A survey by the UK’s Institute of Directors reveals that training budgets have largely been protected during the current recession – unlike previous recessions, when they were frequently slashed.
Executive management has driven cost reductions in staffing (mostly through staff reductions, though also in some cases through cutting salaries) and travel and entertainment, but they view investment in skills as an important enabler for economic recovery and competitiveness. They also recognise that, at a time of slary freezes and reductions, investing in training helps the retention of valued employees. As a result, more than 80% have maintained or increased spending on training in the last 6 months.
Managers are increasingly concerned about value for money, however. This has led to less external classes and conferences and a greater focus on mentoring, networking and on-line programs. This reflects IACCM’s worldwide experience, with record numbers signing up for mentored Managed Learning training. The reasons we are told for this surge of interest is that organizations are seeking high quality at lower cost; they want well-defined content that equips individuals and teams to deal with change; and they want global, multi-company perspectives without the expense of physical classes.
Today, with travel budgets slashed and time at such a premium, training programs must adjust to new economic realities. Lengthy on-line packages lack the stimulation needed to drive effective learning, so programs must integrate a variety of techniques, such as on-line content supplemented by student networking, expert-led sessions, simulations and case studies. The fact that budgets have survived should provide the stimulus for the development of more creative forms of learning. With its worldwide network offering such diverse knowledge and opinions, IACCM is well positioned as a leader in these trends.
The survey mirrors IACCM’s experience,
Following on from my last post regarding public sector contracting, the Obama administration initiative creates an opportunity for change. While welcoming the recognition this brings to the importance of contract management, I am concerned that the proposals miss some of the key factors that must underpin improvement.
Major goals of reform should be to address demonstrated weaknesses and develop procedures and practices that meet the needs of today and the future. It is questionable whether these proposals satisfy either of these criteria. IACCM is preparing its comments and welcomes input from all interested parties. The Association is uniquely positioned to offer global, cross-industry and multi-functional perspectives, which are especially important not only for the sake of the US economy, but also due to the effect that reform may have elsewhere.
By Elizabeth Newell enewell@govexec.com June 18, 2009
Industry groups said on Thursday that they generally agree with the principles outlined in President Obama’s March 4 memorandum on contracting reform, but have some concerns about related guidance to be issued by the Office of Management and Budget in September.
During a public meeting hosted by OMB in Washington, contractor associations and other interested parties offered input on increasing competition in procurement, the most beneficial contract types, strengthening the acquisition workforce and determining when it is appropriate to outsource federal jobs. Speakers applauded the Obama administration for making contracting a priority, but urged that change stem from facts rather than perception.
Chris Braddock, senior director of procurement policy at the U.S. Chamber of Commerce, said industry fully supports expanding competition where appropriate, but asked OMB to recognize that sole-source contracting is necessary and helpful in some circumstances. He noted, for instance, that sole-source awards can increase the government’s flexibility and responsiveness in times of crisis.
Alan Chvotkin, senior vice president and counsel for the Professional Services Council, noted the Federal Acquisition Regulation already establishes a preference for fixed-price contracts. Chvotkin suggested that agencies be required to document and share their reasons for choosing any contract type so officials would not feel overburdened if they deemed a cost-type arrangement best for a project.
A number of speakers cited the diminished acquisition workforce as the thread tying together all these issues. Without a strong, well-trained cadre of contracting officers and program managers, agencies are more likely to mismanage any contract type or to cut corners by making sole-source awards, industry leaders said. They unanimously supported the administration’s attempts to strengthen the procurement staff governmentwide.
“We don’t have a single uniform definition of inherently governmental functions and since we don’t know what an inherently governmental function is, I’ve always been amused by how Congress can expect agencies to understand what functions are closely associated with an inherently governmental function,” Chvotkin said.
Discussion moderator Jeff Liebman, executive associate director of OMB, thanked the speakers for coming to the town hall-style meeting and offering their opinions. He urged interested parties to continue to engage with OMB by submitting written comments on Regulations.gov by July 17.
So far as I know, the memorandum issued by President Obama on March 16th calling for improved contract management was a first. I am not aware that any other head of state ever highlighted the importance of contract management discipline in the effective and proper application of public sector funds.
Recent incidents demonstrate the urgency of this need. For example, Sherry Gordon reported yet more problems for the UK’s National Health Service when she wrote recently on Spend Matters. And the US press has been full of the contention in Virginia, where Northrop Grumman won a major IT outsourcing contract that is now riddled with questions. A further variant arose earlier this month, once again affecting the UK health service, when the press questioned the competence of procurement in its use of reverse auctions to select and deliver outsourced care services – and its failure to oversee the results (see Reverse Auctions).
