As I prepare my presentation for the Ariba LIVE conference today, it strikes me just how far the topic of contracting has come in the last few years.
The number of speaking invitations we receive at IACCM today is overwhelming. There is hardly a day when one of the IACCM staff or a member of our Board or Advisory Council is not presenting on the subject somewhere in the world. Yet just 5 years ago, it was a very different story. Suggesting that anyone – outside a few idiosyncratic groups – would want to know about contracts drew bemused looks. So what has changed?
Some of the panel questions for which I am preparing today are quite revealing. For example, the initial discussion topic is spend management and some of the challenges this represents for companies in today’s global markets. The answer, of course, is that cheap sources of supply are commercially risky sources of supply – so you had better have some astute and knowledgeable deal-makers and contract managers backing you up. Culture, rules, practices, regulations – all represent real and tangible risks to reputation, assets, supply security and recourse and need to be addressed through the selection, negotiation and contract management process.
And spend management has now expanded beyond just low cost commodity sourcing. Suddenly everyone wants to know how to insert ‘value’into relationships and how to ensure ‘preferred’ status. The answer once again comes down to creative contracting – seeking terms and offerings that represent differentiation. Leading companies are interested in developing a ‘relationship portfolio’, supported by model agreeements that range from commodity through solution, partnership, right the way to merger or acquisition.
Performance management, governance, supply chain integrity, asset management, data protection – suddenly there is a whole range of ‘buzz’ issues that require contracts for their resolution – and most companies lack the depth of skills and knowledge to handle them well.
Since Ariba owns this event, it is hardly surprising that technology is another topic for discussion. Again, 5 years ago everyone assumed standard terms and conditions and the use of Purchase Orders. Today, contract management software is viewed as a leading (perhaps even the leading) area of interest. The discussion in fact goes much wider, because ‘the contracting process’ is not only ill-defined in most organizations, it also lacks any technology strategy. This demands much more than contract management software; it gets to areas like e-signature and e-contracts; the use of interactive communication and negotiation tools; the need for records retention and search capabilities. It is a long list – and most companies are at the very beginning.
Finally, I have been asked to speak specifically about the challenge to the Corporate Law department. This is an area that really interests me because we are seeing such a rapid awakening of the in-house counsel groups to the need – and opportunity – of change. The rule of law and the role of lawyers are both topics of growing concern, since traditional approaches are constraining performance in the global economy. The law creates uncertainty in this emerging world; it introduces cost, complexity and delay. Yet at the same time, good contracting practices can alleviate this and offer a structured framework to assess and manage business risk. So enlightened legal groups are jumping onto the oportunity that ‘best practice’contracting offers, to move them right to the heart of business operations and into some of the most interesting challenges that confront commerce today.
The UK’s Sunday Telegraph has done the world a great service by revealing the hidden tactics of retail negotiation. In a hard-hitting article, it exposes the techniques of retail buyers in their efforts to drive down prices.
As a lesson in negotiation principles and practices, this article has great value. The behavior it outlines is self-evidently destructive of relationships or meaningful commitment. Indeed, the article highlights that many supermarkets follow a policy where “Buyers’ lives are often short-lived and they are shuttled from pet food to beer to toiletries. The goal is to ensure they never build up close relationships which might tempt them to treat suppliers more kindly”.
The guidebook acquired by the Telegraph sets out a wide range of ‘psychological’ pressure points used by retailers to grind down their supplier. And in the context of the UK market, they can always resort to the threat of ‘de-listing’, which for many local suppliers may mean going out of business.
For any of us who have dealt with retailers – whether in the UK or elsewhere – we will recognize these traits. Certainly, for higher value goods and services such tactics are destructive and lead to a culture of blame, rather than collaboration. But for all the excitement of the story, is it actually wrong for the supermarkets to behave this way?
