It is less than a year since I wrote a role description for a contract manager (and within this term I include commercial management). The article attracted a high level of interest and is still frequently referenced. So in view of the dramatic shift in economic conditions, I thought I should revisit this topic and answer two questions:
- Has the importance of the role changed?
- Have the tasks or contribution of a typical contract manager been impacted by the dramatic shift in economic and business conditions?
The Importance Of The Role
The original article highlighted the extent to which a global networked economy had elevated the role of contract management within high-performance organizations. It emphasized the extent to which increasing complexity was demanding greater discipline in the formation and management of trading relationships – and how the contracting process is a key mechanism for ensuring such discipline.
Some businesses have developed their contracting competence without investing in dedicated contract managers, but for many others (especially those in high value / high risk business-to-business markets) there has been steady growth in the numbers and quality of the contracts staff.
A key aspect of the role of a contract manager (as opposed to a contract administrator) should be to ensure that commitments sought or given are ethical, achievable and in compliance with organizational policy. Therefore recent economic events – and the collapse of trust in standards of corporate governance – implicitly make the role more important.
In addition, contract skills have been much in demand as a result of the need to renegotiate many existing relationships and improve the standards of governance over others. The US administration has not been alone in highlighting the challenge of building sufficient contract management skills to 0versee the barrage of new capital projects being funded by the public purse, as well as ensuring the success of those already underway.
And as I argued in the original article, high value contract management is about more than just compliance and transactional oversight. It is also about ethics, integrity, the management of reputational and regulatory risk, and ensuring on-going competitiveness. So the role of a contract manager has been made substantially more important – and more strategic – as a result of the economic crisis. In particular, there is a need to ensure that business opportunities are not stifled by risk-aversion; and that contracts achieve positive economic outcomes.
Changing Tasks & Contribution
Investment in contract management is increasing – and this seems likely to continue, both in terms of automation and people. As mentioned above, the expectations of executive management are lkely to increase. They need contract managers who can deliver results and keep the business out of trouble. Hence the need for balance between compliance and innovation.
To the extent that new regulation occurs, contract managers will be expected to understand it and ensure that it is respected. But many business leaders will be hoping that they can run with a system of self-regulation – and this places even more emphasis on the role of the contract manager. In order to remain competitive, businesses must remain flexible; the rules, practices and procedures must make both ethical and economic sense.
The original article highlighted that high-performance contracts groups undertake both a strategic and operational role. They are involved in setting, managing and changing the policies, practices and procedures that determine contract terms. Today’s environment is accelerating that need and also making the job far more attractive – and visible. With that visibility come increased demands and expectations for performance and value – which in turn means measurements.
The recent G20 meeting offered us a sense of the importance of the contract management role and some of the parameters that will surround its performance. In their final communique, they set out future principles of governance for the financial services sector, including the following:
“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 ….”
So in answer to the question on changing tasks and contribution, it is my belief that we will see some shift in the emphasis of tasks performed (and in particular earlier and more selective involvement) and considerable changes in the contribution and its measurement. Contract Management will be targetted with the tasks of protecting reputation risks through ethical contracting and relationship practices; yet at the same time with the need to ensure competitiveness through innovative terms and adaptive processes. It will increasingly be a life-cycle role, which means establishing the right contractual framework and then overseeing its successful management and delivery of expected results.
The G20 emphasis on ‘separation of duties’ is also likely to be reflected in many organizational debates, with stronger pressure for contracts and commercial staff to be immunized from the pressures of business unit performance and deal-based bonus schemes. It will be essential to ensure they have strong market awareness, without succumbing to the short-term demands of individual transactions. Modern technologies should enable this balance, especially with the creation of ‘centers of excellence’ equipped with the right applications, analytical skills, authority and accountability.
I have highlighted the types of measurement that should apply to contract management in previous articles, but they include things like cycle time reduction, the percentage of deals enabled through e-commerce; the economic value of term alternatives and innovations, the reduction in claims and disputes. Good contracting is fundamental to any healthy 21st century business – and it requires a new breed of contract managers who are commited to professionalism.
