicles for their implementation – just like the G20 Summit envisaged necessary for the finance industry. Such a group could certainly have saved Pfizer a lot of money. And I am sure there are many IACCM members who would be willing to help set it up!
Yesterday I moderated a discussion among a senior group of contract and commercial experts from IACCM’s Alliances & Teaming community of interest. Our core topic was to discuss what might be learnt from alliance forms of contract and whether such approaches should be used more generally in contracting today.
Overall, the group recognized the tendency in most corporations for specialist groups to form silos and how these become an obstacle to shared knowledge and experience. “Visibility and transparency in contracts is not good,” commented one participant.
This failure to share and discuss contracting options and lessons learned is a source of weakness and has negative consequences. Among these, participants identified the inability of most contracts or commercial groups to demonstrate value or describe the merits of different contract types. “” We are trying to overcome this by mapping contracts to the financial budget,” explained one Commercial Director, who went on to describe how this meant a need for much more transparency and the ability to evaluate relative performance of different contract types.
However, the issue that most felt should be the biggest driver for sharing of experience is the challenge of managing uncertainty. “It’s the propensity of the business climate to change. It is increasingly rapid and unpredictable; we have to have the ability and flexibility in our contracts and organizations to change targets and goals. We must learn from what works and what doesn’t work.”
The group felt that factors like these are driving new thinking about the priorities within contracting and negotiation; they agreed with the findings of the 2009 IACCM study of ‘most frequently negotiated terms’ and the shift this anticuipates towards ‘governance’ terms, rather than the traditional risk areas. As one participant put it: “Negotiation focus has been on eliminating uncertainty in litigation; today it must shift to ensuring a shared understanding of what the parties want.”
This shift in focus was felt to favor the types of provisions and principles that underlie alliance agreements – although it is unclear whether there are good models to follow. “Often the term alliance seems to be used to describe rather vague arrangements, covered by long and wordy contracts that lack any real substance,” observed one lawyer. A Procurement Director explained that in his company a start has been made by categorizing suppliers into Strategic, Core, Managed and Transactional relationship ‘buckets’. These are reflected by variations in contract type and negotiation approach – although he admitted there was probably some way to go in refining these models.
The issue of ensuring mutual understanding is perhaps key. Many ‘collaborative’ agreements today still fail to reflect the perspectives of both sides. Frequently, the contract model and the negotiation are driven by one side’s view of value and the relationship, paying little attention to how they are in fact perceived by the other side. “The key (to improved relationships) is that they must be founded on aligned strategies,” observed a senior manager from a major technology company. “We need to spend time on creating framework agreements that then enable transactions and we need to build relationships that understand alignments and misalignments between the organizations.”
The challenge of achieving collaboration was highlighted when Jason Anderman, of WhichDraft.com, observed the failure in many organizations to build internal trust. “Is there benefit in cooperating?” he asked. In a comparison to Game Theory, Jason commented that many internal groups understand that in theory they (and the business) would benefit from cooperation, but each is entrenched in its negative views of the ways that the other behaves. In order to make a break-through in external partnering, internal barriers have to be addressed. Incentives and disincentives must be changed.
The discussion concluded with overall agreement that collaborative structures such as those used in alliances would benefit business outcomes and in particular assist in managing the uncertainties that are intrinsic to today’s more complex and more volatile trading environment. However, if we are to move from occasional successes to a more embedded approach to collaboration, changes will be needed in several areas:
- Measurements and incentives must be aligned internally and externally to encourage collaborative, outcome-based relationships
- Internal responsibilities must be clearer and there must be a planned development of the competencies needed for collaborative contracting
- People with the required skills must be developed and placed in positions to enable collaborative agreements
- Model agreements, ‘best practice’ terms should be developed and promoted
Work on these items will continue. As a first step, IACCM will approach members of the Alliances / Teaming Community of Interest to seek examples of contracts or of specific terms and conditions that represent good practice and encourage positive and collaborative relationships.
