There is extensive discussion about the cost of hiring a lawyer. At the Codex event last week, hosted by Stanford law school, a number of presentations focused on ways that new technology will tackle the issues of cost and accessibility to the law. Several speakers spoke of the inevitable pressure on hourly rates and alternative charging arrangements.
Broad issues of social access to the law are not the only questions affecting the legal community. In-house groups are also facing increased pressure to control their spend – and this is at a time when workload demands are increasing.
While some are looking at opportunities to cut workload through delegation (and new technology will increase potential for this), there are a variety of other mechanisms available. These include:
Non-compliance is risky. It leads to fines, job losses, reputational damage, lost sales. Since it is so important, businesses make substantial investments to reduce the chance of breaches – and of course a major element of those investments is people: reviewers, approvers, auditors, compliance experts.
The problem with those resources is that their jobs depend on complexity and, to a degree, their belief that the natural tendency of others is to be non-compliant. Compliance experts are not generally innate optimists who assume that human nature is inclined to ‘doing the right thing’.
As the volume of regulation grows, traditional control methods are too slow, inefficient and erratic – not to mention the issue of affordability. They have to be simplified – and that demands new thinking and new measurements of success for compliance experts.
Two of the emerging approaches are:
- Outsourcing the basic checking process and collection of data. An example is in the area of supplier validation and monitoring, where there are now a variety of external providers offering a service that eliminates the need for individual companies to run checks. This single point of collection obviously reduces workload and cost for both customers and suppliers.
- Use of technology. A number of exciting solutions are emerging. Recent trials of blockchain have included automation of data collection from a range of internal and external sources, automating supplier validation and contract award, then monitoring continued compliance through feeds from public or fee databases. Another method is through the use of apps or bots provided to users so that they better understand compliance requirements and input data that supports self-monitoring or automates approvals. A third example is machine-based checking – for example, ensuring that proposed contract terms align with policy and highlighting any exceptions, which are then routed for review.
By improving data flows, compliance teams are also becoming far better equipped to identify the likelihood of specific risks, enabling them to focus (and be measured) on specific mitigation measures for those with the highest frequency. Managing compliance is a clear obligation; competitive advantage comes from expert teams that focus on how to do it better, faster and cheaper.
”To use machine learning responsibly, there is a need to ensure values are aligned.”
This comment by a representative of Google sums up a key dilemma with all relationships – no matter whether the intelligence being applied is human or machine-based. In the world of business, ‘mismatched objectives’ (or expectations) lie at the heart of many disputes.
Contracts exist in large part because of these mismatches. In theory, a good contracting process serves two purposes – one is to reduce the chances of misalignment, the other is to deal with its consequences. These are demanding concepts – and contracts are not always good at dealing with them. How could we make them better?
That is a question which goes to the heart of IACCM’s purpose and its research has consistently pointed to answers (and the underlying causes). Among the issues / solutions:
– organisational measurement and reward systems: these typically do not offer incentives that ensure ‘matched objectives’. They should be changed, especially for those involved in designing and negotiating contracts.
– attitudes to risk: for all the talk about risk, the focus of terms and conditions remains weighted towards areas such as liabilities, indemnities, intellectual property – not on safeguarding that objectives are – and remain – aligned. Again, this approach comes from custom and choice.
– coherent governance: change is ever-present and increasingly rapid, yet for many the approach to its management has not changed. Fears of ‘scope creep’ or challenges in budgeting result in failure to use the right form of contract (e.g. agile, relational) and to develop agreed change forums and methods.
Ironically, it may require the discipline of machine programming to overcome these deep-seated problems. One benefit from automation is that it is not subject to the ingrained habits of humans!
Are you confused about the differences between ‘outcome-based’ and ‘performance-based’ contracts? Or perhaps simply want greater clarity on how to form or manage them? Andrew Jacopino, an expert in their use, recently updated his blog articles on these topics, plus some outstanding guidance on defining KPIs.
————
“Business contracts need to balance the rights of each party to ensure they aren’t unfair, as smaller firms may not always be in a strong negotiating position.” That statement came from the Australian ACCC in a finding against financial services firm, Cardtronics. It reflects growing pressure from governments around the world on abuse of power by large corporations – an abuse that often operates against both the public and business interest by limiting competition and pushing up costs. Perhaps it’s time to question the fairness (and effectiveness) of your business terms?
————-
A recent IACCM survey on organization structure for supply chain found that most companies wish they had a different model. The study, which focused on the oil and gas sector, revealed that few people believe that centralization or decentralisation work well; they overwhelmingly prefer center-led or matrixed models, no matter which aspect of supply chain management they are considering. Some 30% of organizations have changed their structure in the last 12 months.
————-
An initiative by legaltechinnovation.com is measuring law firms on their uptake of technology and the extent of legal innovation. The findings to date are generally not impressive, showing very limited adoption and use – though focus has been on large firms, rather than emerging ‘disruptors’. Analysis has supported the hypothesis that UK law firms are ahead of many others, especially in their use of artificial intelligence and project management technologies. But no sign yet of the major fee reductions that technology should be delivering.
