One of the key trends we observed at IACCM in 2007 was the rising threat to Western companies – and in particular, US companies – because of their attitudes to risk. They do not have confidence in their ability to manage risk, so they seek to avoid it. And in so doing, they open the way to their more nimble competitors from emerging markets. This is especially evident in the contracting and negotiation practices and policies followed by many international corporations.
Innately we all understand that we must take risks. Every moment of every day, we are surrounded by possibilities and uncertainties – things could go badly wrong at any moment.The big question is how comfortable we feel about consciously taking risks. And the answer to this is very personal; it depends on how good we are at analyzing situations (do we recognize the risks?); how accurate we are at assessing their likelihood or consequence; and how confident we feel about accepting and managing that risk. As the table below shows, there are significant issues of trust that impact those who are responsible for forming and managing trading relationships. We asked our community of lawyers, procurement professionals and contract managers how they felt about the qualities of risk management within their organization.
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% saying that they personally are ‘good’ or ‘excellent’ at risk identification and management |
92% |
| % saying that people generally in their company are ‘good’ or ‘excellent’ at risk identification and management | 18% |
| % saying that their company’s executive management is ‘good’ or ‘excellent’ at risk identification and management | 57% |
| % saying that their immediate colleagues (those performing similar jobs) are ‘good’ or ‘excellent’ at risk identification and management | 51% |
We then asked users of their services – people in Sales, Business Unit managers, project managers – how they felt about the risk management capabilities of their Legal, Procurement and Contract Management groups. Just 16% gave a ‘good’ or ‘excellent’ rating. Most felt that the groups were risk-averse and driven by rules, rather than judgment.
Who is right? Probably neither side is completely right or wrong; the important point here is that no one has a monopoly on good judgment and that perceptions of what is ‘good’ are frequently very subjective.
There is another aspect to taking risk, one that is often overlooked or is considered too narrowly. And that is to understand the nature of the opportunity that comes from taking the risk. Risky actions are not taken in a vacuum – they are in connection with doing or achieving something. So the counter-side of risk is opportunity – and we can make good risk decisions only if we understand what we might gain or lose as a result of our decision.
The problem we face – and the reason that risk is highlighted as Factor #3 in this series – is that business is contending with heightened complexity and uncertainty. This has tremendous impact on groups like Procurement, Legal and Contract / Commercial Management because they feel they are custodians of responsible risk behavior. And that is a very difficult task when the risks are not just hard to quantify, but may not even be recognized.
As we venture into the global networked economy, we daily encounter new experiences, new pieces of information, new ways of doing things. In such an environment, doing anything seems risky. Our networked world has also facilitated far wider input and involvement – and each of those involved has their own take on risk and on the things that might turn out to be problems. Some of the consequences of this environment are readily evident. They come in the form of supply chain disasters; exposures to safety or the environment; performance failures on major contracts; regulatory or compliance exposures. Today, such failures are instantly visible through networked news and it is rarely possible to apportion blame to the other side.
Academics such as Rob Handfield of NCSU have undertaken massive research into the impacts of these supply chain failures. There is also extensive work on how companies should handle problems to limit the fall-out (or sometimes even turn it into a positive because of the excellent way they handle the situation). But behind the scenes, there are less visible – yet pervasive – consequences of this world of risk and uncertainty. We see it in our benchmarks and our research studies – decisions are taking longer to be reached; contract lead-times are extending; workload from review and approval is increasing; confrontation in negotiation is growing. And the hidden results of these ‘risk containment’ measures are that the vision of the opportunity is lost. Far from managing risk, we are often guilty of converting risk – and the new risks we create may be far more terminal in nature than those we avoid.
The last edition of IACCM’s newsletter, Contracting Excellence, contained some great examples of this. One was the story from the telecoms industry, where customers impose rigorous and rigid liabilities, indemnities and damages. As these flow through the supply chain, they force companies to reduce the possibility that things might go wrong. They have two immediate methods by which they might do that. One is to create a defensive culture that always places blame and fault elsewhere. The other is to limit doing risky things – and in this case, that means constraining innovation. By using only tried and tested products or services, it is certainly possible to reduce the chances of things going wrong – but it also means that you are constantly behind the competitive curve.
One of the key trends we observed at IACCM in 2007 was the rising threat to Western companies – and in particular, US companies – because of their attitudes to risk. They do not have confidence in their ability to manage risk, so they seek to avoid it. And in so doing, they open the way to their more nimble competitors from emerging markets. It isn’t just a matter of those competitors being more prepared to take risks, it is also that they have become more attractive trading partners. My conversations with business leaders from a range of industries indicate that they are turning to overseas trading relationships not just because of future opportunities or lower costs, but because these companies are often easier to do business with.