It can be tempting to blame the suppliers. For example, it is suggested that Northrop Grumman lacked the skills and experience to undertake the outsourced work in Virginia and the media in the UK is pointing at BT as the culprit for missed deadlines and service level failures. But in the end, projects like these depend upon a high degree of collaboration and honesty between the parties. They also require robust governance and rigorous performance management. And that has to be a mutual commitment and capability. Blame is rarely all on one side; and certainly not when, as these incidents suggest, the problems and issues go back over a number of years.
Today’s complex, service-based deals demand selection and post-award management procedures that are far more robust than most public sector agencies are equipped to provide. Traditional procurement training is inadequate – and in many cases makes the problem worse. The tendency for public procurement policy to focus on price alone is reinforced by training programs that treat suppliers as untrustworthy and to be held at arm’s length (see for example my recent blog on A Simple Way To Undermine Procurement Success). In many cases, delivery personnel have little training in supplier relationship and performance management, there is little or no continuity of staff and fragmented responsibility for outcomes.
President Obama’s concern was echoed in a recent report by the UK’s National Audit Office, which focused on the challenges in post-award contract management and highlighted deficiencies in current practice. Last year, a Rand Corporation report on EU Public Procurement Policy (based on research by IACCM) was scathing in its observations of contracting policy and practice. The report highlighted the distorting effects of risk-averse terms and conditions, often compounded by the use of external consultants and law firms. Overall, it found that the lack of robust and transparent contracting principles not only sets the seeds for potential failure of many projects, but also leads to higher pricing due to the levels of risk that suppliers must bear.
All the evidence suggests that the need for improved contracting competence is urgent. It is refreshing that President Obama’s advisers have understood the need; and there are similar steps afoot in the UK and Australia. However, given the scale of today’s public sector expenditure, combined with the need to ensure greater efficiency and (shortly) savings, the pace of change must be faster.
Apparently Tolstoy once observed “Everybody wants to change the world, but not everybody wants to change oneself.”
Most of us recognize that we are going through a period of rapid and significant change and there are parts of it we like, and parts we don’t like. In that sense, Tolstoy’s observation is incomplete, because it omits the point that change will occur, regardless of whether or not we want it. So a key question for each of us is to ask how open we are to change and how we react when it is staring us in the face.
Last week I interviewed Jonathan Farrington, who is an expert in selling. He made the observation that around 80% of people prefer a relatively predictable role – they are not going to step far out of the box. Another 15% are more enquiring and can make the move into a consultative role, performing tasks that demand solutions or leading change initiatives. The remaining 5% are those who really welcome innovation and are anxious to find and define value sources. These are the potential change agents.
IACCM is at the forefront of change. The Association sees one of its core goals to be helping its members prepare and equip for the future. In the beginning, we used to get disheartened – we produced so many ideas, so much research, such a wealth of practical tools to lead change, yet it seemed no one ever picked them up and acted upon them. Everyone said they wanted change – but to Tolstoy’s point, change that did not really involve change for them.
Steadily we realized several things. First, change agents were in fact picking up our ideas but they often did not tell us. Second, we could not expect all our members to jump forward and we had to shift our message. Today, we acknowledge that change does not excite and motivate everyone. But we make the point that it is much better to have some control over your destiny than to leave it to fate. So if you want to lead, that is great and we will help you. But if you don’t want to lead, that is fine too – so long as you convey the message and materials to someone who will show that appetite.
At the very least, it is worth protecting yourself against unacceptable change.
There is so much talk right now about supplier risk, but disappointingly little about how customer behavior itself is often at the root of unsuccessful projects and relationships. If we truly want to reduce the risk of things going wrong (and also change the agenda for future negotiations), then both parties must be willing to undertake honest self-examination and to listen to the viewpoints and perspectives of the other.
An excellent example of the problems we face was highlighted by John Yates, partner at Beachcrofts, a top UK law firm. John was speaking at a lively and very well attended IACCM member meeting in London. His topic was “Are Buyers & Sellers Focusing On The Wrong Things?” and his broad conclusion was ‘yes, they are’. (IACCM will have John cover this material on an upcoming Ask The Expert call).
John started by telling us he was angry. He had spent the previous day looking at UK public procurement guidelines and model contracts. And that had led him to think about the typical behaviors he has encountered when he is working with clients (both buy side and sell side) on major negotiations. I am going to save his wider thoughts for our future conversation. Today I want to write about his observations regarding the quality of information.