Most retailers deal in perishable commodities. They interface with a public that demands low prices. How would they benefit from ‘principled’ negotiation? A recent advert in ‘The Grocer’ magazine sums it up: “Honesty, fairness and truthfulness …. can lead to you being punished during negotiation … This is where behaviour such as being inconsiderate, selfish and unfair can be required .. During the negotiation you take on a new persona, someone who wants to get the best deals possible, who will not back down, will be aggressive, selfish, even rejecting.”
In my opinion, the real risk of these behaviors is that they carry through more generally into entrenched buyer behavior – or the image of buyer behavior – and therefore sabotage business dealings in higher value transactions, where relationships really can matter.
The challenge for the Procurement profession is to determine how it avoids being tarnished by the perception that the ‘unprincipled’ behavior described in this article is in fact fairly generic to all buyers. That image lies at the heart of much buyer /supplier mistrust – and often also clouds internal business relationships.
At the ISM conference in St Louis this week, Daniel Pink (author of “A Whole New Mind”) gave his take on the challenges and opportunities for talent in the 21st century business.
Pink’s suggestion is that changes in the economy are putting a premium on specific types of capability – and that this is challenging the dominance of the traditional professions. Lawyers, accountants, engineers – while still worthy roles – will wield far less influence in the new economy – because they are left-brain dominant. And the future, according to Pink, increasingly favors right-brain thinking.
For those not ‘in the know’ on right versus left-brain characteristics, they broadly boil down to people who are linear, analytical, sequential, quantitative, numeric (left-brain) and those who are more inclined to multi-task, see context, synthesize. In traditional businesses, the logical, linear skills used to be the most important – making ‘professionals’ the dominant management groups. But while these roles remain necessary, they are no longer sufficient. The networked world is placing a premium on those who also display inventiveness, big-picture thinking, the ability to see connections.
Right-brain thinkers are more able to see nuances, to see shadows, to sense degrees of tone or light, proportions, space – hence they tend to be better ‘relationship’ people. And as we all know, the ability to form and manage ‘relationships’ is becoming a dominant influence in our networked world.
Pink went on to describe three great influences shaping our world and destiny. These he defined as ‘abundance’ (the fact that in the west, and in the US particularly, people live in a state of material abundance, increasingly buying things that they didn’t even know they needed. As evidence of this ‘excess’, he highlighted the growth of the self-storage industry – which now earns an amazing $22.6bn annually in the US (to be honest, I am not sure many other countries even have ‘self-storage’ at any measurable level).
His second force is Asia – and the pure volume of people that can be deployed to support global markets. Pink declared that “Outsourcing has been over-hyped in the short run” (there is far less of it than people think) “and under-hyped in the long run” (there will be lots more of it). The vast imbalance in numbers of people means that Asia will come to dominate in terms of available skills and purely ‘smart’ people. So future outsourcing will move from routine tasks to higher value work.
Finally, he cited automation. This replaces logical, rules-based work – because the fact it is logical and rules-based makes it programmable.
So the ‘new’ professional will be good at what? According to Pink, they will excel in areas like knowledge management, they will exhibit empathy, they will be good story-tellers, they will be good at ‘symphony’, by which he means joining dots in a mass of information.
There is certainly a large amount of evidence to back up Pink’s concepts. They reflect the work that IACCM has been undertaking in recent years both in its assessment of required skills and in the re-shaping of organizations to enable such skills to flourish (because traditional functional structures actively discourage such behaviors on any significant scale). Our research also demonstrates the problem when we look at the ‘alienation’ of today’s networked youth from the traditional corporate workplace and heirarchies.
Back in 2006, at the IACCM Americas conference, I posed the question about what jobs parents should recommend for their children. By way of illustration, I listed the careers open to children in the late middle ages – and contrasted them with those of the industrial age. As we now move into the information age, how many of today’s roles will survive? Based on history, very few. The questions we are asking simply are not radical enough; organizations are looking for evolution when they should be considering revolution. I’ll write more about that – with a few specific examples – later this week.
I spent time this week at the TPI conference in Chicago. The event attracted record numbers, illustrating the company’s continued growth.