So perhaps the biggest change (and arguably a dependency for success) is the need for Contract Managers to recognize that they can no longer flourish as talented individuals, but must adopt the behaviors of a profession – a consistent body of knowledge, shared tools and methods, a commitment to continuous improvement through research, benchmarking and pooled experiences and development of learning sources that enable a career path.
The demand is there and it is growing; the challenge right now is to increase the quantity and quality of supply and to establish leaders who welcome accountability for results.
The G20 meeting took steps to address the regulatory environment for financial services. Will these new standards remain limited to the finance industry, or will they influence broader standards?
Whether or not there will be increased regulation affecting the entire corporate sector remains to be seen. Industry groups, such as the UK’s Institute of Directors, are already mobilizing to push back against possible regulatory initiatives.
One way that companies may seek to reduce legislation is to take proactive steps in self-regulation. And an obvious area is the separation of ‘poachers and gamekeepers’ within their staff. The G20 communique set up a Financial Standards Board and among the principles it will oversee is:
“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’s influence on incentive compensation.”
It can certainly be argued that those within Legal, Procurement and Commercial / Contract Management are ‘engaged in financial and risk control’ – so we should start thinking about the ways this will change our role, our organizational alignment, our measurements, our standards of practice and our reward systems. We must also ensure that increased responsibility for good governance does not result in damaging or destroying the business.
An exclusive focus on compliance and monitoring would potentially inflict such damage because it would often crush innovation and change (and therefore we would be driving compliance with uncompetitive practices). So to protect our organization’s health, we must first initiate and / or approve the policies and practices that will ensure healthy and ethical competition; and then we can be confident that we are monitoring compliance with the right goals and objectives.
This is a critical shift for our community. It is one that several groups already exhibit – but they are the exception. That is why IACCM is so strongly focused on helping organizations understand and make the transformation to a world where risk management is a balance between opportunity and consequence. Those who attend the IACCM Americas conference in Orlando (April 23rd – 24th) will return well equipped to start their journey.
On the Supply Excellence blog, Mike Petro has written an excellent article regarding the evolving ‘Buy American’ policy.
Petro describes much of the confusion such policies create and the nightmare that they represent for those charged with either writing or performing contracts. He highlights the threat to project costs, as well as the many areas of unanswered questions (e.g. when is a company or its goods deemed ‘foreign’?)
There are two particular areas that should concern IACCM members:
- As with all Government -initiated clauses, it can be extremely hard to obtain clarity over the steps needed to be in compliance. Therefore we are entering into uncertain commitments – always a practise to be avoided. Companies face the very real risk that accusations of non-compliance will be driven by political interests, rather than any sense of equity or justice. For example, NGOs or publicity-seeking politicians will start campaigns that cause severe reputation damage, even though it may eventually be decided that there was no infringement.
- This clause sets an unfortunate example to the rest of the world. If copied elsewhere (almost certainly the case), it will create tremendous uncertainty for companies everywhere. It potentially implies the need to monitor whole supply chains for compliance with a hodge-podge of hastily passed laws. Recent US research into monitoring of the supply chain for food products (a legislative requirement) showed that more than 70% of outlets do not comply; most companies have no clue about the origin of goods or the hands they have been through. It is therefore clear that this clause will increase risk, increase workload and delay contracts (including slowing down the very public works projects that are supposed to kick-start the economy).
Whether or not one agrees with protectionism, no contracts expert should support laws that drive uncertainty and risk. Many argue that this uncertainty is inevitable because global markets no longer allow such discrimination. IACCM’s view is that, unless the law can be improved to create contractual predictability and certainty, it should be scrapped.
The debate over the impact of e-sourcing on buyer / supplier relationships rumbles on, with an article in Supply Excellence that claims e-sourcing and supplier relationships are ‘a match made in heaven’.