Almost every negotiator claims that they are seeking win-win relationships. Almost every bid manager and negotiator expects the other side to provide full and honest disclosure – and if they do not, then trust is undermined. What had struck John was the frequency with which modern procurement and sourcing strategy seems to result in buyers who deliberately withhold information and see this as a valid way to reduce their risk (and allocate it all to the seller).
Behind this thinking (which John observes as endemic to much public procurement) is the idea that if you remain silent on key aspects of your requirements or current business conditions, the seller cannot subsequently point to any inaccuracy in these statements as contributing to possible failure or reasons for price increase. So by remaining silent you place the onus on the seller to undertake ‘due diligence’ – and hey presto, when they discover the truth, it is their fault for inadequate checking!
John’s comment was “Buyers see no connection between quality of information provided, and price, quality and risk”. Withholding information (or failing to take responsibility for its discovery) creates extra risk and then of course forces the seller to push for defensive clauses and to build a defensive organizational posture and behavior.
It was an excellent point and one to which many sales organizations will subscribe. As part of the development of a more formal and disciplined procurement process, far too many sourcing organizations were trained to treat suppliers as the enemy. Far too many were trained to prevent sellers having direct contact with users and to ration the information that is provided. This became integrated into the thinking behind ‘commoditization’ and attempts to standardize and simplify the value of supplier offerings. All these steps are understandable, but they do not work.
Procurement must become more sophisticated in the way that it evaluates business needs and supplier capabilities. One key step is to ensure far better exchange of information across all the key stakeholders. This will not only improve the frequency of successful acquisitions, but will also place Procurement into a far more valuable and strategic role within the business.
SpendMatters raises an interesting debate about the validity of questions in an RFP. It highlights an RFP for legal services which apparently contained the following questions:
– Whom do you regard as your major competitors?
– How do you compare your firm or company against your major competitors?
– What are your key strengths relative to theirs?
– What is the contact information for one client that has ceased to do business with you within the last two years?
– What are the attrition rates over the past two years among your employees who would be working on our matters?
In his article, Rees Morrison describes these questions as “blatantly intrusive and unfair”. I do not agree.
First, I do not think such questions are new – I have come across similar requests in many RFPs. Second, I think such questions are not only right, but in fact are probably welcomed by many suppliers.
The steady move to a services-based economy has made the task of validating quality of supply significantly harder. Suppliers make claims about outcomes that are very hard to test or prove and it can be tough to evaluate relative performance of providers. So wanting to know what you really think are your distinctive features and benefits against the companies that you view as yoru competitors is entirely valid. Indeed, the question regarding who you see as your competitors is in itself very revealing. As a supplier, do I cite the poor performers in my market (risking guilt by association), or do I highlight those who relay scare me?
Service providers depend entirely on the quality and motivation of their staff. Generally they make much of the strength and depth of those staff, the investment in training, the specific knowledge or skills they bring. So asking about attrition is a smart thing to do. It is no more offensive than asking about typical product lifecycles or withdrawal policies.
As someone who often replied to RFPs, I welcomed questions like these. They gave an opportunity to describe strengths and make points about differentiation that was otherwise often lacking. The only time I would not want to give answers would be if I had no source of differentiation, or if my attrition rates were awful – and in that case, I guess the customer was pretty smart to ask.
What do you think about these questions? And are there other examples out there of really good – or really bad – RFP questions?
The Economist reveals interesting insights to the world of derivatives and their use in corporate risk management (Corporate Hedging Gets Harder, June 18th 2009). It also highlights that this important mechansim may be under threat, a victim of the credit crunch and the readiness of banks to carry risk. This could have significant impact on the riskiness of doing business with key suppliers and customers.
The article explains how many firms use derivatives to protect themselves against the swings in commodity prices. For example, as many as 55% of the world’s large companies last year hedged their exposure to fuel prices – and in many cases they now face large paper losses because the price fell so far and so fast. According to the article, “Among the hardest hit have been airlines, many of which paid to protect themselves from higher fuel prices last year when the oil price peaked at $147 a barrel. Because oil now costs much less, many have had to write down the value of those contracts, even if they are not due to be settled for years. The losers included Cathay Pacific Airways, which made paper losses of close to $1 billion, Ryanair, Air France-KLM and Southwest.”
38% of large companies also use derivatives to protect themselves against currency movements and interest rate hikes. The volume and value of such contracts has grown steadily in recent years, up by about a third last year alone.
