In his blog, ‘Contract Drafting Wars’, Mark Anderson has joined the debate over ‘fit for purpose’ contracts. It’s an important discussion because contracts today permeate almost every corner of society – and for most people are unintelligible and exclusionary.
A battle – or difference of perspective?
Mark is perceiving that there is a battle going on between IACCM and Ken Adams (author of a Manual of Style) regarding contract drafting. With the greatest of respect, he misses the point. This is actually a debate about inclusiveness and intelligibility, about the fundamentals of purpose and design, of which drafting style is but a component.
Let’s start with a few facts:
– approximately 4 out of every 5 people do not speak English
– approximately 1 in 6 people (and 1 in 4 women) are illiterate
– less than 0.001% of contracts are litigated; their primary purpose is not to facilitate legal disputes, but to frame an economic arrangement
– even when litigated, courts do not (as Mark suggests) depend solely on words. They have to interpret drawings (engineering and construction); maps (property); software code (IP); musical notes (copyright); designs (patents); video and even e-mojis (yes, there are legal experts in this too). The trend to alternative media is unstoppable.
The change is already happening
IACCM members – some of the world’s biggest corporations – are recognising these forces and the importance of user-based design. They understand that the typical users of contracts are not courts and not lawyers. The first principle of good communication is not whether the transmitter believes it to be clear, but whether the receiver understands it. On this count, traditional contracts fail miserably and it is obvious that A Manual of Style cannot possibly on its own fix the problem.
The emerging world, with its expectations of greater inclusiveness and equality, is challenging for lawyers (and other established professions), yet also exciting. It demands new thinking and a readiness to test and, where appropriate, adopt fundamentally different approaches. Technology will be disruptive. Digitisation offers exciting possibilities. Computable contracts, smart contracts, video contracts, comic contracts – they are all emerging realities and at IACCM we welcome this opportunity to educate, to innovate, to make contracts living instruments, to end a world where they are too often a barrier to social inclusion and justice. In this ambition, we are joined by many lawyers and legal academics from around the world, anxious to lead institutional change and adapt legal practice to the realities of modern business and society.
Within this mix, does A Manual of Style have a place? Absolutely yes. That is why we have always been pleased to promote Ken’s work. Where we disagree is not whether the Manual has value, but whether there is a much bigger need than simply standardising the words for English language contracts. As the facts above illustrate, A Manual of Style is a relatively small step on what is an enormous staircase to the future.
Big organizations have traditionally seen little need to collaborate. Their size gives them power – power over suppliers, customers, distribution networks, even over government and public policy. When it comes to negotiation, they simply don’t do it. Contract terms are imposed on the counter party. Why be reasonable when you can instead exercise control (and call it ‘compliance’)?
This attitude still exists, but increasingly proves to be outdated. The networked world exposes bullying, reveals secrets and condemns unethical behavior. The forces that drive the modern economy are also driving increased partnering and collaboration. They enable open, streamlined data flows that result in improved speed and quality of decision-making and better business results.
Not just opinion
Many commercial professionals – especially those within IACCM – have recognized the truth of this for years (read, for example, IACCM’s annual reports on the Most Negotiated Terms, dating back to 2002). The problem has been how to make the switch.
Yesterday, IACCM partnered with Leeds University Law School to stage an Academic Symposium. While coming from significantly different perspectives, speaker after speaker reinforced the message about cooperation. Lisa Bernstein from Chicago Law School promoted ‘managerial contracts’; Haward Soper from Leicester University highlighted the fact that contracts frame relationships; Christof Backhaus from Aston Business School explored cooperation in the context of ethics; and Olivier Goodenough from University of Vermont offered insight to the way that computational contracts will free up time, allowing a shift in the focus of our negotiations.
I could cite many others from this outstanding event – but the important point is that new thinking is fast becoming mainstream. ‘Stronger together’ is shifting from a mantra to a true movement that will deliver both economic and social benefit. IACCM- along with its fast-growing array of academic partners and industry thought-leaders – is assisting its members to implement the practical approaches that give collaboration meaning – contract design and simplification, relational and performance contracts, research and training. These are truly exciting times!
Discover more by joining us at one of the many IACCM events – conferences, member meetings, webinars. See http://www.iaccm.com for details.
I am observing a growing trend for Procurement teams to adopt the title ‘Commercial’. While I understand the reasons for this, it is typically misleading and misrepresents the true purpose of Commercial Management.
What is Commercial?