IACCM research is not alone in finding that most suppliers disagree with this assessment. As I observed in an article last year, which was specifically addressing reverse auctions: “Logically, the (buyer’s) terms and conditions associated with a reverse auction ought to be considerably less onerous. The customer should – in the interests of gaining the lowest price or cost of ownership – be prepared to take on higher levels of risk and responsibility for selection and use.
Yet as most suppliers know, the reverse is generally the case. Buyers want to have their cake and eat it. They demand not only conformance to specifications, but then also impose onerous terms on the supplier – indemnities, liabilities, often also areas like IP rights and liquidated damages.” Such attitudes do not create a framework for open, trusting relationships – which is why many people within customer organizations share the supplier’s hostility to e-sourcing.
Is The Problem The System Or The People?
The experience of most suppliers is that buyers hide behind the e-sourcing process and use it to impose ‘compliance’. The Supply Excellence blog claims that this ensures transparency and enables suppliers to better understand and address their weaknesses, including the ‘weakness’ of an uncompetitive price. They quote Oracle, saying “E-Sourcing has actually proven to help increase margins for some suppliers”, by forcing them to address inefficiencies.
I have no doubt that e-sourcing has delivered many benefits. But I am also certain that in many cases it continues to undermine economic value and relationships. The big question to be answered is whether those failings are intrinsic to the software products (and if so, what limitations should be placed on their use?), or due to the inadequacies of those using the software.
Questions To Be Answered
Specifically, many e-sourcing events stifle discussion. They seek to make the areas of comparison narrow and to discount things that the buyer has either decided have no value, or perhaps has failed to imagine. Second, they tend to eliminate judgment. Relationships have many nuances and while software can undoubtedly help in narrowing the field, it can also eliminate perfectly good matches because it has no sense for ‘chemistry’. Third, e-sourcing struggles to consider life-cycle performance. It tends to base decisions on today’s environment, eliminating history and ignoring future change.
But to be fair, these criticisms are often levelled at Procurement regardless of whether or not they are using e-sourcing applications. The evidence suggests that it is Procurement’s lack of accountability for longer-term relationship outcomes that undermines the selection process. This results in a ‘one size fits all’ approach to supplier selection, regardless of the strategic significnace of the acquisition. And this is why e-sourcing often gets maligned. It is a visible and outward manifestation of inappropriate or unskilled purchasing behavior.
So in my view, e-sourcing does indeed bring benefits in some situations. What I would really like to know is whether it can in fact bring benefit in all situations, regardless of complexity? And if so, how should its use vary to ensure it really is a tool that offers mutual buyer – supplier value through stronger and more collaborative relationships?
I would love to hear from e-sourcing suppliers or consultants with definitive answers to these questions; or even better, from an organization that can point to ways it has implemented such tools, driven greater internal efficiency, AND built greater supplier loyalty.
Renegotiation of existing contracts is pervasive, with more than 70% of corporations reporting extensive levels of activity. However, just 30% have a defined strategy for renegotiation.
These statistics offered an important backdrop to the interview I held yesterday with three top practitioners – Dan Mahlebashian, Chief Contracting Officer at General Motors; Tim McCarthy, Worldwide Director of Pricing and Contracts at Rockwell Automation; and Bill Huber, Director of CPO Services at TPI.
Each member of the panel confirmed the trend towards renegotiation, highlighting several factors that are driving it. But while precise industry considerations may vary, there is no question that the most common cause is the push to reduce costs and improve cash flow. Tim McCarthy, who is on the receiving end of renegotiation requests, has no doubt: “The issues are pricing and payment terms.”
Bill Huber and Dan Mahlebashian both expressed concern over renegotiations that focus narrowly on price. They pointed to the fact that cost reductions and efficiencies can be achieved from a variety of approaches and that it is possible to do this in more of a win-win style. They shared Tim’s concern that a narrow focus on price reduction inevitably undermines the strength of trading relationships. In answer to a listener question, they agreed that such approaches risk destroying value-add and innovation from key suppliers. “Simply treating all negotiations as one would a commodity – focusing on price – is very dangerous,” according to Bill Huber.