Since records began, there have been those who predict the apocalypse and those who are ready to listen and react. Popular media understands and exploits this tendency to the full. To what extent should those in the business world pay attention?
The dire forecasts associated with swine flu are the latest ina series of warnings related to health risks that might disrupt trade. Add to these the growing concerns over severe and extraordinary weather events, or the on-going threats of terrorism, or the possibilities of political instability and the world soon seems a scary place.
So the risk manager faces a daunting task in seeking to anticipate these awful events and work out how to protect against their potential impacts. What should they do?
The answer often is ‘Nothing’. The economic impact of such disasters is typically far more limited than forecasters predict. Activity may slip slightly, but overall economies remain resilient, according to a recent report for the Canadian Finance Ministry.
Of course, this might be because we have become so good at managing these ‘exogenous risks’ (those which occur outside the financial system). But the evidence appears otherwise, at least according to a recent article in The Economist (Cold Comfort, July 25th). For example, the Canadian report found: “People adapt and work around the shock; those unaffected work harder and longer to pick up the slack.” It is this type of finding that is hard for a risk manager to highlight as a reasonable source of mitigation, yet which in reality typically eliminates the risk.
There is no question that events like the Great Plague in the 14th century caused massive dislocation – but in this case, it transformed an economic system, something which even the most sophisticated risk manager might struggle to predict or mitigate. It seems the real risks we should focus on are those which occur within the system – so certainly financial disruptions or those which are localized within a specific supply network merit full attention. But it would seem that those which are media favorites are generally best ignored.
Organizational performance increasingly depends on the ability to coordinate scattered resources and relationships, and to motivate their contribution towards common goals. As highlighted in my previous article, the forces of technology and globalization have combined to destroy many traditional trading relationships and the hard-won trust that accompanied them. This article will explore the factors that are important in establishing and retaining trust and discuss the contribution made by contracts, contract management and negotiation. It will also examine some of the ways that contracts experts – from procurement, legal or commercial groups – may need to adjust their approach and behavior.
Executives are realizing that driving lowest price acquisitions through global competition is not the competitive panacaea that they imagined. It has revealed a new set of risks and associated management costs that they are struggling to contain. In addition, they have discovered that innovation and value-add have a strong correlation with collaborative relationships – and collaboration simply does not happen when there is no underlying trust between the parties (see Collaborating To Innovate).
Simply returning to old supply relationships and trading patterns is no longer an option, even if it were desirable. Companies must instead discover how to develop partnering and collaboration in the networked world. It is clear that their approaches to supplier selection, bid management, contract standards, negotiation and post-award relationship management are each key to achieving improvements.
Fortunately we do not have to find all the answers for ourselves. A growing number of business functions have grasped the need for change, often because of the failure in establishing effective internal virtual teams, especially when these are multi-cultural. Therefore we are able to turn to a range of research that is directly relevant to the challenge for procurement, legal and contract management groups.
One excellent article was produced by Violina Ratcheva, a lecturer at the University of Sheffield Management School. In a study of multidisciplinary project teams, she sought to understand how team inclusiveness was established and the role of trust in enabling positive outcomes. She concluded that ‘the extra ingredient which turns a group of professionals from different disciplines into an effective team’ is the result of the team establishing ‘ a new way of working’ which can only emerge through intense interactions.
The article contains some key messages for those in procurement, legal and contracts. For example, on the question of inclusiveness, Ratcheva found that trusted and valued team members are those who are prepared to allow their knowledge to be integrated with that of others in the group. This means not just demonstrating and imparting knowledge, but ensuring understanding by others . She also found that knowledge and advice must go beyond simple occupational expertise; it must also be sensitive to the context of the project. Therefore, highly knowledgeable experts who simply state opinions or quote rules will not be viewed as core team members.