In the opening session, TPI exceutives outlined some current industry statistics – for example, in 2007 there were 487 commercial outsourcing deals awarded in the US, worth a total $80.4bn. There are currently 2,902 active contracts and TPI recorded 113 providers who in 2007 won at least one award.
The provider market continues to grow – perhaps surprisingly, given the struggle that many face in maintaining acceptable margins. This has resulted in major shifts in market share – for example, over the last two years, the share of deals won by ‘the big 6’ is reported to have dropped from 45% to 21%. European providers have seen small growth, as have the Indian ‘majors’, but the real switch has been to ‘other’ – up from 38% to 54%.
With such volatility and price pressure, quality seems bound to suffer. And certainly the challenges of achieving innovation and value-add were high among delegate concerns. TPI has often been criticized for its ‘aggressive’ negotiations and the extent to which these sour the atmosphere for execution. But the evidence at this event was quite the opposite; I heard consistent appeals from TPI speakers for buyers to think and work more collaboratively. Indeed, the fact that I had been invited to speak (in two sessions) demonstrated to me their seriousness in trying to change the atmosphere of many outsourcing engagements.
While there is no doubt that some buyers, and their selected advisors, continue to use aggressive, risk averse approaches and focus on ‘commoditization’, the stories I heard suggest that many providers are guilty of similar behavior. And those that behave well in negotiation often change their spots when it comes to on-going contract management, their focus turning to margin recovery rather than relationship-building.
The industry is strong in terms of revenue, and it seems clear to me that there are real opportunities for providers who take a new and more principled approach to establish competitive advantage. It is up to them to show that they can shift their marketing to demonstrate how trust and collaboration will generate superior outcomes. To do this, they must also show their ability to offer agreements and governance structures that really do provide a platform for innovation and added value.
IACCM research has unearthed some fascinating data regarding the impact of contract review policies at many major corporations – and shows that they have generated increased workload and cycle times. While this research did not measure the economic cost of such policies, it is clear that they are responsible for lost savings opportunities.
The story begins with Procurement and the drive to contract standardization and compliance. As we all know, recent years have seen a steady push to develop standard term and condition templates. Many times, these are driven by Legal and have been accompanied by little if any discretion for negotiation by the procurement staff (separate research in 2007 confirmed this).
It seems obvious that risk and workload can be reduced by imposing standards on suppliers – and the research shows that this has indeed enabled a transfer of Legal resources away from support of Procurement. Indeed, in many cases, Legal has even imposed lengthy turn-round times for any deviation to the standards, to discourage requests for negotiation. (There is evidence that this is having significant adverse impacts on supplier relationships and wider aspects of business risk, such as innovation and pricing, but those findings are not the focus for this article.)
What the latest research reveals is that this approach has been self-defeating. The rigid and risk-averse clauses included in standard purchasing contracts have forced suppliers to push back and demand negotiation – especially in the typical areas of Legal concern, such as indemnities, liabilities and intellectual property. This has caused a substantial surge in workload for most Legal groups (in many cases close to 10% year on year) as they seek to counter the inflexibility of their customers. (About the only sectors immune from this are those in consumer industries – and they are some of the worst offenders when it comes to onerous terms and conditions and therefore among the most disliked by their suppliers.)
The research points to several shocking discoveries that forward-thinking corporations will wish to address:
- Nearly 40% of staff in Procurement and Contract Management see Legal as ‘a roadblock’
- Average contract review and approval cycle times in the last 5 years have INCREASED by more than 10%
- For every head that Legal has saved in support to Procurement, there has been an average increase of 2.1 heads supporting Sales contracts
This data alone points to an urgent need to reconsider policies and practices related to Procurement contracting. And that is not a task for Legal alone – one key reason for this rigid approach is that in many corporations, there is little contracts expertise within the purchasing organization. Even now, most training materials for those in sourcing / supply chain are seriously lacking in anything to do with contracts, therefore limiting opportunities for immediate empowerment and flexibility.
The economic and relationship consequences of this weakness are only now becoming apparent – and they will the subject of a series of further articles. Overall, it is clear that this issue deserves urgent attention and requires cooperative efforts from senior legal and procurement staff.