To be blunt, the ‘sophisticated’ economies run the risk that they will become so paralyzed by rules, regulations, procedures and the fear of doing something wrong that it will be almost impossible to do anything right. If lawyers, contract managers and sourcing experts truly wish to be viewed as responsible and credible managers of corporate and business risk, then they must start to challenge the behaviors that could otherwise destroy not just their company, but their nation’s competitiveness. At present, far too many either push a self-defeating ‘control and compliance’ approach, or alternatively they insist that every situation demands their personal oversight and judgment. In either case, they are effectively placing a straitjacket around their business and its competitiveness. Today’s trading conditions mean that we must abandon notions of controlling circumstances and creating certainty. We must stop taking the view that risk is somehow manged if it has been handed to someone else. In this world of inter-dependent supply networks, we must focus on building the tools, systems, techniques and skills needed to become exceptional ‘managers of uncertainty’.
Trading relationships are becoming more strategic and more complex. Therefore the challenge as we enter 2008 is to implement risk regimes that are far more holistic in their data collection and analysis. Risk categorization must be improved (there are some great models, such as that offered by Synaptic Decisions). Economic analysis must be faster and more complete (that means more integrated business functions and business information, a better understanding of the financial consequences of terms and conditions). Trend data must be collected to allow improved portfolio analysis (for example, contract management systems that identify frequently negotiated terms or capture repetitive performance issues). Fall-backs must be issued to support greater empowerment and to eliminate the need for such frequent review and approval. But above all, there must be accountability. Leaders in our contracts community must step forward and promote the measurements and KPIs that support an environment where risk is truly understood and managed, rather than simply contained.
Networking has always been key to success, whether we are talking about the broad networks of the sales rep., or the highly selective expert groups of the researcher or academic. Networks offer contacts, influence, ideas, inspiration – and today they have taken dramatic new forms because of technology.
In a recent McKinsey survey (issued January 2nd, 2008), executives identified ‘increased technological connectivity’ as the #2 business trend for 2008 – and the resulting ‘ubiquitous access to information’ as their most pressing challenge. Yes, MOST pressing – more significant than talent, regulation, competitive pressures, economic downturns. And the reason for this is that networked technology changes the economics of knowledge.
Much of what we know will ‘commoditize’. Sharing of experience, access to data will become far easier. Those who prosper will be the companies and individuals who turn that wealth of information into innovative and high-value market understanding, approaches and offerings. They will use networked resources to be faster, better and more consistently creative. They will use networked technology to offer superior customer experiences and services.
Networking drives the need for new behaviors and methods, new attitudes to the performance of work and a new definition of our personal value and responsibilities.
So where do most corporate employees stand on this issue? Are we embracing the opportunity that technology offers, or resisting the changes it implies? As always, the answer is mixed; but the evidence suggests that those responsible for ‘commitment management’ (contracts professionals, sourcing, legal) are towards the back end of this particular curve. Of the three groups, Procurement is probably the most comfortable with technology and most likely to use it for research. Lawyers have always been networkers, but have tended to do this in physical forums and only within their own immediate ‘brother / sister-hood’. However, the new generation is spreading into virtual networks and making avid use of the internet; and a few will even converse with non-lawyers!
That leaves the contract and commercial managers, who risk being left behind in this race for knowledge. Some are convinced that sharing is innately bad (they believe they have a monopoly on good ideas); others are terrified of any technology; and many aren’t sure what they can share, or who to share it with (they have never had a ‘professional community’ in the past).
So what is it that executives see and how might this impact their expectations? How can communities like ours respond and help top management address the networked knowledge challenge?
At one level, we can use networking to spot trends as well as habits. And we can use that information to suggest changes in policy, practice, business terms and offerings. We can use technology to collect internal data – but more exciting, we can also gather external data. It isn’t just a matter of using the internet (though that is a start). Blanket internet use is very inefficient – so managed networks are generally offering more immediate value. Blogs can be one source – but social networks are another. For example, IACCM (www.iaccm.com) has provided a range of tools for its members – such as the worldwide ‘communities of interest’ that enable peer communication and research; or the ability to build personal networks based on comprehensive member search facilities. You want to know about contracting practices in the Ukraine? You want to understand the typical approaches to negotiation in Taiwan? You want to explore trends in liability limits in the telecoms industry? Then these networks and tools offer immediate answers.
Unfortunately, today’s technologies generally demand a significant change in working methods and invariably expose us to much greater visibility in terms of output. Many people find this threatening. It may also take time to learn – so arguments about efficiency regularly fall on deaf ears. And maybe an ageing community (the average age for senior staff in Procurement and Contract Management is 45+) simply feels it can outlast the pressure for change.