So it is through this world of finance that many companies are protecting their ability to trade profitably and to manage the uncertainties of global markets. And apparently their bankers smile on those who hedge their risks in this way – it has a direct effect on the banks willingness to lend and thereby provide working or investment capital.
However, the credit crunch has reduced the appetite of banks for carrying risk, so only companies with the highest credit ratings can now obtain derivative contracts. And according to the Association of Corporate Treasurers, “some perfectly solvent banks have wriggled out of derivative contracts by invoking obscure break clauses that they had previously promised their customers they would never use”.
Even for those who can obtain bank support, the associated bank fees have risen dramatically – from a typical rate of 0.1% of the contracts to levels as high as 2%. Those whose credit rating has dropped face a different problem. Fearing that some of their cash-strapped customers may default, banks “are asking firms to post collateral for the money they owe on derivative contracts”.
This specialist area of risk management has been of major importance in supporting the growth of world trade and the management of key aspects of supply chain risk. The additional costs and limited availability of such instruments has created a new set of risks about which most business-to-business negotiators are only dimly aware. As we look at selection criteria for suppliers or customers, we may increasingly need to understand the extent of their exposure to commodity price or currency fluctuations – and seek assurances over the quality of their hedging of such risks.
According to an article in Business Week, we should all feel sorry for the airlines. “The burdens they operate under are more extreme than those most businesses face—so they present a perfect opportunity to study and be prepared.” (see http://www.businessweek.com/managing/content/jun2009/ca20090616_430880.htm?campaign_id=rss_daily)
The idea behind this article seems to be that airlines are in some way risk champions, at the leading edge of every imaginable disaster. And that their more fortuante cousins in other industries can somehow learn from the trail-blazing airline industry.
On one very basic level, I agree. But the lesson I draw from the airlines is that it is yet another of the traditional, cloistered sectors that has largely brought the disasters on itself. So the lesson to learn is, stand on your own feet, never be complacent, always work for your customers.
Just like the automotive industry, airlines believed they were special. And when the ‘specialness’ began to wear thin, they turned to the politicians for protection. Pleading all sorts of special interests, they found governments that to varying degrees were prepared to regulate and prevent real open competition. Airlines were strategic; airlines were national flag carriers; airlines protected jobs; airlines demanded special safety standards that were not compatible with real competition. For all these reasons and more, major airlines (including those in the US) were protected from take-over, were protected from rigorous competition, were bailed out when they failed.
The article suggests deregulation somehow created inevitable financial losses. Why? There are plenty of airlines in various parts of the world that make money (though it is true that the oil price has undermined most of those profits). Not all of them are low-cost start-ups. They make money because they are creative, they target specific market segments, they look for ways to cut costs or deliver in-demand services. They work for customers rather than for themselves. And they do not turn to politicians for protection.
The airline industry is riddled with distortions – many of them in the nature of their contracts. They fail to properly consolidate, they fight take-overs and instead run inefficient alliances. They are confused over how to contract with major customers and rather than offer relationships based on value and ‘solutions’. compete instead on price discounts – and are then shocked when people see them as a commodity. They have failed to tackle labour issues and have contracts that represent an impossible cost burden. They deliver appalling customer service through staff who are generally demotivated and aggressive. Security issues – at least in the US – are often seen as an excuse to abuse customers and ignore their valid complaints.
So yes, I do think many of the airlines are a special case – and the sooner they are allowed to face up to true global competition, the sooner we will have an industry that is creative, responsive, right-sized and profitable. And maybe then the ‘burdens they operate under’ will be shown to be largely of their own making.
One of the reasons that our work at IACCM is so fascinating is that we gain perspectives from a range of different business functions. And many of the challenges we hear about are very consistent; they all involve the idea that a) we must expand our role and b) we need some new skills and areas of knowledge in order to do it.
The truth is that inter-comapny relationships are becoming more important and in many ways more fragile. Simply selecting a supplier or a customer and then hoping that performance will be good is no longer enough. Everyone involved in establishing or managing trading relationships understands that we must become better at defining the relationship and then in ensuring it delivers the right outcome. In other words, we must measure thequality of our work.
But that is hard – and it is made harder by the fragmentation of today’s organizational models. It is often unclear who does what in structurng or selecting trading agreements. It is even less clear who is then charged with ensuring it achieves its goals.
As we discuss this with senior managers from Procurement, Legal and Contract / Commercial Management, they all feel that there are gaps in today’s processes and responsibilities. Many see this as an opportunity – so long as they can assume the mission to fix the problem and if only they had the right skills and tools to do it.
