I was never a great fan of legislation as a way to drive corporate performance. In the same spirit, I prefer contracts wihout massive penalty and liability clauses. I like to believe that organizations are driven by a desire to do the right thing and to maintain a positive market image. But I must admit that the US airline industry has managed to change my mind.
My nine year old son may – or may not – be somewhere over the Atlantic right now on a Delta flight that was due to leave New York some 6 hours ago. During that time, the airline kept an over-sold flight captive in an airless room. They refused to give information; they refused to provide any sort of refreshment (even water); and of course they use ‘security’as a weapon to prevent any sort of complaint.
When it comes to customer commitment, the majority of US airlines have none. All of us can recount stories like this (my most recent was with Continental just 2 weeks ago, when I suffered a 26 hour delay through avoidable incompetence; my wife’s was a week ago on US Airways, when she gave up and drove to another airport, 7 hours away).
I acknowledge it is a complex industry. But the incompetence and hostility that major US carriers show to their customers is more in line with Soviet-era behavior. It simply should not be accepted in the country that sees itself as the face of capitalism, the home of the consumer.
In previous blogs, (see, ‘Are Rules Destroying Value?‘) I called for increased debate on legislation and rules versus voluntary and ethical codes and i highlighted the negative impact that regulation can have on the market, introducing distortions and complexity (for example, export / import regulation). But it appears there may be times when indutry must be held accountable. While European airlines are far from perfect, it does seem to me that the ‘bill of rights’ that the EU introduced, enforcing compensation for passengers, has had a significant and positive impact. Introduced against the protests of the industry, it appears to have brought a new level of discipline and concern. It seems – unfortunately – to confirm the point that organizations respond only if there are direct and meaningful consequences for their actions (or inaction).
It would be nice to believe that companies want to do well just because they care. But the truth is that, over time, they need some pressure to strive for excellence. The airline industry is protected; the competition is limited. And that has allowed the major US carriers to sink to a point of the lowest common denominator. So either they need an injection of competition (open the market to foreign ownership) or they need some form of compulsion – such as obligatory compensation to their customers.
The media is full of stories about the failings and weaknesses of global supply chains. It seems we have suddenly discovered that China is far away (and not in fact a remote US state); that ’emerging’ markets do not share Western value systems; that business rules and practices are driven by culture and cannot simply be overridden or suppressed; and that historic economic muscle does not automatically translate to limitless power and control.
So now the body of experience is growing. The war stories are proliferating. And as costs rise, supply constraints kick in, quality failures become visible and threatening, we find an environment in which fundamental questions are being asked over supply strategies. Perhaps local sourcing makes sense. Maybe those old suppliers were not so bad after all.
Given these valid questions and concerns, it surprises me that Western suppliers are not taking greater advantage of the situation. For some time, I have been urging my friends in sales contracting to think about the opportunities that their customers’ global supply concerns represent for their company. After all, risk reduction has value. So if my company can offer more reliable supply, can commit to ethical and environmental standards, can guarantee compliance with customer codes and policies, can adopt and use the technologies required by the customer – does that not make me a more attractive supplier? Does it not win me the business?
The argument goes further than this, because there are of course substantial cost justifications in selecting reliable suppliers who operate with guarantees of integrity and have established world-class practices and technologies in running their business. These savings arise not only from tangible benefits such as compliance with delivery dates, but also by avoiding the hidden – and growing – costs of oversight and compliance monitoring.
So why is there not more evidence of major Western corporations countering price and negotiation pressures with clear benefit statements relating to their risk-free operations?
Much of the answer, ironically, is that we are now all caught in the same trap. As recent surveys show (see, for example, the latest Ernst & Young study), virtually all major companies depend on outsourced providers for key aspects of their performance. So no one can offer guarantees because they do not know whether they can honor them.
