This week, IACCM released the results of its annual “Top Ten Most Frequently Negotiated Terms” survey. With responses representing thousands of b2b negotiators, it offers the world’s leading (perhaps only) insight to where negotiators spend their time and effort.
The list has shown little change over the 7 years in which IACCM has undertaken the study. And it shows most negotiations focus on ‘what happens when it goes wrong?’ One IACCM member wrote to me with the following observation:
“(Research has shown that) the top two perceived traits of respected leaders are Honesty and Competence, which – according to Covey – are exactly the elements required for trust. So, this means that successful leaders are those who inspire trust, but the question becomes “in whom are they inspiring this trust?” Their employees may trust them and they may trust their fellow-employees, but when it comes to dealing with the outside world, neither the leaders nor the employees are good at establishing trustful relationships. Hence they spend all their time negotiating terms about failure and exit strategies.”
These observations are important. I would question one aspect of the writer’s statement – and that is about fellow-employees. I think the core of this problem is that many negotiators do not in fact trust their own organization. They are protecting against bad commitments, promises that cannot be honored, concerns over true requirements and capabilities. Perhaps that is why CEO’s have highlighted ‘excellence in execution’ as such a high priority issue – they understand that their company must be clearer about its needs and its promises.
You can view the ‘top terms’ (the study in fact identifies the top 30) at this link.
The crisis in world markets, exacerbated by the ‘rogue trader’ at Societe Generale, simply illustrates the spiralling complexity of today’s trading conditions.Our networked world has enabled a massive new array of business offerings and transactions. Most of us – including it would seem the managers of institutions like the banks – appear completely bemused by their range and meaning. And the structure of these offerings, together with the manic motivation and measurement systems that accompany them, has resulted in behavior that is more symbolic of a casino than it is of responsible business management.
The London Times commented last week on work by Roger Steare, Professor of Organisational Ethics at Cass Business School. He put more than 700 financial services executives from major firms through integrity tests – and found that, as a group, they score lower than average in honesty, loyalty and self-discipline. This, according to Steare, indicates “a culture of greed and short-termism”.
With the massive investments by the financial services sector in risk-management systems and technology, plus all the regulatory oversight for the industry, it is shocking that such attitudes can prevail. Yet perhaps the two are directly linked. The industry rewards risk-takers at the same time as it tries to control them. It hires mavericks in order to drive growth and profits, using instruments that are incomprehensible to most people, and then tries to contain them with complex technology-based fences.
It should not be surprising when some of these mavericks find ways around the system – it is typical behavior for any group that is driven by lop-sided measurements.
What is interesting is that the problem facing financial services is not really so different from that facing any other company. We are talking here about trading commitments – or contracts. And what is needed is a system to monitor and capture those commitments, so that someone can see the portfolio and observe any specific trends or heightened exposures to risk. On one level, it seems remarkable that Societe Generale would not already have such an overview, enabling it to see the overall exposures to future market movements that resulted from M. Kerviel’s ‘bets’. And one presumes such insights might have prompted action.
What exactly have the banks been spending money on if they do not have even such a basic contract management system, or the controls needed to capture their external trading commitments?
And will this cause management in other companies to wake up and realise the risks they face through their failure to automate this critical – and increasingly complex – area of their business?
I recently came across a very interesting statistic. CFOs were asked “What is it that is most likely to make you believe in the accuracy of data that you have requested?”
The biggest single factor turned out to be the speed of availability. If the answer came within an hour, they were 43% more likely to believe it.
In this era of ‘on-demand’ expectations, that should not perhaps be surprising. But at a time when a growing number of our community face demands to justify their headcount, their cost, their performance, it left me wondering how many of us are prepared. Could you meet that one hour response time?
As a manager, I longed for that hard, factual data that could raise my authority and ability to protect my organization. But I could rarely find it. If there were providers, they were too slow or too expensive (they didn’t pass the speed test!). So at IACCM, I was determiend to change that – to ensure we became a source of fast, accurate and low-cost information. How many heads should you have? What roles should they perform? Where might you add value? What should your cycle times be? How many reviews should take place?