The International Association for Contract & Commercial Management (the world’s only Commercial Management association) has a very clear and comprehensive definition of ‘commercial’. In essence, it is about ensuring that an organization’s policies and practices are aligned with market needs and business goals. Ultimately, it is an integrationist function that reconciles the multitude of (often conflicting) stakeholder perspectives and interests to better understand both opportunity and risk, operating to support both buying and selling.
in an excellent article, Bruce Everett has illustrated what disastrous consequences can occur when that overarching alignment is missing – the human, social and economic cost.
So why isn’t Procurement ‘commercial’?
I am not suggesting that individuals trained in procurement can’t be commercial managers. On the contrary, I know many who have made the transition, along with others from functional specialisms such as Legal, Finance, engineering and project management. But here we have the point: Commercial is cross-functional in its nature. It cannot be some bolt-on to specific functional activity.
Why is that? The answer essentially lies in functional purpose and measurements. As Bruce’s article points out, performance measures such as lowest price and compliance are not compatible with long-term value or ethics. Similarly, if we think about this in the context of lawyers, a contract that is legally watertight is often not going to generate a collaborative relationship or future innovation. That doesn’t make typical Procurement and Legal roles less important – it simply acknowledges they represent functional positions, which are not the same as holistic business and social interests.
Into the future
I understand why functions like Procurement want to re-brand as ‘Commercial’, because this high-value, analytical role is where the future lies. More formulaic and repetitive activities that today are performed by functional specialists will in many cases rapidly become automated. I welcome the wish people have to make this change and IACCM is here to assist with membership, training, mentoring and advice.
Commercial Management is a critical role that reconciles economics, ethics and innovation. Making the shift requires much more than simply changing your name or job title.
CAPS Research issued a study result that ‘only’ 72% of companies offer supply management training within the first 12 months after hiring a new employee. The commentary implies this is a problem; but is it?
i must acknowledge that I don’t know precisely how CAPS worded their questions, but the published result appears to be specific to supply management training, rather than training more broadly. So if, say, an employee undergoes an on-boarding program, that probably doesn’t count.
There’s also no reference to hiring policies. To the extent that organizations are making experienced hires, or selecting supply chain graduates, they may well feel no urgency in providing specific training on supply management. What they will care about is that the new employee understands how to apply their knowledge in the context of the business. And IACCM research suggests that is often knowledge acquired ‘on the job’, from colleagues.
People often work within teams, or on specific projects, or gain informal mentoring. They are being trained, but not in a traditional, structured context. Increasingly, there’s also a view that employees must take personal responsibility for filling gaps in their knowledge. And often these days, it isn’t functionally specific skills or knowledge that they lack – it’s broader business or personal skills.
IACCM will shortly be issuing its findings – and observations – on trends in training and skill development as one of its series of benchmark reports. It’s an important topic, but one that is increasingly answered through growing diversity of approach.
As we enter 2019, what are the key focus areas for improving contract and commercial management? IACCM gathered data from approximately 750 organizations to discover their plans and priorities.
Number one on the list, being tackled by 61%, is contract management tools and systems. Many have yet to take the plunge on meaningful automation and others are back in the market either to replace or augment existing systems. But the range of tools now being considered is also becoming more diverse, as some organizations look at deploying ‘apps’, ‘bots’ and other enabling devices, such as dynamic playbooks and clause libraries, or more specialist applications, such as machine-based negotiation.
In second place, scoring 59%, is the development of new terms and updated contract standards. This traditional housekeeping task is becoming much more frequent; the speed of change in markets means that some corporations are undertaking review as often as every quarter to ensure competitiveness. Others are recognizing the need to innovate their commercial offerings or to develop new contract templates, for example for cloud services or to support performance-based agreements.
Coming third, at 49%, is contract simplification. There are several potential drivers and the perception of ‘simplification’ can take several forms. For some it is may be about greater standardization. For others it may be increased alignment of contracts with RPA (robotic process automation) initiatives. But for the leaders, it is potentially much more than this; it is about fundamental re-assessment and re-design of the way their contracts are structured and worded. For these organizations, there is recognition that contracts should be designed for users because this reduces risk, cuts cycle times and increases ease of doing business.
Given the changes that these focus areas indicate, it is perhaps not surprising that almost 50% highlight a priority for skills development. Contract and commercial management have tended to be overlooked areas for training investment and senior management is awakening to the issues this creates, both for their dedicated CCM staff and more broadly for those across the business with a need for greater commercial awareness.