The situation has been made worse by the trend towards greater risk transfer. As understanding of exposures has increased, the reaction from buyers has not been to build closer supply relationships, but has in fact been to impose ever more rigorous terms and conditions related to failure. Indemnities, causes and consequences of liability, parent guarantees, liquidated damages – these are all areas where negotiations have become tougher and more adversarial. And the result is that it is simply too risky for suppliers to take on customer risk; they have become3 defensive and protective. Far from looking to expand their commitments, they look to limit them.
I still believe – perhaps naively – that this means there are big opportunities for suppliers who capitalize on the issues of reliability and integrity, who actively seek to differentiate through taking on extra responsibiliies. At IACCM we have started to explore the types of terms and conditions that might represent a charter of ethical and trading practice value. By leading with such terms, companies might start to shift the negotiation agenda – escaping the sterile battle over risk allocation and moving the agenda to partnered risk management.
In a world where every business struggles for differentiation and value-add, surely this will be a logical and compelling area for future market advantage?
Let’s start with a simple premise.
Most negotiation occurs because the parties have an intrinsic interest in reaching a mutually acceptable agreement. In other words, most negotiations are not simply a pretence or a cover for quite different intentions.
Based on that premise, ‘good negotiators’ are those who can reconcile the interests of the respective parties to develop the framework for a successful relationship.
Looking at the current state of the world economy, it is clear that skilled negotiators will be in high demand. Trust is in short supply and the forces that undermine opportunities for agreement are having a field day. Politicians and regulators are adding to the stockpile of ‘positional’ issues that interfere with negotiated agreements, As if their rules and posturing were not enough, many deal-makers are also battling thier own staff groups, where the forces of control are in the ascendancy. And finally, many negotiators find themselves having a very one-sided negotiation – the other side offers not a negotiator, but a talking head.
More and more I hear complaints by IACCM Members that it is increasingly tough to establish ‘good faith’ negotiations, that they regularly face Procurement or Sales personnel who have no empowerment and simply recite the company rule book. And that rule book is frequently one-sided and unreasonable as a base for a successful relationship. This short-sighted behavior frustrates deals, but even in cases where a contract emerges, it offers no basis for trust or commitment. These are relationships that typically fail to deliver.
At a time of such uncertainty, when economic and political decisions have added to the supply chain and cultural issues that challenge negotiators, it is imperative that companies empower their representatives. Successful negotiated deals do not emerge from polarized positions. They take creativity and imagination, flexibility and vision.
Rules-based negotiators will increasingly find themselves marginalized .. as individuals and as companies. The time to train and develop a skilled core of professional negotiators is now – and the need is urgent, because most organizations show limited talent in this area, especially in their buy-side operations.
Several months ago, I commented on a survey of CEOs in which 89% regarded globalization as ‘ínevitable’. I questioned the quality of risk management in companies where this view prevailed (see https://tcummins.wordpress.com/2008/05/27/is-globalization-the-next-mismanaged-risk/).
Now the questioning has reached mainstream media, wih the New York Times being the latest to weigh in. Yesterday it featured an article ‘Shipping Costs Start To Crimp Globalization’, highlighting the impacts of higher costs on many of today’s sourcing decisions. But the article also pointed to deeper stresses in the world economic order, with the collapse of the Doha trade talks illustrating fundamental disagreement on issues ranging from environment to protective trade practices.
So are we headed for a collapse in world trade, for the reversal of many outsource decisions, perhaps for a period of increased international tension and conflict? There are certainly dangers, especially if unscrupulous politicians start to blame recession on external forces, or suggest that economic health could be restored through the repatriation of jobs. And indeed, within corporations, there will be the pessimists who look to retrench and take this period of doubt as an opportunity for increased controls.
But overall, we must hope that the world economy is simply far too integrated to allow a significant reversal. Indeed, I take a counter-view. The human mind – and humanity as a whole- flourishes at times of uncertainty, because this uncertainty challenges us to find new ways and new solutions. We may take wrong turns, but in the end all progress depends on our ingenuity and creativity. That is why the pessimists are never in the ascendant for long; humanity responds to optimists, to those who create a positive vision.