I am pleased that IACCM today undertakes more thna 200 research projects a year. On average, they are completed within 7 business days – and many are achieved in 2 or less. These provide information that enables our community to drive change as well as determine its relative positioning and effectiveness. But I am disappointed – and that is because so few of our community really make effective use of this on-demand service. When they get the call from the CFO, very few will be equipped to answer at all, let alone within an hour.
For a community that prides itself on risk management skills, it is quite remarkable that we are so careless with managing the risk to our own future and that of our department. Especially when it doesn’t have to be that way.
One IACCM corporate member faced the challenge this week – and was fortunate enough to be attending an IACCM breakfast meeting when they received the CFO’s note. Within 30 minutes, I had been able to provide her with a report on typical headcount in her industry and the variables that should be considered. But the data also helped her position ways that savings and efficiency improvements could be achieved – not by cuts in her department, but by expanding its role and activities.
Of course, I was pleased we could help – but that was just a matter of luck. The same presentation that quoted CFO data also had a great chart on world-class risk management. It said that top performers manage risk through headlights, not tail-lights. In other words, they anticipate the risks and prepare for them, rather than panicking when bad things have happened.
That’s the choice many function managers now face – prepare, or wait for the call and panic.
IACCM has the information waiting, or the capability to gather it. If you are not recession-proof, then maybe you should be questioning the quality of your risk management!
The issues of compliance and regulation are of growing significance worldwide. Yet it is evident that there is a continuing mismatch between contract terms and supplier capabilities. In today’s environment, can we rely on the old approach of simply ignoring or paying lip service to performance standards that go beyond product and service quality and tackle wider aspects of company performance or ethics?
In recent years, we have witnessed a steady expansion of the terms that buyers seek to impose – expanding from areas like Most Favoured Customer and levels of insurance to embrace political, social or ethical values. But for both sides, there has typically been little monitoring. However, now we see sophisticated software tools that will enable more rigorous oversight. Will this simply generate increased conflict in negotiation, or will some suppliers see an opportunity to create competitive advantage? And are these incremental commitments something for which buyers are prepared to pay, or simply ‘a price of entry’?
What new terms or contracting practices might this trend generate? This article offers a few ideas. Let’s start with an example of the problem that was sent by one of our members in New Zealand (just demonstrating the universal nature of the issues now facing us as a community):
“My company provides consultancy and software services to businesses, giving visibility and best practice processes to their vendor governance. At the moment we are focusing on IT and FMCG companies and we are seeing an upward trend towards compliance requirements being imposed by their customers although virtually zero awareness from stakeholders within these businesses of those compliance requirements. An excellent example is with one company in the FMCG sector where we reviewed their top 21 suppliers which accounted for more than 80% of their spend, 11 of these suppliers required Food Safety Authority compliance or the equivalent and we were staggered to discover 9 suppliers did not comply. Had they been audited, the site would have been closed down and operations terminated immediately until compliance was achieved.
We have also noted that awareness amongst executives, management and stakeholders is low, to the extent that someone else is expected to have completed appropriate due diligence associated with each external supplier engagement which includes SLA/ KPI and contract negotiation prior to execution. However, in its simplest form, we are finding the business representatives are committing the organisation to almost anything so long as it meets the buyer’s immediate criteria of what is it, how much does it cost and when can I have it. Ultimately this occurs through a lack of visibility and governance responsibility and awareness training.
We are introducing to these companies stakeholder awareness and supplier surveys that consider various elements of supplier excellence, such as performance, communication, responsiveness, flexibility, ROI, technology or service capability and competence.
Significantly, we are also seeing in some businesses that whilst the executive and finance areas generally support greater visibility and management of their suppliers, some procurement teams and/or long serving individuals (especially where they have operated in silos) are approaching such change as a threat to their controls or perceived power over suppliers and have been very resistant.”
I replied to this note with the following observations and suggestions:
“Your findings certainly mirror the lip-service that is frequently paid to compliance obligations. Obviously the rigor with which review is occurring depends significantly on the jurisdiction and the extent of corporate governance oversight. The other – and increasing – driver is summed up by ‘reputation risk’ – and this is probably more powerful right now in most jurisdictions than any government oversight. As highly publicized cases like Mattel, BP or some of the financial services exposures demonstrate, the speed and extent to which governance failures become evident has been transformed by today’s networked economy. Global information flows mean instant awareness and a growing inability to blame others.