Looking from the outside, I am disappointed by the slow adoption of networked technologies and networked thinking by our community. It is an area that offers dramatic opportunities for leadership. As the McKinsey study reveals, executives need answers to this revolution. Those answers will come from the groups that have the courage to adopt and explore the exciting potential of networked technology and networked behavior. It isn’t just a matter of preparing contracts on-line, or measuring compliance and savings. Networking opens the world to our vision and transforms the way we can interact in the formation and management of our trading relationships.
Back in 1937, in his seminal work “The Nature of the Firm”, Nobel-laureate Ronald Coase set out the economic principles that underlie outsourcing. He demonstrated the inefficient nature of the integrated enterprise and how the true entrepreneur would choose to orchestrate contracted relationships, rather than employees. In 1937, the only inhibitor to that vision was the lack of appropriate technology.
Seventy years on, the picture has changed. Technology is networked and supports the formation of networked communities and knowledge. Competitiveness is no longer about integrated enterprises, but is instead a battle between superior supply networks and trading partners.
That should mean the time for our community to flourish is upon us; our ability to form and manage those supply networks and trading partnerships should put us at the forefront of corporate strategy and execution. But will it? The answer depends on our willingness to adopt networking, to form networks, to extract networked knowledge. Where do you stand?
As we enter 2008, businesses face mounting uncertainty. Political tensions, shifting economic power, threats to the financial system … it is tough to predict how the world will look a year from now. These issues add to (and to some extent result from) the underlying changes still being driven by the networked world. An era of cheap and easy communication is transforming how, where, when and with whom we do business.
While periods of rapid and unpredictable change threaten many, they also represent tremendous opportunity. Some will simply prove lucky – but others will focus on the key issues and attributes necessary to ensure their survival. And those same factors should also influence the attitudes and behaviors of individual employees who want to not just weather the storm, but emerge with their status stronger and their career plan intact.
In this series of posts, I will highlight five factors that appear to be critical and which represent these areas of opportunity. The first is Globalization.
Globalization will not go away. It will continue to open new sourcing opportunities, not only to reduce prices but also to tap new ideas, methods and labor pools. Increasingly, sophisticated supply chain experts will look at broader issues of acquisition cost and sophisticated suppliers will understand how they can leverage the risks of extended supply chains to create competitive advantage. Let’s look at a few of the trends that may become ‘big news’ in 2008.
For several years, globalization has placed negotiating power in the hands of the buyer. It has contributed significantly to the renewed focus on cost and the virtual blindness of many buyers to any other value factor. A combination of cheap labor and weak commodity prices created an environment where falling input costs became a norm. That era is not fully over, but the end is in sight. And in addition, the issues of quality, environment, social responsibility and rising commodity prices are limiting the options for such a simplistic and confrontational approach.
Already, some industry sectors have started to develop a more sophisticated approach to their sourcing management – better segmentation of relationships based on value and importance; greater sensitivity to future shortages and supply threats; more holistic measurements that incent a change in procurement and negotiation practices. These changes have some way to go, but they will be rapidly adopted by the winners in 2008.
Part of that shift will be for buyers to analyze the true costs of acquisition, rather than simply purchase price. They will take greater account of logistics issues – the cost of delays, shipping, customs and duties; installation, maintenance and running costs. They will also become more sophisticated in understanding the risks behind global sourcing and in considering the need for improved information flows and greater transparency.
For suppliers, these shifts represent real opportunities. After years of being beaten up over price, of being forced to move production to low-cost centers, they will be able to step back and consider how to build competitive advantage into their offerings. For example, can they take on some of the buyer’s risk in areas like transportation or export / import? Can they differentiate by offering more reliable supply? Can they create better integrated technologies that offer on-demand capabilities and information flows?
Suppliers are also waking up to the fact that globalization is creating new pockets of wealth. The markets that were yesterday’s sources of cheap labor are today’s emerging economies. Already we see major suppliers switiching their sales and marketing spend, building new alliances, partnering with the international corporations of tomorrow. Buyers who maintian their old, confrontational approaches to negotiation may soon find that their suppliers simply shrug and turn elsewhere.
Finally, what about the impacts of globalization in those emerging markets themselves? The Western press tends to focus on how globalization affects the developed economies. It may report on the opportunities that are being created, but it rarely looks at how business leaders in those fast-growing economies are handling their success.
Interestingly, many of the emerging companies appear to have learnt little; they show every sign of emulating the traditional (and crumbling) enterprise model of the 20th century corporation. Rather than thinking about lean organizations, with a center-led, outsourced approach to operations, they are building centralized infrastructures, huge facilities and campuses. It is a model built on short-term opportunities for labor arbitrage – and defies the economic forces that led to their success. So the final trend that I believe will emerge in 2008 is that a weakening economy will place some of these early leaders in countries such as India under very real pressure. They will need to rapidly reengineer and develop a business model and structure that does not depend on such high volume employment, but instead that operates with disciplined business processes and technology that allows superior information flows.
Commitment Matters 