It is my bet that within weeks we will be reading about leading companies that have developed a new business model to take advantage of the shift in global conditions. They will have invented ways to circumvent rising prices and to manage some of the risks that globalization has generated. Indeed, from research that has recently been commissioned from IACCM, I know that some are already progressing fast down this path.
Shipping costs may have crimped globalization; I do not believe they will crimp humanity.
The debate over the desirability of rules and regulations will never go away. Humanity has long struggled to determine the ‘right’ balance – and clearly different cultures have different perceptions of what that should be.
But this debate – and the effect of the answers – should be a very active topic for discussion by the contracts, sourcing and legal community. These groups are typically charged not only with creating many of the rules in their organization, but also with their enforcement.
Not surprisingly, many see ‘the rules’ as important and valuable. There is a natural inclination to want more of them – since that is surely the route to greater power and more resources and to ensure control over the ignorance or poor judgment of others. That is the quintessential ‘police force’ mentality – and as the challenges of modern policing reveal, it is not especially effective and becomes a slippery slope of ever-greater constraints on freedom.
There is a counter view to that position, which is that rules should be minimal and that adherence to acceptable ‘codes of conduct’ should wherever possible be voluntary. Proponents of this position argue that a rules-based culture inhibits innovation and creativity; it becomes innately risk-averse. By reducing freedoms, we force people to choose either to comply or to leave. And of course it is those that leave who are typically the value-generators, the entrepreneurs, the people with personal drive and ambition.
The challenges facing political decision-makers are therefore reflected in the corporate world. Indeed, many of the new rules that our community is being called upon to enforce are today being driven from outside the company.
Contracts experts, lawyers, procurement professionals are in a unique position to observe the effects of more rules and tighter controls. And because these groups are seen as having an innate interest in supporting them, a voice raised in opposition would have significant impact.
The time has come to start raising those questions. It is clear that governments in the free world are steadily undermining freedoms, not just to protect their citizens, but increasingly to protect vested interest groups that have seen an opportunity to drive new regulation. Those rules may be protecting our jobs – at least short term; but longer term, they are destroying competitiveness and will lead to major economic shifts of power.
IACCM has announced that it will increasingly monitor the areas where external regulation damages world trade and jobs (export / import controls is a current example). It has also called on its members to monitor the way that internal rules are having similar effects on their company’s competitiveness. Together, we must start to campaign for (and describe) an environment that maintains intelligent balance between regulation, trust and education – and structure our contracts and associated policies and practices accordingly.
Many professionals in legal, procurement or contracts groups know only too well those repetitive problems that just won’t go away. In fact, much of our work involves protecting against the risks that those ‘problems’ would otherwise generate.
But sometimes it is good to sit back and wonder whether it is true that there really is no other solution, or that the alternatives would prove unacceptable.
The ‘green’ revolution is daily throwing up examples that suggest the problems may often be in our minds rather than in reality. A recent example appeared in The Economist, which described an initiative by UK retailer Marks & Spencer to build a new, environmentally-friendly factory in Sri Lanka.
The “eco-factory” began as a branding experiment, but turned into an economic success. No air conditioning; natural light; hydro-and solar-power; a turf roof. Energy costs alone are 40% lower than comparable ‘traditional factories. And the goods it produces – ‘ethical’ lingerie – are no more expensive than their eco-unfriendly competitors.
Behind this story there was imagination – a group pf people who challenged assumptions and found practical – and superior – answers. It would be interesting to know the make-up of the team that developed this concept and oversaw its realization.
So what about some of our ‘insoluble’ or ‘risky’ problems, such as those terms and conditions that always demand negotiation and to which ‘there is no alternative’?
Are we the barrier to innovation?
Throughout history, human affairs have been governed by rules. They change and evolve with shifting needs and the emergence of new issues and challenges.
