In many cases, organizations continue to make purchasing decisions based on price. It has been baked into their DNA, with the mantra of ‘commoditization’ backed up by software that drives price-based competitive auctions and measurement systems that continue to monitor ‘negotiated savings’. In the public sector, this is further reinforced by public procurement rules that blithely ignore concepts of value and have failed to adapt to the nature of today’s supply requirements.
Many claim otherwise
Suggestions that procurement decisions remain focused on price are often met with howls of protest and claims that such an approach is a thing of the past. In some cases, this is true – there are Supply Management groups which have moved on and many who advocate the need for change. Yet supplier experience continues to attest that those who have actually changed are very much the exception.
Why is this a problem?
Simply put, purchasing decisions need context and it is rarely true that price is everything. The commoditization craze that came with reverse auctions and spend management discouraged the use of economic judgment – essentially, it resulted in economic illiteracy. A great example of this was cited in a recent edition of Talking Logistics, which examined the influence of networked technologies on the logistics industry. It made the point that, during the dot com era, many believed that they could convert a traditional relationship-based industry into a spot market commodity. They were wrong. The article highlights how similar efforts are now appearing as a result of digitization. In both cases, these are driven by the hunger for lower prices, but illustrate two fundamental misjudgments:
1) creating a spot market does not necessarily alter the availability of supply and is more likely to reduce competition over time than to increase it;
2) low prices frequently do not translate to low cost. For example, reliability and quality of collection, shipping and delivery frequently has far greater importance than saving a few dollars in processing costs. A failed delivery may well catch the CEO’s attention; a nominal ‘saving’ certainly will not.
So what’s the answer?
Procurement decisions need context. They must examine impacts that stretch beyond the acquisition and explore downstream effects. I recall a great story from the public sector, where a buyer thought it would be a marvellous idea to save money in the criminal justice system by supplying gaols with fruit that had failed the supermarket tests of homogeneity. It seemed entirely logical – saving money and the environment – until it caused a prison riot due to the inequitable size of portions!
With the growth in the scale and types of acquisition, in particular the shift towards services, procurement decisions need a new and economically-based approach to sourcing decisions and supplier management. ‘Price’ must be put in its proper place – and my next blog will expand on how that should be achieved.
Over 60% of those working in Commercial Management are excited by the impact and potential of new technology. They believe they can harness its power to better understand and mitigate risks and to increase their influence with senior management.
This welcoming and confident attitude is encouraging and at odds with some other professional groups, who tend to see technology more as a threat. Similar optimism is reflected in the fact that 85% see the current and future job market for their skills as ‘fair to good’ and a high proportion are also confident that they know what future skills they need.
Not all is roses ….
The work of a commercial professional is challenging; they are motivated by the contribution they make to business goals; they love negotiating. But most are somewhat frustrated by the limited career path and opportunities, meaning a significant proportion either plan to change company or change jobs in the next 5 years. Over 40% feel that their current organization fails to invest in its people; over 30% are unhappy with company culture and a similar percentage are dissatisfied with their current pay.
In the context of training, a fascinating statistic is that more than 50% feel the ready availability of knowledge and information, driven by networked technology, means there is now a GREATER need for structured training programs. Clearly a case of too much information becoming overwhelming.
This data is extracted from IACCM’s current Talent Survey and reflects just a small portion of the insights being generated. To participate in this study (and receive a copy of the resulting report) visit https://iaccm.fra1.qualtrics.com/jfe/form/SV_73XH9Gj76yAEk3b
At its heart, commercial management is about grasping the big picture, seeing connections, developing practical solutions. On one level – the availability of information – the digital age is streamlining and simplifying the commercial manager’s role. On many others, it is potentially making it more complicated, or at least very different from the past.
What are the issues?
A recent book put it like this: “Complex trends in globalization, demographic shifts, and new technologies are raising urgent challenges for managers on an everyday level. Because of the number of companies undergoing digital transformation, managers need to navigate an intense speed-to-market landscape while juggling virtual teams within and sometimes outside their organization“.