Certainly, such exposure can have a range of negative impacts, both long and short term, such as loss of stock price, loss of customers and potential for litigation or fines. However, as you indicate, management in many companies appears to prefer to turn a blind eye and hope for the best, rather than spend the time and money to develop effective oversight. IACCM recently ran an Ask The Expert call on this subject. While the focus was information security, the conversation applied to pretty much any aspect of compliance – and the case studies confirmed the reluctance of senior management to develop a policy that goes far beyond “Let’s hope for the best”.
So what can be done?
Clearly the work of consultants and software providers can be fundamental in spreading awareness and perhaps having management consider the risks they face by failing to monitor their obligations. As a customer, if I feel it is worth requiring a commitment, it would certainly seem smart to then monitor compliance.
Another approach to this might be to cite significant consequences for non-compliance – and to include as a requirement that the supplier self-certifies on a periodic basis (failure to self-certify being a cause for the specified consequences to come into effect). The advantage of this approach is that it places responsibility and cost at the door of the organization making the commitment.
Otherwise, I am seeing early development of software tools to support compliance monitoring. Aravo (www.aravo.com) is a leading example and IACCM featured their CEO on an interview just before Christmas. Others – for example, from the Legal compliance area – are also developing applications and I have encountered several more (including in Australia and New Zealand.
I think the key to improvement is the need to offer realistic and actionable solutions to management, so they can make a balanced decision on the relative costs of effective versus ineffective oversight. The two methods I mention could bring us to this point, where either suppliers or their customers could estimate the cost of implementing a program versus the risk of not having one. But cost avoidance is never an easy sale and I suspect that we will need more exposés – and perhaps more regulatory involvement – before the majority of companies take action.
In Summary: Think The Opposite?
Technology is a key element in any solution, but it must be an integrated application. There are just so many partial solutions out there and either they represent an integration and maintenance nightmare, or they require groups like Procurement to flop between multiple systems both for data entry and extraction.It seems to me that much of the responsibility for compliance needs to be pushed back onto the supplier and we need to think more creatively about their overall certification of performance and the consequences if a) they cannot certify or b) they are found to falsely certify.
At present, many ‘commitments’ are just empty promises because everyone knows they won’t be monitored and if they are, then either a) fault can be disputed or b) there are no tangible consequences (‘sorry, won’t do it again’).
It seems to me that a requirement for periodic certification compliance with tangible consequences for failures might attract the interest of management at suppliers and change their attitudes. And if those consequences were even more severe if they were found to be untrue, or if they failed to submit the certification, they might actually start to monitor and ‘systems assure’ their performance. The point here is that it might shift the responsibility for checking performance back to the person who made the promise, rather than as it is today – on the recipient of the promise.
Liquidated Damages are a good example. Our research suggests pervasive use, but that collection occurs in a minority of cases. There are many reasons for this – but key is the fact that it is up to the customer to monitor, call out failures and battle for collection. But maybe the onus should be the other way round, with rights of audit on a selective basis and consequences then doubled or trebled for either failure to provide accurate information or for dishonest reporting – in other words, let’s reward honesty and punish dishonesty and evasion.
Continuing my theme of picking up on recent correspondence, I received the following observation from one of my contacts earlier this week:
“As in-house legal counsel and contract professionals, our primary responsibility is to protect the legal interests of the corporation/entity that we represent. It is not to maximize profit, minimize losses, or ensure a healthy balance sheet. We certainly can and should play a role on the business/finance side, but this is secondary to our key function which is to always ask, “how does X, Y or Z impact our legal interests”? We meet our primary responsibility by minimizing and, where possible, avoiding risk. And, when a company is in the business of developing, manufacturing and selling consumer products, risk is all around — from identifying intellectual property issues in developing new technologies, adhering to appropriate manufacturing standards, and meeting consumer expectations based on our advertising and marketing materials.”