At a recent IACCM meeting, a senior member observed: ‘Our industry, and industries like automotive, have destroyed trust and collaboration (with the supply base). Shame on us. Now, as markets tighten and power moves to the supplier, we will reap the consequences of our behavior.”
In essence, he was suggesting that many in Procurement have been walking down a blind alley. For all the talk of strategy and of reaching the top table, the reality is that many sourcing organizations have been pushed into short-term objectives to grab price reductions, at the expense of longer-term strategic thinking. Globalization appeared to offer a never-ending source of cost reduction and fierce supplier competition. The emergence of today’s dramatic supply shortages has caused a crisis for many. Far from being able to sustain price reductions at this time of growing cost pressures, procurement is in some cases struggling to even find a source of supply at any price.
As worldwide wealth grew, what did ‘strategic visionaries’ expect? Two years ago, IACCM was warning its members that the change was coming and that suppliers were shifting their loyalties – for example, they were investing their marketing dollars in emerging markets, rather than their traditional (disloyal) customers.. We alerted buyers to the fact that they would pay a price for alienating the supply base. But the good times rolled on – commoditization, reverse auctions, confrontational contract terms – these were just some of the ways that buyers showed their lack of loyalty to the traditional supply base in their haste to grab low prices and exert their dominance.
For those in the West, who led this charge, the cost will be especially high. As we reported last year, their risk-averse behaviors have already resulted in suppliers looking East when it comes to innovation. Now they will also be exacting revenge through price hikes to recover from the years of buyer domination and abuse of power.
The result will inevitably be a further hit on the competitiveness of the leading western corporations. They will be faced by choices between higher prices or lower quality – neither being a recipe for success.
Is there a solution? Yes, but companies must act fast. They need to redeploy their resources to focus on trading relationship outcomes, rather than the short-term, input based ‘savings’ mentality. They must oversee contract life-cycles and ensure accountability for results.
Through such approaches, combined with a portfolio view, they can drive substantial efficiencies.
Another priority is to ensure a shift in measurements and to develop new terms and conditions that reward collaboration. IACCM has been working on such terms for more than a year.
Applications and skills will remain challenging. Since software inestment has largely assumed supplier compliance, it is questionable how much of the recent investment will survive. And skills – there is a desperate need for leaders who can oversee this latest transition.
Measures such as these will steadily restore the damaged buyer / supplier relationships of the ill-considered commodity era. But Procurement is going to face some tough times in the interim.
A major theme at this week’s IACCM Conference was the challenge of ‘alignment’. In today’s networked world, as businesses diversify and traditional organizational models fragment, how can controls be maintained?
As the Financial Services industry has vividly demonstrated, national laws and regulations are inadequate to handle the complex web of global relationships that typify today’s business. While transparency is increasing, so is overall complexity – and much can be missed.
“When it is a battle of rules versus culture, culture always wins” (a quote by IACCM Chairman, Tim Cowen). The latest debacle within the US airline industry is just another indicator that rules alone are not enough. Corporate behavior is ultimately driven from within, by people who care – people who are not driven by short-term measurements and operate as an independent source of management advice.
Audit groups and complaince officers have not shown themselves able to step up to the task, perhaps because their experience is typically too narrow. The same challenge faces the law department – their need to remain externally focused (to maintain knowledge and understanding of law) works against their ability to develop deep internal business understanding.
That is why at the IACCM event there was extensive discussion of the role of those in contract management (or perhaps commercial or commitment management) to perform such a role. They are typically the group that has extensive understanding of internal business processes and capabilities; they understand rules and practices; and – as their name implies – they have insight to the external relationships being formed by the business.
Arguably, therefore, they are ideally positioned to oversee the balance – not allowing ‘compliance and risk management’ to destroy opportunity, but at the same time preventing short-term greed or measurements to undermine responsible decisions.
One leading academic was so taken by the models that he discovered at the IACCM conference that he said: “You had better be ready – within 2 years this event will be attracting at least 2,000 people each time you run it”.