And this means ….
Commercial managers must not only identify the risks and challenges from this fast-moving environment, but also – and this is critical – innovate, offer creative solutions. Fundamental questions in a digital world are how to innovate, develop new ideas; how to influence and gain insight from both physical and virtual teams; how to communicate and drive change across extended ecosystems. In themselves, the questions are not new. It is the scale and speed that makes things different.
Keys to success
A growing volume of research points to the critical role of communication style and ‘managing your network’. High performing commercial managers unite teams around a clear and shared sense of purpose – not just what they are trying to achieve, but why. They generate an environment where ideas and positive challenge are welcomed and where collaboration is understood, expected and achieved. They are comfortable operating across extended networks, internal and external, both to gather information and achieve results.
At the same time as the digital world imposes these demands, its effective use also makes it possible. Today, there is no excuse for being information deprived; there is no excuse for failing to establish connected networks; there is no excuse for failing to master diverse communication techniques; there is no excuse for lacking self-awareness and influencing skills. These are simply critical attributes for a Commercial Manager.
Communication – the final barrier
Finally, what about communication style and content? As recent conference delegates know, this is an area where IACCM has been doing a lot of research. Working with academics at UC Irvine, we have examined a large number of ‘commercial’ personnel – lawyers, contract and procurement managers. Many are not today exhibiting the critical communication style required to be a commercial leader or influencer. Rather than projecting themselves as enablers, they are seen as ‘preventers’ – safeguarding what we already have, rather than enabling opportunities for the future.
Not everyone wants to be a Commercial Manager, but for those who do it is critical that they understand and grasp the implications and needs of working in the digital age. A good place to start is in shifting personal and team image by challenging and, where necessary, changing what and how we communicate.
IACCM offers its members tools to analyze current communication style and provides methods to establish the new approaches needed for individual and functional growth.
Energy supplies are fundamental to the functioning of any advanced economy, so blackouts such as that which occurred on a large scale in the UK earlier this month are bound to be big news. However, they should be no surprise.
First, it is important to note that the UK is not alone in facing major challenges in its energy supplies. Inadequate investment, the wrong investment, major policy shifts, failure to control demand – all of these are factors which, in varying combinations, have put energy supply into a state of crisis in multiple countries.
The response
On such a critical and politically sensitive topic there is of course no easy answer. Experts such as Lord Redesdale, CEO of the UK’s Energy Management Association, has been warning about collapsing and inadequate infrastructure for at least a decade. And even if anyone had been listening, the time it takes to bring new supplies on stream would mean that investment in infrastructure is only ever part of the solution.
Today, the commercial considerations are further clouded by extensive debates over the environment and sustainability. Which energy sources do we really want to support? How much energy do we really want to produce? Impact assessments take many forms and are subject to multiple viewpoints. For example, wind farms may be ‘clean’, but they are often unwelcome due to their other environmental effects – and, as incidents and reviews such as those in Australia and Germany show, may not be a reliable or cost effective solution. Another question relates to the move from centralized grids to distributed energy. This is rather like the technology transition when businesses moved from mainframes to distributed computing; it raises big questions over the scale and timing of investment shifts and also is accompanied by new sources of supply and new entrants to the market (e.g. the move by Shell to become an electricity provider).
Demand management is another critical issue. The commercial challenge is not just about increasing supply, but also (perhaps more importantly) raising efficiency and reducing demand. That requires not only greater awareness on the part of users, but also commercial incentives for producers. There is some progress in this area, particularly around effective control and monitoring systems and potential advances in the Internet of Things. Perhaps we will also see faster progress in improved contracting models, such as shared benefit or shared savings agreements that accelerate deployment of advanced technologies. Meaningful consumer education is also an important topic, since ‘consumer concern’ has not translated into ‘consumer self-control’.