Now this is a common perspective, but is it right? And more importantly, does it work in today’s fast-changing business conditions? In my reply, I commented as follows:
“You say “We meet our primary responsibility by minimizing and, where possible, avoiding risk.” To many in the business, this might be seen as a negative statement, suggesting that you are not interested in meeting market requirements. Another way to express the same sentiment could be “We meet our primary responsibility by assisting the business in its ability to accept risk.” The implication of the latter is that Legal / Contracts staff have a key role in ‘business enablement’, by spotting trends, competitive initiatives etc. that may challenge the accepted policies, practices or performance capabilities that are reflected in the contract standards. The question is – does good risk management wait for bad things to happen, or proactively seek to understand and anticipate those bad things and therefore equip to manage them? And to what extent is it our job to explore the outcomes that are generated by the words we write or the policies we protect.”
Perhaps the real point here is that the old model of managing risk through narrow functional perspectives and groups that were committed to maintaining the status-quo was great in an era of low-cost manufacturing (for which the typical organizational model today was designed); but it is useless in servicing a fast-moving economy where the need for flexibility and change to meet market and customer needs is paramount.
Functional specialisms were established to ensure and maintain high levels of quality in a standardized output. They were designed for efficiency and speed in an environment that sought to eliminate ‘deviations’. Today, ‘deviations’ are fast becoming the norm, but they need to be handled in a standardized way to ensure they are planned and capable of fulfilment. That’s why views like those expressed by my correspondent actually increase risk. And that is why at IACCM I have been promoting new organizational models to address the needs of business today.
What do you think?
Today I received this note from a frustrated manager, trying to drive an improvement project in a large corporation.
“Measurement has always been a challenge for contract management to create a management dashboard. In all my previous companies this measurement was not a high priority area as the business case for other areas were stronger. But, I am glad that my current company has made it a high priority area, although they are not very optimistic of the results.
I have taken an approach of using the Quality methodologies to study the presales, sales & marketing, legal, project delivery, project maintenance process and procedures. The study shall give certain meaningful database. Another database shall be created by Risk analysis of the Contracts at Clauses/ Sub-clauses level. These database when read with the Company policies and International standards may give a dashboard that can detect, prevent and predict according to the management’s goals and objectives or Judgments and assumptions.”
“According to me,” he continued, “the biggest hurdle in creation of dependable dashboard has been the Legal team seeing the Contract management process in isolation. They have not succeeded in integrating other process equations which either feed contract management or Contract management feed them. “
This resistance to metrics is at the very least unfortunate – and is a key factor in preventing management seeing real value from the process. Without such data, it is of course viewed as a transactional activity, as good or bad as the last story they heard. And unfortunately, many of those stories are negative. In my response, I commented as follows:I endorse your comments. In part we face the challenge of strong internal parties resisting discipline or change because they feel secure in their traditional ‘professionalism’ and able to protect themselves based on extrernal ‘fear’ issues, like regulation and compliance. That in itself suggests an inadequate understanding of risk management – it seems like a very risky strategy for self-preservation!
I have a range of metrics that I recommend to get things started. At this point, many of these are directed at information gathering so that broader change initiatives can be identified and evaluated. For example, what do we spend most time negotiating? What are the most frequent internal roadblocks on review and approval? What are some of the key deal outcomes and what factors in the bidding and contracting process influence those outcomes (good and bad)? Measures of this type can range from things like levels of discount through to failure to meet commitments or percentage of errors. Many times these ‘outcomes’ track straight back to business policies or offering strategies owned by legal, finance or product management. The complexity (lack of quality) comes out in the contracting process – and by capturing this, we can use the process as a driver for core improvements (‘waste elimination’) around the business more generally.
Measurements – far from being threatening – are in fact a source of fascinating new ideas and approaches through which we can enrich our jobs and raise our strategic value. I wish more of our community shared my excitement!
‘Sourcing Innovation’ has produced a good summary of recent research on future trends in sourcing and supply chain management. The latest article focuses on the challenge of overseeing multiple supply networks – a topic that should interest both buy and sell side professionals.