Another important finding relates to the perceived value of each individual’s occupational or professional credentials. Inclusion is made more likely if other team members can see that a particular occupational field brings consistency and conformity to the project (for example, is it based on proven methodologies and a broadly accepted set of practices?). They also look for individuals who have access to external bodies of knowledge and extended professional networks – they value facts much more than opinions. Ratcheva summarizes this with the expression “Impersonal trust is based on the appearance of everything (being) in proper order”. And to establish this trust in a multi-cultural team, there must be openly shared discussion and understanding of the expectations generated by each local organizational environment, industry practices and addressing role-based stereotypes.
Sir George Sayers Bain, a past President of London Business School, highlighted the problem that comes from traditional functional education and organization. He describes how many managers see things in the context of accounting problems, legal problems, marketing problems etc. Yet in reality, most things are business problems that require the involvement of several functional areas and the management of the interfaces between them. This, he believes, demands far more focus on path-breaking and implementation and far less on functional rules or positions. Valued skills become those such as negotiation (win-win, not confrontational) and team building. Once again, many from Procurement, Legal and Contracts groups tend to be seen as strongly positional and often adversarial in their style – so once more, not conducive to team inclusion.
Time and again, when I talk with other functional groups about the role of the contracts or procurement or legal function, they say ‘Oh no, they are too negative’. If indeed we generate so little trust within our own organization, no wonder that our working practices often undermine trust in our trading partners. So how do we address this?
An excellent paper written by Michael Pirson and Deepak Malhotra of Harvard Business School identifies key ingredients – and reaches conclusions that may surprise many. In ‘Unconventional Insights For Managing Stakeholder Trust’, they observe “Customers who perceive a breach of trust are more likely to switch to a competitor. When trust is lacking in supplier relationships, more resources need to be devoted to contract enforcement and monitoring, the result of which is increased transaction costs.” So having highlighted the importance of trust, they are encouraged to find that executives generally understand the need to manage stakeholder trust -but their research then shows that “many of the trust-building initiatives and approaches that organizations invest in may be of questionable value. Others may actually destroy trust”.
In summarizing below the major ingredients for trusting relationships, I have also attempted to suggest ways these may apply to contracts and negotiation practices. However, these are simply illustrations and high-performing groups should consider these attributes as they undertake their service planning and contract design.
Transparency is increasingly seen as important to trust. Yet Pirson and Malhotra found that this was not true. In fact, enforced transparency has in many cases undermined trust. They offer excellent examples that should certainly cause regulators to pause; yet we must also think about the impact of enforced disclosure within contracts. Do rights of audit or Most Favored Customer clauses lead to open and honest communications, or tend to suppress them? Can we rely on imposed metrics or obligations to reveal significant changes in business circumstances? Negotiators must think carefully about mechanisms that support honest disclosure and open discussion of critical risks, problems or changes during the life of a relationship.
Integrity is important to everyone, but the authors discovered that it is a reputational entry card. If you do not demonstrate integrity, you will not get in the door, but over time, trust and loyalty depend on visible care for the results of what you are doing. Operating to the contract or to the letter of the law will not win hearts and minds. “Being right and maintaining your integrity is not always enough …. you need to demonstrate concern for the wellbeing of (the affected parties)”. So while our contracts must be sensitive to issues of integrity, it is in fact through the quality and sensitivity of negotiation practices and our post-award contract management that we will win over time. An obvious example during negotiation is when Sales make one set of promises and the contract attempts to place limits or may even contradict the commitments on offer.
Competence is another critical attribute. For external stakeholders, the key issue is apparently less to do with managerial competence and more based on technical capabilities – the ability to produce goods and services of high quality and to deal effectively with the supply chain. But companies that lack either of these attributes will eventually fail. The article offers some great examples that ultimately undermined customer service and commitment. For many contracts professionals, it is clear that we often struggle to build positive internal perceptions of our competence, in part because we appear too narrow or too judgmental and not sufficiently concerned about eventual outcomes.