And then there is politics
Given the sensitivities around energy costs and reliability, it is inevitably an area for extensive political debate. Whether or not it directly controls the industry, government has a big role. It sets policies, it often regulates prices, it influences the nature and extent of competition. Factors such as these keep energy at the forefront of debate and always leave lingering questions over whether there can ever be such a thing as open, meaningful competition. From a truly commercial perspective, doesn’t a competitive market actually result in massive duplication of effort and resources, multiplying stakeholders and leading to inefficient allocation of funding and investment?
i am no expert on energy supply, but it is clearly an area that demands the highest level of commercial expertise and assessment – and therefore a field where IACCM is becoming increasingly active.
At present, supplier-led innovation appears to be more fantasy than fact. That’s the conclusion we must draw from an IACCM Research report, published last week. It shows a significant divide between the aspirations expressed by buyers and the reality experienced by suppliers.
What’s going wrong?
There is wide agreement that supplier-led innovation is both possible and desirable. There are, of course, some great examples of it occurring. But it is the exception rather than the norm, in spite of the efforts of many customers who insert ‘innovation clauses’ into their contract, in the rather forlorn hope that this may cause something to happen.
Part of the problem is that ‘innovation’ is frequently not well defined. For example, is it innovation at a global level, or within an industry, or just in the context of the specific customer? And how does ‘innovation’ differ from ‘continuous improvement’?
However, more severe than this issue is the fact that most organizations have not established any form of innovation process or protocol. There isn’t a formal structure for review or to generate funding or to determine how risks and benefits will be shared. This is a source of frustration for many suppliers, who feel there is no avenue for ideas to be proposed and evaluated.
innovation needs trust
Finally, there is also a significant trust barrier. However much Procurement groups may claim they have changed, the experience of most suppliers is that bid selection processes remain dominated by lowest price and risk allocation. Quite simply, they do not trust the underlying integrity and sense of fairness in many of their customers. In those where trust prevails, innovation flourishes.
The IACCM report, compiled through surveys and interviews and authored by a group of academics and practitioners, provides guidance and methodology to those who really seek supplier-led innovation. It happens, but only when the environment is right.
The 2019 IACCM Benchmark Report will soon be issued, providing a wealth of data and insight to the current state of contract and commercial management. One of the many areas we have researched is to understand what major initiatives contracts and commercial teams are currently undertaking. The list (which appears below) is interesting – and the differences between buy-side and sell-side priorities even more so! Our report explains the implications and the reasons – along with a myriad of data regarding performance measurements, headcount levels, the state of automation, skills and knowledge management and a host of other topics.
Is Procurement under greater pressure?
The study shows that a much higher percentage are driving key initiatives on the buy-side. This certainly supports the idea that Procurement groups are feeling the heat when it comes to the need for change. We examine the reasons for that and suggest the implications for the future. But we also explore whether the relatively lower level of activity going on within sell-side groups is an indication that they may be sleep-walking into disaster. So do they need a wake-up call?
One thing is clear. Contract and Commercial competency is a growing priority and in order to respond, we need more and better data to support our planning and implementation. Many IACCM members are under pressure to provide benchmark information, or need analysis to support the case for investment. With input from 760 organizations, this latest report is without question the authoritative guide to all things contract and commercial – once again demonstrating the many benefits that come from having an IACCM membership!