Drawing from a recent report published jointly by ISM, AT Kearney and CAPS, the article starts with the observation:
In tomorrow’s world, the ability to respond to change will just be the price of admission. Competitive advantage will require agility, while supply chain excellence will be defined by the ability to:
- Anticipate changes in customer requirements, product offerings, supply conditions, regulations, and competitor actions
- Adapt to the changes by deftly reconfiguring existing supply chains or creatively assembling new ones
- Accelerate implementation of change to capture the new opportunities ahead of the competition
These comments are perhaps a longer and more detailed way of expressing IACCM’s recent comments that “in the future, we must become ‘Managers of Uncertainty'”.
The real point, of course, is that change is happening ever-faster and our systems and capabilities must mirror this new reality. And one area where that has dramatic impact is in the contract relationship. Since so much is unpredictable, we can increasingly forget about things like volume commitments or rigid supply forecasts. Clearly , we have to get comfortable with the fact that customers cannot accurately forecast requirements in any sense – they won’t know what they are. Trading relationships will have to be based on an understanding of mutual interest in each other’s success and a commitment to work together in dealing with an uncertain – and fast-changing – world.
But on the other side, if suppliers can no longer expect such firm commitments from their customers, what is reasonable in terms of what customers can expect from them? Clearly (and as recent IACCM case study articles have shown), traditional buyer behavior of shifting risk to the supplier while taking none themselves is not the type of ‘flexible partnership’ that this new world demands. You cannot expect a supplier to invest in ‘anticipating changes’ and ‘deftly reconfiguring’, nor providing the latest innovations, if the core of your relationship is constant – and unilateral – focus on cost reduction and an atmosphere of blame for any shortcoming. If you cannot accurately define your requirements, how can they possibly make firm commitments – except commitments of fidelity, of integrity and honesty.
This ‘new world’ points to the critical need for more collaborative relationship structures and that in turn suggests a focus on outcomes, rather than inputs. While those involved in structuring and negotiating the relationship remain fixated on short-term objectives, that tend to assume dishonesty, it is unlikely that we will see emergence of the capabilities indicated by this article.
Since the bidding, negotiation and contracting phase precedes the relationship, or shapes its governance framework, we will only build these more integrated and collaborative structures by re-thinking our approach and policies in the set-up phase. In addition, if we are truly establishing networks, we must start to look at the interplay between contracted relationships and create models that encourage transparency and cooperation.
Today, such discussions are far too often taking place between groups and individuals who are outside the contracting process; functions such as Legal, Procurement and Contract Management are seen as obstacles to getting the right relationships in place. The words of one executive always ring in my ears at moments like this: “We believe that we can collaborate in spite of the contract.”
While true, is this not an indictment of our work and is it not a threat to our future relevance?
It is time for both buy-side and sell-side to consider the impacts of reports such as Succeeding in a Dynamic World: Supply Management in the Decade Ahead and to work on developing the practices, procedures and policies needed to ensure competitiveness in this emerging business environment.
(See the Sourcing Innovation commentary at http://blog.sourcinginnovation.com/)
It seems that everyone is writing about talent management. Surveys from consultants and academia regulary highlight the dramatic shortages, the threat to business operations, the impacts on innovation. For example, a recent report by McKinsey showed that executives see the battle for talent as the #1 trend in the global economy.
Perhaps they are right. Certainly, I do like the work that McKinsey has done on ‘tacit knowledge’, in which they distinguish those who contribute to ‘efficiency’ (and can largely be automated or outsourced) and those who contribute to ‘effectiveness’ (knowledge workers and integrators who bring added value). This analysis says that tacit workers are growing in volume – and it is the shortage of people with these advanced analytical, communication and coordination skills that lies at the heart of the talent crunch.
These broad, cross-industry findings are reflected in the results of IACCM’s surveys of the commitment management community (contracts, procurement and legal staff). Managers and senior professionals bemoan the shortage of new recruits and the inability to plan for the future.
I agree that there is a talent issue – but I do not think it is a shortage of talented people, I think it is a failure in their deployment.