A message we regularly hear is that delivering greater value depends on people who have a more creative mindset, who have good facilitation and problem-solving skills, who can work cross-functionally and deliver outstanding market insights. In addition, they must be good risk managers, great negotiators and value-focused commercial experts. So we must train people and perhaps bring in a few new faces. But is that really the answer?
I hear similar recipes for success from other professional groups. It seems that project managers and sales account managers also plan to fill these gaps. So there is plenty of competition – yet little evidence that much is happening.
The truth is that many of the individuals populating today’s business functions cannot and will not make this transition. If they had the desired skills, they would not be doing their current job. So maybe we are on the wrong track and need to think not so much of expansion, but rather of integration. And that in many ways is what lies at the heart of the IACCM concept.
Traditional business models were built on the idea of functional groups that delivered specific expertise and were motivated by a system of creative contention. Today’s demands for greater speed, the introduction of greater complexity and the innovation caused by global networks have destroyed key aspects of that model. The result of these changes is that we often see destructive contention and competition between functions, as they struggle to deal with the demands of the new business environment.
While it may be true that businesses today require more of certain skills, that is not because such skills are completely lacking – they simply are not well deployed and in some cases, they are in short supply. The challenges that face buy-side relationship management are very similar to the challenges that face sell-side relationship management. Even if we could fix one side, it would not address the problem – because the other side would remain deficient. So we must take a more holistic view – and perhaps that means greater consolidation between skill sets and the amalgamation into new business functions.
Just as the old jobs of the late mediaeval period vanished, to be replaced by new roles and organizational models, so we must today face the realities of the networked world, with all the differences that implies. I believe we have the chance to change the mould and consolidate the skills and knowledge of contract and c0ommercial specialists from both buy-side and sell-side into a single, new business function.
IACCM has released its latest insights to the Most Frequently Negotiated Terms. This annual study is eagerly awaited by many negotiators and contract policy strategists for the insights it offers to business trends and issues.
This year’s survey differed from those of previous years because IACCM asked participants (who came from Legal, Procurement and Contracts / Commercial groups around the world) to describe not only what they spend most time negotiating today, but also whether they feel that today’s focus is best for their business. 75% of them said no – that at least to some extent, the agenda should change.
In their report, IACCM reveals for the first time the topics that seasoned members of the negotiating and contracts community believe should represent the priorities for a negotiations agenda. And they set out some thoughts on why this change should occur, plus the reasons it is proving hard to achieve.
Developing the report took longer this year, mostly because a record participation has allowed far greater detail. For example, it has allowed the results to be sorted in many different ways – by function, by jurisdiction, by industry. The initial report will be followed by the more detailed break-outs with commentary on why differences exist and what they tell us about the quality and effectiveness of negotiations.
Perhaps the biggest question to be answered as a result of this study is how we can make the transition to the new negotiating agenda. It is clear from the answers that many contract and negotiation experts feel frustrated and constrained in achieving change. They see internal and external barriers, they know that they could achieve more with the right management support and the right timing and level of involvement.
IACCM will be working on how to advance this agenda and will welcome thoughts and input. In the end, progress will depend on some inspired leadership and teamwork across the community – bringing together lawyers, contract, commercial and procurement managers to define and promote the way ahead.
Two specific ways that IACCM is already approaching this change agenda are:
- IACCM is currently running a survey on the Most Admired Companies For Negotiation. Based on the results, it will conduct a series of in-depth interviews with the top companies and publish a report detailing the practices and approaches that have gained them this respect. Please take a couple of minutes to record your view at https://www.etouches.com/negotiation1
- IACCM has a Negotiations ‘Community of Interest’. This highly active group of more than 2,500 contract negotiators has been making real strides in developing ideas around best practice, undertaking research and forming an active networked community on a worldwide basis. Simply log-in to the IACCM site at www.iaccm.com and visit the Communities of Interest page, or drop an e-mail to info@iaccm.com and they will register you as part of this group.
If you would like a copy of the report, which details the Top 30 negotiated terms of today and for the future, simply e-mail info@iaccm.com. And in case you want to know the current Top Ten, they are:
| Limitation of Liability |
| Indemnification |
| Price / Charge / Price Changes |
| Intellectual Property |
| Confidential Information / Data Protection |
| Service Levels and Warranties |
| Delivery / Acceptance |
| Payment |
| Liquidated Damages |
| Applicable law / Jurisdiction |
Commitment Matters 