Today, we seem beset by increasingly vague and unreasonable regulations. It seems almost anyone – governments, suppliers – feels entitled to impose rules that protect some particular interest – and they feel no obligation to consider whether it is reasonable or enforceable. That is your problem.
I am talking about topics that range from corporate governance, through bribery and corruption, through export and import controls, to issues like software or license compliance. In recent months, I have heard story after story from business people who have no idea how they can ensure compliance with the rules being imposed upon them. In a story today, a US corporation that legitimately provided program access to its German subsidiary found itself in breach of export regulations because a Romanian employee (based in Germany) used the system.
We cannot do much about government regulations, excpet campaign against those that are clearly against the public interest (and IACCM will increasingly do that). But those who negotiate contracts must start pushing back on unreasonable obligations to monitor use. If they wish to protect their assets, suppliers have a duty to build protection into them or into the way they are distributed. It is not right to simply pass the burden of oversight to a customer, except in respect of fraudulent or deliberate misuse.
It is not only a question of reasonableness (though that is also an issue). The point is more that the organization subject to these rules is somehow meant to oversee their enforcement. In a digital world, that is incredibly difficult to achieve.
An IACCM member posted a question on a subject that has been bothering me for some time (and which we included as a discussion item at the most recent IACCM conference). It relates to the area of Codes of Conduct and the extent to which these may represent ‘enforceable’ promises. Or put another way, how do Codes and Contracts interrelate?
This particular question relates to the Codes produced by buyers of goods or services; but of course we are also seeing Codes produced by providers as they seek to reassure or set expectations for their customers.
The question was this:
“I am interested in knowing whether any Purchaser has had a supplier sue or threaten to sue for breach by the Purchaser (including uneven application of the Supplier conduct rules) of obligations on the Purchaser contained in the Supplier Code of Conduct.
There was a California class action case in which employees of Wal-Mart suppliers (offshore) sued Wal-Mart for failing to remove other suppliers who breached the code. It failed of course because employees of a supplier have no privity of contract with Wal-Mart, BUT had the suppliers commenced the action, it would likely have succeeded.
I am not focussed on the class action – just on a Supplier who has agreed to a code of conduct as a term of an RFx or a term of its supply agreement and who then sues its Purchaser for breaching its obligations uner the code. Sometimes codes of conduct have very high aspirational standards (like “highest ethical standards”, no “apparent conflict of interest”, no concealment of relevant criteria”) that conflict with sound commercial practice. So there’s an opening here for a Supplier to sue for Purchaser’s breach of the code, if the code is part of the contract, or on collateral warranty if the code is a separate document.”
The issue of ‘codes’ is of great interest to me (and IACCM). For example, to what extent do these supplement or even supercede contracts? Will Corporate Codes be used to replace the need for contract terms in many areas, and in particular used to address the inconsistencies of law between different jurisdictions? And if so, will the result be that they become a source of litiagation, or will ‘the jury’ be public opinion, when companies are called out for failing to match their promises?
We have to remember that Codes are typically used as a marketing technique (setting out capabilities or responsibilities). Contracts (in good companies) may also do this. But more often they are used by each side to limit their capabilities or responsibilities. Codes are about trust; contracts (frequently) are not. So there is a fundamental conflict of philosophy; yet to prosper in the global economy, companies must establish trust in their brand – to attract the best customers and the best suppliers and distribution partners. So Codes seem likely to proliferate ….
My enquiries suggest that in most companies, the group responsible for producing the Codes has little or no relationship to the group producing the contracts. I understand why this may be the case, but it doesn’t seem very smart. The two areeas must bereconciled, or there is a very real risk that they simply cancel each other out (and what does that do for generating either trust or good risk management?).
The question cites the example of Walmart. In the end, Walmart responded to public pressure (reputaion risk) much more than legal pressure. And perhaps that is the way of the future.
If the use of Codes increases, I guess it is only a matter of time before they more frequently get introduced in litigation. What we have yet to see is the extent to which courts are prepared to take thm into account in reaching judgment. Presumably key questions will be the extent to which reliance was palced upon them, whether companies explicitly or by implication include them in their contractual undertakings, the sophistication and history of the other party etc.