I observe more and more people wasting more and more time on low-value and highly repetitive activities. Decision making is in tatters. People are running ever faster and often going nowhere. And this issue goes right to the heart of this series of articles. It is symbolic of so many revolutions. Old systems and methods are breaking down. They have not been replaced by any coherent alternative. Some elements of the new world are present, but they are running amok, with no real control (e.g. e-mail, networking, global supply chains etc.). Management is out there following every new approach, yet because it is new, no one really knows what they are doing. Chaos is the result – and it doesn’t really matter how much talent you have, it cannot flourish in such an environment. Indeed, having too much talent in a chaotic environment is probably a bad thing; at least untalented people just sit there and wait; those with talent try to fix things.
There are many examples I can cite to support my conclusions. For example:
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lengthening lead times to get deals negotiated and closed, due to increased reviews and approvals and fear of making commitments.
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inability to compile effective requirements or to define desired outcomes.
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reluctance to automate or outsource traditional work, because of uncertainty over its replacement.
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growing organizational conflict over roles and responsibilities.
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reluctance by professionals to share information and knowledge, to enable the performance of others.
I had a typical conversation on this today, with a very senior manager from one of the major outsourcing providers. He was the latest in a long line who complain that deals frequently fail to meet expectations because those expectations are so unclear. He highlighted how most customers seem unable to define requirements and revert instead to imposing onerous contract terms, as if penalties somehow substitute for meaningful defintions of performance. I pointed out to him that this is not likely to be because customers are in some way holding out on him; it is because they don’t actually know what they want. They can’t reach agreement because the systems and procedures are not there to involve the right people; they are restructuring the enterprise with no plan; and they have no real sense of the characteristics needed for future competitiveness in a global economy.
And that is typical in a revolutionary environment, where uncertainty is the main reality.
But maybe it’s true that the people left in the corporate world aren’t very smart. Perhaps everyone with talent has become an entreprenuer, or retired, or moved to India. Well, we see no evidence of that. In fact, I have been amazed by the commitment shown by IACCM members to raise their knowledge and gain further qualifications. Five years ago, less than 17% of our members had an MBA. Today, that proportion is approaching 40%. Clearly, people in the developed economies are personally commited to raising skills and knowledge – but many feel their organization has no appreciation of this. They seem to be doing it as a defensive measure to remain employable, rather than because their company then makes real use of their enhanced capabilities.
So that leaves many talented employees extremely disillusioned and yes, many do think about moving into less stressful or more persoanlly rewarding roles, perhaps self-employed or in a different business sector.
In the end, there is little question that businesses are operating inefficiently and it must be very frustrating to be a top executive right now. That same McKinsey survey mentioned in the opening paragraph revealed that, while CEOs know that change is needed, well over 50% have no idea who in their organization is responsible for making changes happen! And 72% feel that they must hire from outside to get the right people as their key management team.
None of this is a strong indicator of a talent crisis. But it is a very powerful illustration of a world that is changing so fast that we have the wrong people in the wrong places, we have procedures and policies that inhibit change, we have a control culture in the West (reinforced by an unimaginative regulatory environment) that constrains the very change on which our future prosperity depends. And there are certainly education shortfalls in the developing world that means a potential shortage of talented people with know-how (and therefore a potential crisis for the labor arbitrage model of outsourcing).
So although I have entitled this article ‘Talent’, what I really think we face as a challenge is an issue of leadership – people who will step forward, establish credibility and accept accountability for taking their organizations through these turbulent market conditions. And those leaders will of course establish for themselves and their teams a high-profile, strategic position in their organization. Those leaders will be the ones who make sense of today’s technologies (the source or our revolution) and really understand how to deploy networked capabilities that enahnce both efficiency and effectiveness. Our crisis is one of productivity more than availability of good people.
One final piece of evidence to back up this assertion. When IACCM undertakes benchmarks and talent surveys, we see consistent feedback that individual professionals have a good sense of what they need to do to enhance their skills. We see graduates emerging with talents far beyond those of previous years. And we see a distinct lack of confidence in functional heads; their people simply do not believe that their top management has the vision necessary to navigate them through these fast-changing times. Management does not – in general – understand technology and therefore it tries to do new things in old ways. And that simply does not work.
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?
Commitment Matters 