The contract management organization at General Motors is working hard to avoid this approach. They have found great support and cooperation from their major outsourcing providers – and that is not a characteristic they paln to put at risk. “In terms of immediate steps,” commented Dan Mahlebashian, ” we look to restructure contracts and relationships. We are looking for simplification, re-scoping, taking out elements of performance that are no longer necessary or so important.”
Bill Huber agreed with this thoughtful approach and observed that smart companies are looking to re-address structural aspects of their deals, as well as pursuing opportunities to consolidate activities into a smaller group of providers. But he emphasized that this approach cannot be followed with every supply relationship. Sourcing groups must segment their supply portfolio and understand the differences between true commodities and the relationships that differentiate business performance. The most talented experts within the contracting or sourcing organization, those who have the capability of driving innovation, and value creation and framing risk/reward options for executive decisioning must be dedicated to the those critical, differentiating relationships.
Top Suppliers Also In On The Action
Bill highlighted that the traffic is not all one way. He has noticed that market sensitive providers are recognizing an opportunity to upgrade their customer portfolio. For suppliers who have no immediate cash or credit concerns, this is a time to be more selective in which accounts they gain or retain. These ’suppliers of choice’ (in most cases, the well-established brand names) are demonstrating increased due diligence and are today more likely to withdraw from the bidding if they feel a customer is at risk, or is seeking to impose strongly one-sided terms.
“These suppliers are also looking to expand scope with existing clients, to overcome reductions in service due to factors like reduced sales or headcount,” Bill said.
At several points in our conversation, the experts focused on the issue of strategy. “You need a strategy,” said Dan Mahlebashian. Tim McCarthy agreed strongly. While emphasizing that each situation requires case-by-case handling, he has no doubt that companies which fail to consolidate and learn from experience will struggle to survive. Tim highlighted examples of issues – such as contract suspension and supplier termination for convenience – where there may not have been documented policies in the past. “This (current economic) situation is causing a need for a whole new set of policies and practices; you cannot just make those up as you go along.”
A Breakthrough Opportunity
Each of the participants was equally vocal about the importance of contract management and commercial expertise. “A failure in contract management is the silent killer of expected results,” stated Dan Mahlebashian. There was consensus that this is a time when contracts and commercial personnel must rise to the challenge and the opportunity for greater status and responsibility. Bill Huber highlighted the unique insights that those in contracts organizations possess (buy-side and sell-side). Tim McCarthy and Dan Mahlebashian have both observed the need for contracts groups to show leadership and ensure executive management has visibility into market conditions and the strategies needed to survive and flourish.
“It is time to raise the stature and visibility of the function – we have been waiting for this opportunity”, said Tim McCarthy. He also agreed that current economic conditions have removed any doubts about the need for contracting to be viewed as a life-cycle activity. All the participants observed that modern contracts professionals and organizations must take accountability for deal outcomes, not just the input of a signed contract.
In order to drive a renegotiation strategy, it is critical for those in the contracts, procurement or commercial organizations to network more effectively. They must consolidate experiences and jointly develop and propose solutions. They must understand and distinguish between relationship types and avoid ‘one size fits all’ approaches. And the networking goes beyond simply internal groups. The panel highlighted the way that successful companies are using IACCM as a focal point – through message boards, through use of the IACCM networking facilities and through research and conference calls. They also observed the importance of physical events, such as the up-coming IACCM conference in Orlando, where much of the discussion will focus on today’s challenges.
The Path To Success
I asked the panel to tell me three things that they would recommend as a way forward for contract management and commercial groups.
Dan Mahlebashian offered the following advice:
- Standardize your work environment, both contracts and processes. It really helps both suppliers and customers if there is a predictable base for driving improvements and changes.
- Ensure a structured discipline for governance – oversight of performance, the relationship and financial management.
- Leadership. It is critical that we are equipped and ready to deliver against executive needs – and also to push back when the business may be driving in the wrong direction.
Tim McCarthy drew on a slogan used at Rockwell Automation in identifying his three imperatives:
- Listen. Take your time to understand the driver behind customer requests. Get into their skin, rather than react with a defensive position.