It does indeed appear that ‘commitment management’ is rapidly moving to the heart of the business. Exciting initiatives such as the Capability Maturity Model and the new concept of ‘Maintain, Manage, Initiate’ (MMI) that was introduced at the conference promise possible solutions that can sit alongside regulation and offer a more robust form of corporate management.
The old integrated enterprise is fast eroding, to be replaced by flexible supply networks. To maintain competitiveness, these networks are increasingly global and their oversight requires a new combination of skills and technology. At the heart of this new business model is the ability to orchestrate effective contract relationships, spanning sourcing, distribution and support.
So what happens when these skills are lacking? The answer, quite simply, is that you lose competitiveness and go out of business. At least, that should be the answer. But of course, such companies often attempt to blame others for their dilemma – and seek political support.
Such is the case with a company called Leggett & Platt – at least, according to research undertaken by Jason Busch, the editor of Spend Matters. In an article titled Anti-Dumping: A Topic Every Practitioner and Consultant Should Know About, Jason takes the management of Leggett & Platt to task and launches an appeal for each of us to consider the impacts of anti-dumping legislation when used to protect shortfalls in commercial competence.
As professionals, we should indeed care about this. Economic survival depends on each of us honing our skills and ensuring they are effectively deployed. That is the only sustainable way to build economic wealth and success. If we think we can hide behind regulatory barriers, we lose the urge and the incentive to develop our capabilities. Staying ahead depends on being better, not on handicapping the competition.
Recent IACCM research illustrates the urgency of this point. Our 2007 ‘issues’ survey indicated the dilemma we face when we live in an economically advanced society. For sourcing and contracts professionals in the West, the number one issue was ‘work-life balance’. For those in the emerging economies, the number one issue was ‘raising my personal skills and knowledge’. The prospect of wealth and personal success is a powerful incentive – much more so than simply protecting what you already have.
To further illustrate this point, more recent research focused on the areas of skill and knowledge that those in sourcing, contracts and legal feel are important. For those in the West, the traditional fields of legal knowledge, negotiation and teamwork topped the list; understanding technology and undertaking market research languished at the bottom. Once again, this provided a stark contrast with those in emerging economies, who see technology and market understanding as their routes to success.
So perhaps the real point behind the Leggett & Platt story is a moral tale and a warning of the fate that could easily befall all of us unless we have the energy and the determination to stay ahead.
Finally, I rather liked the analogy that Dick Locke made in his response to Jason’s blog posting. He analogized Leggett & Platt’s dilemma over bed springs to that which faced the PC industry several years ago. “I’m going to bet that if there is an antidumping duty on springs, there won’t be one on mattresses containing those springs. I remember once there was a 200% antidumping duty on laptop displays but not on laptops containing those displays. Guess what happened to the US laptop building industry?”
Dick’s observation reinforces the basic principle of physics – “For every action there is an equal and opposite reaction”. Use of instruments like anti-dumping simply masks the real problem and moves its effects elsewhere.
In this week’s Economist, the lead article unsurprisingly focuses on the financial system and the threat of its collapse. It highlights what it terms ‘entanglement’ and the extent to which global interdependency has allowed the mushrooming of relationships between financial service providers – and has created a nightmare for regulation.
In many respects, it is this same phenomenon of rapidly growing, often services-based, relationships that challenges all those involved with ‘regulation’, whether at a governmental or a company level. In the corporate context, ‘the regulators’ are generally the traditional support functions – Legal, Finance, Procurement and Contract Management. The challenge they face is that competitiveness depends on leveraging the global economy, yet this move to global markets creates a far more complex and unpredictable web of relationships – hence the ‘entanglement’. Staff within these control functions face the same challenge as the regulators – if we impose too many controls, we stifle growth and risk bringing our company to its knees. Yet if we fail to identify and manage risks effectively, we will find our commitments spiraling out of control, until we burn and crash.