Trade-offs represent an area in which our community should excel. The article points to the importance of balancing stakeholder needs and perspectives. As an example, it recites the story of Mattel and its 2007 product recalls. Pointing fingers and allocating blame to others misfired disastrously. For those in the world of contracts, this need to understand and reconcile stakeholder perspectives to ensure alignment is perhaps the greatest value we can bring to our role. It is certainly an area that IACCM emphasizes strongly within its Managed Learnign program and our research of the top performers in negotiation indicates that many of the leaders are very good at analyzing stakeholder perspectives and ensuring they have been addressed, not only during negotiation but also in the post-award phase. This quality becomes highly visible through metrics such as the frequency and resolution of claims and disputes.
Value congruence is the final area – by which the authors mean the perception that values are common and shared. I believe this is an area which most negotiators fail to address. It has become more complicated – and more important – as we venture increasingly into global markets and cross-cultural relationships. Typical bid and negotiation processes often seek to build alignments that do not really exist and frequently fail to identify or explore misalignments. We do this to our cost, because many such relationships prove to be unprofitable and may fail. This is simply because our true values and approaches to business, as well as our real expectations, will become evident once the deal is struck. I believe that sophisticated (and profitable) companies will increasingly ensure that there is ‘cultural fit’ with their trading partners. How that is done – and the ways it will change the role of conracts professionals – will be the subject of a future blog.
This article has only been able to highlight a small number of the valuable research contributions that are relevant to our community and its continued evolution. I will continue with this periodic series in future blogs. Readers may also be interested to refer to the expert perspectives of IACCM member D C Toedt, who has recently written on this issue of trust and offers an immediate tool for improved management of disputes.
The recent, very active discussions on this blog about the role and value of contract management have highlighted growing consensus on the need for improved financial skills and knowledge.
One of the distinctions that I observe between Contract Managers and Commercial Managers is that the latter often play a much more significant role in financial modelling and oversight of cost or revenue performance and risk. This is obviously a powerful source of functional value and acts as a counter-balance to the narrower role of managing only legal risk. The current credit crisis – and broader market volatility – has rendered the need for strong financial skills and awareness even more important.
It is not always obvious where the contracts professional can look for broad financial updates. One source that I find useful is gtnews. While many articles are very focused on detailed corporate finance or treasury issue, there is a good mix on wider market updates and trends. Last week, for example, there was a series on the Financial Supply Chain and the challenges being created by current credit conditions (pretty important stuff for anyone establishing trading relationships).
I was able to learn about the emergence of pre-paid cards and the development of industry standards in Europe. This is expected to reduce fraud and simplify a wide range of consumer or small business cross-border transactions. This issue of standards (or the lack of them) is apparently a major inhibitor to supply chain efficiencies in Asia Pacific, where trends to e-invoicing are limited by the lack of common platforms within the banking and commercial sector. So contract negotiatores need to be aware that deals involving trade within Asia Pacific may face limitiations in their use of e-commerce.
The article on e-invoices highlighted a number of further trends and opportunities in Asia. One interesting fact was a trend back to the use of Letters of Credit in trade finance. Open account, in which the importer pays after receipt of invoice, is currently the norm for some 80% of international trade business. But credit concerns have led to a re-think and the push for more security that LCs in theory provide. However, teh article warns that credit shortages have resulted in many banks becoming far more bureaucratic in their management of letters of credit and using the smallest excuse to delay release of funds. Again, important information for the contract manager.
The credit crunch is also apparently leading to a spate of mergers and acquisitions in the banking sector in Asia, leading some to suggest that international trade is best entrusted to the large international banks, with a consequent shift away from smaller, less technologically enabled local banks.
Finally, I turn t0 an article on Eastern Europe, which reveals the continuing challenges faced by the region as a result of the global economic crisis. Western European banks continue to tighten credit lines and in some cases withdraw from the region; sovereign credit-worthiness is still declining; and commodu=ity price drops have had substantial impact. The report identifies two distinctive segments, one being countries that are within the EU and part of the Euro-zone, the other being those countries outside the Euro-zone and are far more exposed. “In the current climate, a company’s corporate governance, which includes the trust and integrity of the management and owners, has become much more important”, according to the article – again, a consideration for the contract manager in assessing risk and seeking relevant disclosures.
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.
Commitment Matters 