- Think. Based on your listening, work with others in your organization to map out a path forward that benefits both sides. Explore ways to change the tenor of the other party’s demands.
- Solve. Bring your ideas to the customer. Demonstrate you have listened and show concern for their needs. Communicate how those needs can be met with a more creative ‘win-win’ solution.
Bill Huber also highlighted three steps that he has observed in the organizations that appear to be coping best with current conditions:
- Strategy. You must have one. And it must tackle issues such as what resources you have available (internally or externally) to address the demands of the current business environment. The strategy must set scope and timing based on agreed priorities – it is a time for targetted shots, not a scattergun.
- Segmentation. Activities must be prioritized and driven by the importance of the relationship.
- Negotiation. Organizations that lack a structured process for executive review and disposition of alternatives for innovation outside of simple price reduction in the context of negotiations must establish one. For those organizations who have previously adopted this approach, it is time to evaluate how it can be taken to the next level..
“In the end, we come back to leadership,” concluded Tim McCarthy. “Our professionals have a unique perspective. Today we are faced with new challenges. If we don’t lead, who will?”
Channel Insider carried an interesting story about eBay, How eBay Is Alienating Selling Allies.
What this article illustrates to me is the challenge organizations face in establishing ‘fair’ trading terms. It highlights that fairness ultimately depends on the fact that both sides will can trust that the other will behave ethically and honestly – either because they want to or because they have to.
What does this story tell us about some core contracting and negotiation principles?
In the case of large b2b transactions, there are intrinsic safeguards that should allow the parties to moderate their need for onerous contract terms and aggressive negotiation style. For example, there is reasonable probability (at least in normal times) that both companies will remain in business and therefore offer a target for redress and recovery. Second, as corporate entities, there is a reasonable probability of fundamentally ethical behavior, if only because of concerns over reputation.
So part of a risk assessment is to establish whether principles such as these apply in all circumstances. And of course they do not. Smaller business or those that appear financially unstable may not operate to such high codes of practice – and hence they tend to face more onerous terms. Similarly, some markets function with a very different business culture, where the values and principles of one side may not be held or understood by the other (Intellectual Property or Health and Safety would be good examples). Again, this imposes a need not only for more detailed discussion but also for added safeguards in establishing any relationship.
Consumers – as the story in question shows – are yet another breed. It is unattractive for businesses to have to chase consumers. Courts are not intrinsically sympathetic; tracking them down can be difficult; it is costly to pursue them. That is why damage to the consumer’s reputation is one of the few realistic areas of recourse – hitting their credit rating or otherwise limiting their ability to trade.
And that is ultimately the interesting point in this story about eBay. By removing the primary opportunity for business to have recourse, they are making their marketplace an unattractive place to sell. The scales must be balanced in order for trading relationships to flourish.
There is a second interesting aspect to this story and it relates to the mechanism that eBay has at its disposal to enable opnness and transparency. In principle, this is a contract governance dream – the ability to develop consolidated and real-time performance data and feedback to help steer buying and selling decisions. It is the type of data that offers transparent risk assessments which could then be reflected in the nature of the terms and conditions offered. But sadly, if that data becomes one-sided, much of its value is destroyed. It is like gamblers playing in an environment where one side always sees the cards and the other plays blind.
It is a story worth remembering as we consider our approaches to trading relationships and as we seek to develop more sophisticated approaches to contract and relationship management.
It is time to get serious about our jobs. Each day now, it seems we face new challenges – or perhaps they are truly new opportunities.
Just today, there have already been three news items that have caught my eye and caused me to think “What does that mean to anyone in commercial, or legal or procurement?” And the answer is that they all mean something significnat – but of course what we actually do about it is a matter of choice!
So the first item was from Wharton School of Business and highlighted ‘freeconomics’ – the trend towards zero pricing of a product or service inorder to generate future revenues.
The second was the report that ‘caveat emptor’ has taken yet another blow, when the US Supreme Court ruled against drug approval and clear labelling being enough to eliminate manufacturer liability for its products.