Looking down the list, it is interesting to note that 40% are seeing an expansion of their role (reinforcing IACCM’s view that automation is actually increasing the relevance and demand for contracting and commercial skills). For almost a third, this is accompanied by a change in reporting line – though interestingly there is no great consistency in the shift being made (IACCM has issued a more detailed report on this topic).
| CM_Tools | 61.1 |
| New Terms_Contract Standards | 59.0 |
| Contract Simplification | 49.1 |
| Skills Development | 48.5 |
| Contract Analytics | 47.2 |
| Risk Mgmt_Corporate Governance | 44.0 |
| Role Expanded | 40.5 |
| Reporting Line Change | 31.4 |
| Knowledge Mgmt System | 27.1 |
| External Benchmarking_Research | 25.5 |
Overall, the list illustrates the growing focus on raising contract and commercial competence and business contribution. While technology is an enabler of these improvements, there is increasing demand for talented individuals who can lead change and interpret trends and opportunities. This is why topics such as analytics and benchmarking now appear on the list – they were not in the top ten 5 years ago. It also indicates that the role is becoming steadily less transactional and more strategic.
Over coming weeks, IACCM will be releasing more detailed data on the state of contract and commercial management, and continuing its work with members to assist them on this important journey.
Tomorrow, January 30th, is an important date in my personal calendar. It is the 370th anniversary of the execution of King Charles I of Great Britain, who fell victim to a fundamental disagreement over scope and obligation management. Many would argue that he also suffered from a lack of negotiation skills. Unfortunately for him, neither he nor his followers were members of IACCM and the records suggest that in any case he would have ignored advice. Ultimately, he paid a heavy price for his failures at dispute management.
What should he have done differently?
The 17th century was a turbulent era, with levels of social discord growing as the economy shifted from largely agrarian to early industrial. Traditional relationships and loyalties became fractured as values altered and new skills came to the fore. As trade expanded, wealth increasingly moved from the land to the merchant classes.
Charles saw it as his duty to maintain many vestiges of the past and was influenced by his belief in the divine right (and duties) of kingship. These led to core concepts around the preservation of power, protection of assets and resistance to change – concepts that resonate with much that is happening today. New forces, driven to a large extent by economic and social interests but dressed up as religious belief, increasingly challenged the scope of a king’s role and the established order. Those forces were often unclear and divided over what they wanted to achieve, but were united by opposition to Charles’ view of his rights and obligations. Eventually, the country split, descending into civil war. Charles chose not to negotiate, essentially stifling efforts to achieve peaceful change. Instead, he insisted on compliance – and lost.
The contract between king and people may not have been in written form, but it existed none the less. Those in positions of power, whether as governments or as large corporations, ignore the fundamental principles of good and fair contracting at their peril. To maintain position and status, there needs to be an underlying consensus over a common purpose and roles and responsibilities in its performance. There need to be effective mechanisms for review and change, with a readiness to make adjustments for altered conditions. King Charles failed to grasp these fundamental elements of contracting and in consequence became seen as a tyrant. His experience provides a critical lesson for those who are charged with developing, negotiating and managing key stakeholder relationships – and even more for the leaders who wish to flourish and survive.
How effective can public procurement be in achieving social and political goals?
The leadership of the Australian Labour Party is just the latest in a long line of politicians promising a boost to the national and local economy through imposing requirements for the use of local firms and workers when awarding public contracts. It’s a policy that grabs headlines and is in many ways laudable, but is it realistic?
First, there is the challenge of the international trade rules that apply to public procurement and seek to prevent anti-competitive selection criteria. Whether or not one feels that the current rules are appropriate to the modern economy (and in general I don’t believe they are), it is pointless to deny their existence. Indeed, the Labour Party announcement acknowledges this when it says that “public service departments would still be required to prioritise value for money in major government contracts”. In practice, this always tends to mean ‘the lowest price’, since public procurement officers seem to struggle with finding an objective measure of ‘value’ that would avoid competitive challenge.
Understanding the numbers
Second, there is the issue of capability. It would certainly be nice to find small and medium enterprises and pockets of highly skilled local labour both available and with the capacity to fulfil major government contracts. But this is a real chicken and egg situation and in general those capabilities simply don’t exist. Where they are present, we run into the third problem, which is the unattractive nature of much government business. The time, cost and complexity associated with bidding and performing on public sector business is daunting. In general, small and medium enterprises simply find it impractical to engage. The United States has superficially been one of the most successful countries in driving SMB activity and social inclusion through public procurement policies, yet research shows this is often misleading. For example, many small businesses are owned by former government employees who know their way around the system and have inside connections. Many of the larger awards are fronted by a small local business, yet actually performed by a major enterprise as a sub-contractor. Too often, the numbers may look great, but the reality is very different.
A waste of time?