And the pattern here is also likely to vary depending on the jurisdiction and its relative readiness to incorporate supplementary materials into its judgments.
Recession, supply constraints, sub-optimized relationships – whatever the forces that lie behind it, more and more organizations are talking about ‘collaboration’ or ‘partnering’ or ‘customer / supplier of choice’ as ways to improve business performance. But realizing such relationships is proving tough to achieve. There are some obvious reasons for this – but maybe there is a hidden factor that actually makes it impossible.
This week, I was at a meeting of IACCM members in Houston, Texas. We were discussing the many pressures and opportunities in front of those in Procurement, Contract Management and Legal. And of course, much of the conversation revolved around the question of how we could improve the quality and results from trading relationships. There is a lot of talk about the need to enhance performance management and relationship management, as well as growing understanding that somehow negotiations (and RFx procedures) must become less constrained / adversarial.
So of course, conversation naturally turns to concepts like ‘trust’ and ‘collaboration’ – words that are increasingly on executive lips as well. And we started to outline some ways that these attributes might be encouraged or achieved.
That was the moment that a critical question came from the back. “Why do you think that we can start building trust and collaboration when we have executives who destroy such principles?” (I do injustice to the exact words, but this addresses the principle). Our questioner (who is French) was making the point that the Anglo-Saxon model of business management has increasingly become suffused by lack of loyalty, lack of trust and an aura of greed and personal progress at the expense of corporate values or principles. So how can you reconcile this attitude -and the resulting detachment that many employees feel – with attempts to create ‘trust’ and ‘collaboration’ between organizations?
It’s a great question and in many respects goes to the heart of some of my recent comments on globalization. Collaboration requires levels of compromise and a readiness to sometimes forgo short term opportunity for longer-term gain. It also requires trust (if I forgo a benefit now, can I trust that you will do the same at some point in the future?). So where are the incentives for such behavior? Since markets demand short-term results and the speed of change makes future needs hard to predict, is there in fact any hope that organizations will invest in forming and nurturing longer-term relationships? Or like employees, are all things now dispensable?
What are your thoughts on this?
When it comes to contracting and negotiation, the software industry has proven one of the most frustrating for its customers. Now, it seems things might be changing.
There are good reasons for some of the complexity in software contracts. The need for developers to protect their asset and establish reasonable returns is well understood. But this has led to tortuous charging mechanisms and onerous terms and conditions – and it has also been accompanied by supplier reluctance to take meaningful responsibility for product performance.
So it is no surprise that Microsoft recently discovered that some two thirds of IT directors see software procurement as a cause of delayed implementation, increased complexity and a source of damage to the reputation of IT within their organization.
What is surprising – and to be applauded – is the fact that Microsoft plans to do something about it. Today, they have announced an initiative to ‘champion industry change in software procurement’. They plan to do this through three major steps:
- Deliver better terms that focus on speed, lower transactional costs, balanced allocation of risk and more customer-oriented contracts;
- Agree commitments that improve customer and partner alignment with Microsoft’s engagement resources;
- Reduce standard contracts from many unique forms to a rationalized few.
A key goal appears to be to build increased collaboration with customers, to agree fair and reasonable levels of accountability for outcomes. This approach not only puts Microsoft at the forefront of the software industry, but in fact moves it to a leadership position in many industries.
Of course, buyers will be waiting to see whether these sentiments are borne out in practice. But early customer experiences cited in the Microsoft press release support the value that is being claimed. Hopefully, customers will respond positively and show themselves ready to work in a collaborative spirit to develop win-win relationships. Microsoft has shown it is listening and is prepared to take a new attitude to risk – and there are many who will be watching to see if that pays off.
It will be excellent news for business everywhere if this succeeds and spurs new approaches to contracting and negotiation on a cross-industry basis.
Commitment Matters 