And the third article was a report that the public has lost trust in business and wants far more regulation.
It won’t take long for you to recognize that each of these developments has potentially massive impacts on the world of contracting. Each of them relates to the nature of the promises we make, the commitments we undertake and how we perform on them. It also raises the importance of far better monitoring of results and oversight of outcomes.
The Supreme Court judgment has potential far beyond the pharmaceutical industry. The New York Times suggests “Producers of goods as different as antifreeze, fireworks, popcorn, cigarettes and light bulbs have sought to take refuge behind federal oversight in recent years to fend off litigation. After Wednesday’s decision, those efforts are most likely to succeed if they are based on express language in a Congressional statute or a specific regulatory action that makes compliance with state requirements impossible.”
The Wharton article raises fascinating possibilities for both buyers and sellers to re-think the commercial relationship. The traditional razor and blade approach is not new, but new technologies mean that it may be extendedinto many untried areas. However, this also raises massive questions with regarding to developing charging formulas, monitoring or auditing useage, protecting against counterfeits or ensuring IP rights.
Loss of consumer trust in big business and the integrity of corporate leadership is scarcely surprising. Many things are tied up in this and certainly the scale of remuneration – and perceived ‘rewards for failure’ – will be an area for focus. However, the global nature of the shift in public sentiment is probabaly the most fundamental issue. Business leaders have managed to alienate even the most committed enterprise societies, in particular the United States.
Just a moment in time? Emotions will change and memories move on? Probably not, i that the impacts of this recession are too broad and too severe. Far too many people have had their hopes dashed and their future plans destroyed. But we all know that regulation is not really the answer. It is a blunt instruement, takes a long time to structure and is slow to adjust and change. There must be other mechanisms to restore trust – and commercial contract policies and practices (and their fairness and enforcement) are high on the list.
Finally, innovative ideas such as ‘freenomics’ are precisely the sort of thing that might lift us out of economic malaise by invigorating markets and enabling company survival. What other areas might change the framwork for business? Certainly greater transparency in trading relationships is one example. We also need to re-think the principles of confidentiality and IP management. There are many ways that we – as a community – could add to scoail trust by avoiding confrontation adn eliminating ‘blame’ from our trading relationships.
So times are hard; and it is in those times that new leaders emerge. Those leaders can be both individuals and institutions. It seems to me that the time for those with contracting expertise – those who are skilled at forming and managing trading relationships – has truly arrived.
I have found there is a great divide within the legal, procurement and contract management communities. It is between those who feel that they are fully accepted and respected by their internal customers (executives, business unit personnel, sales); and those who consider that their role is undervalued.
This latter group generally observe that they ‘are involved too late’, that the extent of their contribution is limited by a failure to consult them earlier in the process. In general, the members of this group significantly outnumber the members of the ‘accepted and respected’ group – I would guess by a ratio of 4:1.
Support groups are right to feel concerned about perceptions of this type, especially at times of economic uncertainty and cut-back. Being undervalued can rapidly translate to being seen as dispensable. So what can be done to address the problem?
There are of course a number of steps that need to be taken, especially if an entire organization needs to shift its image. I have written extensively about these elsewhere in Commitment Matters. But individuals are not powerless to act and I recently discovered some useful advice in a book entitled “The Art of Woo: Using Strategic Persuasion to Sell Your Ideas.”
The authors highlight the need for each of us to remember that we are selling our competence – and that we must persuade our audience that it is a competence that will help them achieve their goals. They set out 9 questions that any of us should ask ourselves before we go into meetings or conversations with our customers:
- How does this individual perceive the problem I intend to solve?
- What is the pithy summary of my idea that will appeal to this person?
- What roles does this person play in the decision-making process?
- What is my goal for this encounter?
- What is the basis for my credibility with this person?
- Will my idea conflict with any of this person’s beliefs?
- How might my idea conflict with this person’s interests?
- Can I leave the relationship better than I found it?
- What kind of public commitment from this person would best build momentum?