This does not necessarily mean that political efforts to drive policy initiatives through public procurement are a waste of time. Indeed, the need for innovation in service delivery means that public procurement has a key role in identifying suppliers and solutions that can deliver social benefit. Encouraging local enterprise, growth and employment are important and laudable goals, but they require a level of analysis and understanding that is typically missing from politically-inspired initiatives. If the Australian Labour Party – and indeed Governments more generally – are serious about expanding the mission of public procurement, they must recognise the need for fundamental reform of the role and its underlying policies and practices.
This year’s IACCM benchmark study of the contracting process shows no improvement in typical cycle times for reaching contract signature. At a time when digitization and robotic process automation are streamlining many other business processes, the continued bottlenecks that delay contract closure are not good news.
Is automation the solution when it comes to speeding up contracts? The answer, based on the benchmark evidence, is at best ‘maybe’. It depends on whether:
a) organizations select the right software solution – something appropriate to the nature of the relationships they form. Too often, we see selections that are incapable of dealing with business needs and which ultimately add to complexity and delay as users battle with the system.
b) organizations try to overlay software onto their current manual process, without meaningful attempts to assess and reengineer underlying activities.
In reviewing the data, I was reminded of a recent article by Kate Vitasek, which highlighted a recent book by Professor Kathleen Eisenhardt, “Simple Rules: How to Thrive in a Complex World”. This title – and the five steps that Professor Eisenhardt suggests – seem especially appropriate in the world of contracting, since ‘complexity’ is the typical excuse for delay. So what should we do to improve?
Identify a bottleneck that is both specific and strategic – the bottleneck should be relatively narrow, a well-defined process or process step, not a broad aspiration. (Contract cycle time seems to be a good example.)
Let data trump opinion – don’t come up with wild, “shoot from the hip” rules; base them on a thoughtful analysis of historical experience. (In other words, gather data, such as ‘what are the actual causes of delay – IACCM has research on this!)
Users make the rules – don’t hand down rules from above, let those involved in implementing the rules develop them. (This requires deciding who the true ‘users’ are – the answer shouldn’t be the lawyers or contracts staff.)
The rules should be concrete – rules should not be difficult to understand; think yes-or-no criteria. (This is where good automation can really help, perhaps via electronic playbooks or apps.)
The rules should evolve – simple rules shouldchange as the company and the market change, and as managers better understand what is actually happening on the ground. (And yes, this is not about rigid compliance; markets change and the new system must continue collecting data and adapting.)
So perhaps a key project for the new year (and a great new year resolution) might be to eliminate contract bottlenecks.
IACCM is pleased to announce that it has been working with the Business School and Law School at Leeds University in the UK to develop a new Masters program (MSc or LLM) in International Commercial and Contract Management. Available as either a two year part-time or one year full-time course, this represents a unique collaboration between a leading business school, law school and professional association.
Discover more and share your views in our brief survey at https://www.research.net/r/MScCCMresearch
The growing dynamism and diversity of trading relationships in today’s volatile markets has elevated the importance of commercial and contract management. They represent essential competencies for purposes both of control and creativity, designing and delivering business-critical outcomes.
New technologies have steadily disrupted traditional business relationships and the way they are managed. This is resulting in continuous change in what relationships are formed, where they are formed and how they are formed. As a result, there is a pressing need for a fundamental shift in the role, purpose and value of contracts, which in turn depends upon continuous challenge and innovation in commercial policies and practices.
Both business and government must develop commercial and contracting competence –the ability to integrate across multiple stakeholder views and interests to develop and deliver required outcomes. This competence will in part depend on having individuals with the skills and knowledge required to lead commercial and contract management transformation and to embed organisational capability at both strategic and operational level.
BACKGROUND TO THE BUSINESS NEED
The importance of commercial and contract management in terms of responding to dynamic markets and supporting the overall strategic goals of the organization cannot be overstated. A failure to do so impacts on financial performance and, perhaps most critically, the organization’s reputation. At an operational level, weaknesses in the contracting process damage external relationships, create delays, undermine innovation and increase costs. Conversely, where commercial and contract management are aligned to the organization’s strategy, where project objectives and outcomes are clearly articulated and well managed, the cost savings and revenue improvements are significant, reputation is enhanced, and problems and risks minimized. The scale of commercial and contract management in both the public and private sector, their economic importance, social role and impact on the bottom line is immense.
This program offers organizations and individual practitioners the opportunity to develop the skills, methods and connections that are needed to modernize commercial competence and compete effectively in today’s demanding markets.