| Buy-side: Major Initiatives for 2019 | Sell-side: Major Initiatives for 2019 |
| 1. Relationship segmentation (59%) | 1. Reporting line change (32%) |
| 2. Revised measurements (54%) | 2. Expansion of current role (30%) |
| 3. External benchmarks and research (49%) | 3. Skills development (29%) |
| 4. Contract analytics (48%) | 4. Contract management tools/systems (28%) |
| 5. Reporting line change (44%) | 5. Contract standards/new terms (27%) |
| 6. Contract simplification (43%) | 6. ‘Self-service’ support (27%) |
| 7. Reduced role (42%) | 7. Knowledge management systems (27%) |
| 8. Contract standards/new terms (42%) | 8. Revised measurements (25%) |
| 9. Improve risk management/governance (41%) | 9. Contract simplification (25%) |
| 10. Knowledge management systems (39%) | 10. Improve risk management/ governance (23%) |
Twice last week, I heard from business executives that long, complex agreements are a thing of the past. I don’t know whether they had been speaking with each other, or perhaps attending the same event, but both were forceful in their view that contracts must change – a sentiment that we strongly echo at IACCM.
In the view of these executives, there are two fundamental issues driving the need for a fresh approach. One relates to the sheer complexity, time and cost associated with drafting and negotiating multi-page agreements. They also observed that such massive tomes are rarely used and, when they are, they are full of contradictions – a classic case of ‘too many cooks’, as one law firm recently described the typical business contract.
Focus on principles
The second factor is that they want agreements that truly reflect the spirit and intent of the parties. In this context, they talked about contracts which focus on underlying principles and clear approaches to governance, all of which can be expressed succinctly and then communicated within the customer and supplier organizations. Ultimately, these executives reflected the growing view that litigation in the typical b2b contract is so unlikely that traditional ‘belt and braces’ legal agreements are unnecessary. That doesn’t mean clarity is not important – in fact, the reverse is true – they want clarity for the business user as well as for the lawyer.
Calls for better contracts are not new*, but they do appear to have growing momentum. In part, this may be because they are now so pervasive. But I suspect also that the overall complexity and volatility of our business environment has increased appreciation of the need for documented agreements – and that these, far from adding to the complexity, must actually make it simpler to handle and understand.
Great jurists such as Lord Denning been powerful advocates for clear language, promoted also by evangelists such as Ken Adams and his Manual of Style. Today, these efforts have been further advanced by IACCM member working groups which have established a series of contract principles, model terms and contract design standards, all freely available at the IACCM web site.
According to LinkedIn, there are some 8 million people with Contract Manager as their job title. I don’t know how all 8 million feel, but many that I speak with complain that people don’t really understand what they do, or fully appreciate its value.
My answer to that is, you are right. So what are you doing about it?
Diversity is the norm
It is widely recognised that collaborative relationships generate better results. It is also generally acknowledged that collaboration doesn’t just happen – it requires characteristics such as openness, honesty, free-flowing communication and a sense of shared interest.
McKinsey’s Global Institute is just the latest in a long stream of consultancy firms to publish research on the future of work. Like many others, it calls upon senior management to set up “systems and programs to help the tens of millions of people who may need to switch jobs or even occupations” as a result of automation. I am sure McKinsey will be delighted to assist such initiatives – for a substantial fee.
But is there a real issue with automation and to what extent does it truly demand urgent action and intervention?
History suggests otherwise
In a world where the past is increasingly dismissed or ignored, we are only too ready to believe that the challenges we face are somehow unique. Yet technological innovation is far from new. It stretches back across millennia and in every instance it disrupted old ways and demanded new skills and ways of working. Somehow, the world coped – even without the benefit of highly paid consultants. And it is my belief we will cope now because, just like in the past, change will be evolutionary, not revolutionary.
This comment is not intended to belittle the massive impact that automation will have upon society and the workplace. It is more to point out that a) it will happen over time; b) humans are actually quite adaptive and c) many aspects of the impact are unpredictable – even to consultants.
A case in point
Let’s take an example – the switch from steam power to electricity. The BBC is running an excellent series on 50 forces that shaped the modern economy. The adoption of electricity is one such force. Today, it seems obvious that any business would rush to use electric power in preference to steam. Yet that wasn’t the case in the 1800’s. Although electricity and electric motors started to become available in the early 1880s, twenty years later less than 5% of US factories were making use of them.
Commitment Matters 