Many times, the groups that feel undervalued turn out to be those that rely upon some perceived executive mandate – for example, related to compliance. While this may indeed be an executive desire, they also want to close business or to ensure speed of execution. What they expect from internal staff groups is not just that we will recite rules, but that we will find solutions, ways to reconcile conflicting priorities.
And that ‘can do’ attitide is what our other internal customers also look for. So if we want to be among those who feel that they are accepted as a part of the core team. remember that we must all be sales people – we must explain how our expertise or processes are going to assist in achieving the goals of our audience better, faster and with less pain or aggravation along the way.
Our customers don’t use our services because of their inherent virtues; they come to us because they see it as necessaary if they are to reach some desired outcome or result. Therefore, if you want them to come early, willingly and often, you must make them see how your involvement gets them the results they want to achieve.
It is not only lawyers who argue that the rule of law is fundamental to a flourishing society and economic welfare. Economists also recognize the critical importance of trust in creating sustainable conditions for business and trade – and that trust depends in part on having clearly accepted rules and principles that are capable of fair and objective enforcement.
So while business leaders may not always welcome regulation (for example, greater oversight or tighter restrictions on their actions), they do endorse the need for ‘the rule of law’ as it relates to contract enforcement or the protection of rights (for example, patents or intellectual property). And they also realize that today’s international variations in regulatory and legal standards is a source of uncertainty and risk.
It is not surprising, therefore, that there is extensive interest in the spread of international standards and the development of more consistent codes and principles. But as with all forms of standardization, this immediately leads to questions such as ‘Which system should we use as the model?’ or ‘Which country does this best?’
We have witnessed tussles over this in areas such as the adoption of consistent accounting rules and principles of corporate governance. The most visible arguments have been between the US and Europe, but today the ‘battle for supremacy’ is extending to more general debates over who offers the ‘best’ legal system. Of course, as the country with the world’s most lawyers, the United States inevitiably lays claim to its superiority and has sought to promote its legal model as the global standard (for example, through the spread of US law schools into other countries). It cites its governance model, with clear constitutional separation of powers, as the way to safeguard good government and objective legal decisions.
Many disagree with this. They point to class action lawsuits, the dominance of trial lawyers, the aggressive, win-lose attitudes of attorneys and the ‘corruption’ created by lobbying and political funding. And the World Bank supports their point of view. Its analysis of governance (see http://info.worldbank.org/governance/wgi/index.asp) and, within that, specific analysis of ‘the rule of law’, shows that the US is among the best – but certainly not the best.
That honor goes to the Nordic countries, together with Australia and New Zealand.
This is interesting, because work at IACCM has consistently revealed the Nordic countries as a hotbed of thought and research on issues of contracting and trade. Indeed, the Association has extensive links with universities and business schools in Norway, Finland, Denmark and Sweden.
There are many hypotheses about why these countries score well in governance indices. Among these might be that they have been relatively isolated from the extremes of world economics and that their small, but highly educated, populations have flourished in an environment of trust and high social responsibility. Indeed, these countries have remained free from many of the extremes of capitalism and personal wealth and are regularly used as mediators or moderators in world affairs.
But does this mean that they offer us a good model for governance and the rule of law, or is the model in fact solely due to specific local conditions and not truly replicable in other cultures?
Recent evidence would suggest that it may indeed depend on local conditions, because among this top rank of countries was Iceland – which sadly let itself become infected by the financial governance inadequacies that caused the crumbling economies of the United States and United Kingdom. So if ‘unbridled capitalism’ is unleashed, even these systems prove inadequate to control it.
However, this does not alter the fact that the Scandinavian countries and their Antipodean rivals have in general been able to sustain a model that offers an environment of trust and relative stability. And it seems probable that academic and business interest in the use of contracts and commercial policies in overseeing successful business relationships is in some way linked to this overall leadership in the Global Governance Tables.
So as we search for models as a basis for developing greater international consistency in contracting and terms and conditions, we should maybe focus on the countries that lead the world in governance and the rule of law. Perhaps they have discovered secrets and methods that would assist us all in developing a framework of trust for our trading relationships.