(Contributed by Bruce Everett)
To be agile is to move quickly and easily. As a project management method, it is characterized by the division of tasks into short phases of work and frequent adjustments of plans. As a contract management method, it is characterized by collaborative relationships with outcome and performance-based contracts, designed to deal with high levels of uncertainty. The fundamental premise is that you can’t plan or contract for what is unknown, so decisions are made along the way as better information becomes available through experimentation and client feedback. This allows you to adapt as circumstances change and to counter predictive risk.
The challenge comes when we want the freedom of being agile, but want to counter contract risk by fixing responsibilities, price, and service levels as well as imposing a higher level of governance. We do have budgets, timetables, probity and stakeholders which act as constraints to unfettered freedom so, as good contract and commercial citizens, we seek to provide as much certainty as possible. However, agile contracting cannot be ‘set and forget’ because the requirements or product/service features change through the development and testing lifecycle as we learn more. The Principles behind the Agile Manifesto[1] even encourage such changes, with Principle 2 saying: “Welcome changing requirements, even late in development. Agile processes harness change for the customer’s competitive advantage.”
As a consequence, if scope changes, then the other ‘iron triangle’ components of time and cost have to vary. In a fixed contract, this can lead to time and cost overruns, delivery risks and strained relationships as the costs exceed the ability of the contractor to absorb them or pass them on (as opposed to new scope via change control and often to the contractor’s commercial advantage).
Conventional wisdom, well Wikipedia, will tell you that fixed price contracts don’t suit innovative new projects with untested or underdeveloped technologies. Yet I’ve worked recently on so-called ‘hybrid agile’ projects in the government military sectors and in the commercial financial services sector where fixed price contracts are used. Indeed, sometimes because of an extended governance process and a management culture that demands order, the costs are fixed before the scope is even agreed. According to the results from the IACCM Most Negotiated Terms Survey 2018, the ‘Scope and Goals/ Specifications’ was the #1 Most Important Term in the contract. But in agile projects still we try to fix price for a moving scope and specifications.
Why do we do that? Yes, for change control reasons (but aren’t we trying to encourage change not limit it?). Yes, for risk and governance reasons (but isn’t a governor used to limit the top speed of a vehicle and aren’t we seeking speed through an agile approach?). Yes, to provide certainty (but don’t we know that we can’t predict the future only adapt to it?). Yes, because as good contract and commercial practitioners we seek to avoid time and cost overruns (but the body of evidence is showing that fixing the contract is actually contributing to these negative consequences). I am saying Yes because we do need to consider these reasons as we establish and manage contracts. However, I propose the other reason is that we don’t trust the contractor not to exploit either the lack of firm specifications or the ready access to the end-customer to up-sell scope and increase their revenue. Frankly, I also propose that we don’t trust the project team or end-customers to manage scope creep. Therefore, we seek to limit their freedom through the contract and seek to fix as much as we can negotiate with the customer and the contractor.
Rather than fix price for the whole contract or even various releases of features, contemporary project and contract thinking recommends the use of cost-plus time and materials contracts; or incremental delivery and checkpoints (e.g. after the initial test phase) where scope, budget and due-dates are agreed; or target cost contracts with gain/pain share. Each of these approaches balance freedom and control, so start to suggest that the term ‘Agile Fixed Contracts’ does not need to be an oxymoron. Each of these approaches also presents an opportunity for collaboration. For example, if a root cause of the desire for greater control is lack of trust, then a cost-plus T&M contract will require a substantial level of trust. The #2 Most Negotiated Term for 2018 of ‘Responsibilities of the Parties’ will need to be clear, but moreover, the relationship will need to be strong and open to share cost and profit data to support a “trust but verify”[2] contract management approach. Similarly, for a gain/pain share target cost contract, trust will be important to encourage open dialogue around scope, perhaps using the agile MoSCoW prioritisation rules (i.e. there are Must haves, Should haves, Could haves and Won’t have this time).
We often focus on the type of contract that is best-fit for agile projects and my encouragement is to focus equally on the best-fit relationship. A key first step in the IACCM Relational Contract process is “To build the trust necessary to focus on the relationship, ensure alignment within your own organization and thereafter use a process for choosing a partner that considers relational competencies in addition to service offerings, quality levels, etc.” [3] Trust but verify sure but, if we want to be truly agile in our projects and our contracts, collaborate for trust first.
[1] http://agilemanifesto.org/
[2] Attributed to US President, Ronald Reagan, based on a Russian proverb
[3] David Frydlinger, Tim Cummins, Kate Vitasek, Jim Bergman, “Unpacking Relational Contracts – The Practitioner’s Go-To Guide for Understanding Relational Contracts”, A White Paper by THASLAM College of Business, IACCM, LINDHALL, Open Source, Oct 2016 p.7
Commitment Matters 