There have been many examples of the disasters that come from a lack of effective commercial controls in recent years. These range from the collapse of the ‘dot-com’ boom, to the demise of corporate giants like Lucent Technologies, Marconi, Barings and now Bear Stearns. If we are to provide effective support to our organizations, we must begin to use networked technologies to better manage and oversee our networked world. Old forms of knowledge management and traditional working methods will be no more effective than they have been in areas like financial services. We must use technology to gain better insights; and we must also broaden our skills to undertake the necessary analysis and to drive the right internal debates and commercial decisions.
This point is emphasized in the current Economist debate which focuses on the connections between networking, regulation and risk. It also reflects a campaign that IACCM has been waging for the last three years – the need to re-think education and create a greater understanding of relationships and their alignment. We have pushed academia to support fields like contract and commercial management, but (as The Economist indicates) the response has been that such topics are too inter-disciplinary. The same challenge exists in most corporations; powerful ‘specialist’ functions prevent the emergence of functions that could deliver strong commercial oversight. At the international level, The Economist debate sums up the argument as follows:
“We need an education that values different modes of intelligence and sees relationships between disciplines. To achieve this, there must be a different balance of priorities between the arts, sciences and humanities in education and in the forms of thinking they produce. It goes without saying that the only way this shift can be effected successfully is through sophisticated and thorough governmental regulation and the intervention by leading political figures to create a discourse of innovation and creativity, as the UK government has done through its creative industries policy.
The thrust of the argument, then, is that the contemporary economy, operating in a world of work dominated by new technologies and cyber-commerce cannot be advanced through tinkering with disparate elements of regulation. The system needs to be completely rethought and delivered in the context of a set of regulatory policies which allow for the taking of risk, innovation and flexibility, but always in a safe environment for consumers and workers. And it would be naive to imagine that companies would deliver this environment without constant and active governmental regulation and intervention.”
The same considerations apply to the creation of an effective internal governance structure within companies, with this same balance between ‘risk, innovation and flexibility’. That is the framework which IACCM’s ‘commitment management’ concept seeks to provide; and its ‘capability maturity model’ is designed to provide the roadmap for its implementation.
As an advocate of technology, I am always fascinated to learn about its consequences in practice. That is why I am especially looking forward to interviewing Andrew Moorhouse, a Research Consultant with Huthwaite International. Andrew has recently issued a report on the uses (and, it would appear, abuses) of e-sourcing tools – and in particular reverse auctions.
I have a very strong regard for the work done by Huthwaite, who I first encountered in the 1990’s. This research was driven by a supply-side perspective, but unearthed significant concerns among senior procurement managers about the negative effects of reverse auctions. For example, one manager is quoted as saying “self-serve auction tools have degraded and destroyed the reverse auction market place”.
The purpose of this commentary is not to anticipate the interview with Andrew (for details about this, click here). What interests me more is the underlying philosophy of the reverse auction – and the questions this raises.
IACCM has regularly highlighted that the emergence of our global services economy and the push by buyers towards ‘commoditization’ has prompted many suppliers to abandon the historic ‘caveat emptor’ approach to contracts. In other words, to escape the commodity trap, they set out specifically to understand customer requirements and, rather than deny responsibility, are in fact assuming some levels of accountability for outcomes. In the process, they obviously lay themselves open to greater risk if things then go wrong.
Reverse auctions turn this concept on its head. Buyers argue that the reverse auction creates a level playing field and enables them to avoid the confusing behavior of ‘added value’ solution providers – the auction environment enables them to compare apples with apples. But implicit in this approach is that the customer has a very clear understanding of their requirements and is giving the supplier no real opportunity to influence the process or the outcome. Logically, therefore, the 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. While it may be a moot point whether courts would uphold such terms (and I would be interested to hear of any case law in this regard), there is no doubt that theoretical risks are high.
And this, perhaps, is what led that same procurement executive quoted in the introduction to this posting to make the observation that “the way companies approach reverse auctions has damaged integrity and resulted in abuses of power.”
What are your thoughts and experiences? I hope you will post them here and also join the interview with Andrew Moorhouse on April 1st.
Commitment Matters 