And if we truly wish to build consensus and a common framework, we must also accept that no-one has a monopoly on truth. Good ideas can come from anywhere and everywhere – a global standard must be open to shared influence and an openness to excellence, not subject to domination by those with the loudest voice, the greatest power or the longest traditions.
That is why the unique community that has joined together to establish IACCM has the potential to show leadership in such fundamental issues as the framework for improved trading terms and conditions and the development of global standards for the integrity and oversight of trading relationships.
Unbridled greed, selfish behavior, a failure to consider the needs or interests of others … these are the tendencies that have unleashed social and political anger against the world of business and its leaders.
Latest in a long line of complainants is the UK’s Royal College of Physicians, demanding an end to the ‘culture of gifts’ that permeates the world of pharmaceutical sales. Arguably, they are a bit late – the days of profligate gift-giving to doctors mostly dried up some years ago.
But there is no doubt that businesses face a backlash because of the failure by some to make sound moral and ethical judgments. This includes the vast majority of CEOs and the Boards that awarded excessive personal remuneration. Society reluctantly accepted the argument that multi-million dollar salaries and bonuses were merited because of the exceptional growth these individuals were driving (and from which so many benefitted). What dismays everyone is the lack of accountability and the failure to reverse these rewards now that things have gone wrong.
In the end it became a collective behavior, because so few spoke out on the excesses, even if they privately disagreed with them. Now, if it is to avoid extensive interference from regulators, auditors or NGOs, the corporate sector must work to rebuild social trust. That work must address the new realities of networked communications and technologies that support not only speed of communication, but also greater transparency. Executives who believed that decisions could be hidden from the public view, or that business complexity somehow absolved them from personal responsibility, need to think again.
The assumption that corporations – and those who lead them – are innately evil is wrong. While the governance scandals of recent times have certainly revealed some characters who are fraudsters and criminals, much of what has gone wrong is due more to incompetence than dishonesty. In the excitement of a globally expanding economy, the fear of being left behind transcended good judgment in making business decisions. What the collapse has demonstrated is the failure of today’s organizational structures and management information systems.
Whenever I write about risk management, I recall a very simple principle that we adopted during my time at IBM. The method we used was called ‘Balanced Business Decisions’ and it forced people through several discrete yet simple phases. It also made clear that EVERYONE owned risk and was responsible for its management – unlike the world of today, where ‘experts’ are hired to relieve management of the need to take personal ownership.
First, they had to describe what they were trying to do and what outcomes they wanted to achieve.
Second, they faced a long checklist of stakeholders – internal and external – and had to describe the impact on these stakeholders and what their reaction would be.
Third, they had to develop and document a risk mitigation strategy for any identified issues or dependencies, with particular focus on the steps needed to reduce probability. (Keeping things secret was not an acceptable risk strategy).
Finally, they had to write an imagined press article that resulted from their initiative, remembering that the job of the press is to expose and ridicule, rarely to praise.
I have tried to use that simple system for the last 20 years. I am sure it is not foolproof, but it is easy to understand and to follow, unlike many of the horrifically complex enterprise risk systems imposed by ‘experts’. I suspect many corporate executives would have done well to adopt such a simple yet rigorous approach to their business decision-making.
To restore the credibility of business, three steps are needed:
- Executive management must de-mystify risk and ensure that all employees and trading partners understand their responsibility for its assessment and management. Ignorance is not an excuse.
- Businesses must introduce risk management techniques that do not depend on experts and outsiders, but which every employee can understand and use.
- Responsibility and accountability for making good decisions – and learning from bad ones – applies equally to everyone in the company and its selected trading partners. And that accountability starts at the top.
The philosophy of ‘Balanced Business Decisions’ was based on concepts of trust, teamwork and collaboration. It demanded thought and consideration of viewpoints and perspectives that went beyond your own narrow interests. What business needs today is not socialism, but social responsibility.
Commitment Matters 