————-
Are contract and commercial skills adapting to changes in the business environment? An analysis by IACCM confirms that pressures for greater speed, agility and the introduction of new technologies are placing real strains on commercial staff. These are reflected in the skills assessments and benchmarks undertaken by IACCM, which reveal significant shifts in management expectations – but many practitioners are struggling to keep pace. Areas such as problem solving, change advocacy, technology use and financial awareness are among those where the largest gaps are emerging.
Sign up to Commitment Matters to have this weekly update delivered direct to your in-box.
Many people ask “what is blockchain?”, but much more important is to understand “what can blockchain do?”
One answer to this question is that blockchain can act as s foundational layer that sucks data from multiple sources and creates an accurate, verifiable record, based on which many of today’s manual decisions can be automated.
In that context, blockchain has the potential to remove delays, cut costs and reduce the need for specialists. It has massive implications for any activity that requires verification or validation – for example, in acquisition processes, in transactional records and exchange, in contract management. Arguably, for example, it could automate many aspects of world trade, cutting through laborious procedures such as customs and documentation checks.
An answer for Brexit?
It seems probable that blockchain will gain rapid publicity through some role in resolving the issues created by a post-Brexit world. It would be surprising if it is not being considered as a potential answer for the dilemma of a reconstituted border in Ireland. Blockchain could make that border ‘virtual’ and a successful pilot there would rapidly spread across international markets.
But much more broadly, there are already exciting pilots underway, a number of which were discussed at this week’s ACT-IAC forum in Washington DC. The use of blockchain can overcome the complexity of gathering and reconciling data from multiple sources – and the beauty is that it overlays those sources, it doesn’t replace them. Hence the cost and politics associated with its implementation can be low. Contract award procedures, compliance checks, performance management, identity verification, ownership rights – the areas which today cause extensive costs and delays are all within the potential scope of blockchain-based solutions.
This ‘democratization of data’ has massive impacts on business and society. Those impacts must be evaluated. But the answer for those who are affected is not to ignore blockchain and hope that it goes away, but rather to understand how it can benefit your area of activity and the nature of your work. Certainly, at IACCM we are closely involved with the development and use of blockchain, providing our members with the insights and understanding they need to ensure that blockchain is indeed ‘an answer’, rather than a threat.
I hope we will see you at one of our forums – be inspired!
Larry Fink, CEO at Black Rock – the world’s largest asset management firm – has built the business around diversity. But he brings a new context to this theme, which he describes in a recent interview.
“People who are engineers like to be around other engineers. People with a background in political theory are generally around other people in political theory. People who have an affinity with one political party or another are generally friends with people in that political party. There are so many places where you see congregations of people around ideals, around education, around race. We have to break that down. Firms fail when you have groupthink. You generally have groupthink when you have replicants all around you.”
Fink goes on to welcome diversity – but makes the point that one critical aspect is frequently missing and that is ‘diversity of mind’. He illustrated this with the following comment: “It’s very easy to see across a business and ask, how many women are there? What’s the gender mix? It’s very easy to see if there is a diverse group of men and women with diversity of race. We don’t spend enough time asking: Do we have an organization with diversity of mind? I think this is where most companies fall down.”
Contracts – groupthink – what can you possibly mean?
Are those of us in contract and commercial management – those of us who produce contracts – guilty of groupthink, of both lacking AND ignoring diversity of mind? If you are not sure, consider for a moment this quote from a recent blog by Stefania Passera, an expert in design:
“As an information designer, my job is to solve complex communication problems. Contracts seemed to be a genre of documents in dire need of a user-centric makeover. We can pick any contract, and, at a glance, they just look and feel and read the same. This, from a design point of view makes no sense: why so much sameness in different documents for different users with different needs and skills, produced by different organizations to regulate different transactions with different goals? At best, we are foregoing the opportunity to create a meaningful touchpoint and build positive relationships and experiences with suppliers and clients. At worst, we are leaking economic and relational value!”
When you consider the diversity of people who need, use or are affected by contracts, it is indeed remarkable that ‘groupthink’ has remained so powerful, that the legal community, backed up by contract managers, has succeeded in perpetuating uniformity of approach in an area of such importance to business and the wider population.
Many organizations do not have a well-defined, end-to-end contracting process. Frequently, contract-related activities appear as sub-elements in other processes – for example, in Product Lifecycle Management, Procurement or Project Management. Activities are therefore often ‘functionalized’ and this leads to a lack of cohesion and poor data flows. Ultimately, it means that no one has an overview of who is really responsible for producing a complete contract, nor how well the contracting process is performing.
Fragmentation carries a cost
This fragmentation is inevitably reflected in many of the automation products, since their development has been guided by functional users and driven by what they see as operational reality. The IACCM Automation Report in 2017 reflected the consequences of this perspective – a high level of dissatisfaction with performance, in particular due to the challenges of gaining user adoption. From conversations with many contract management technology providers, I understand their frustration in trying to assist their clients. All too often, software is being implemented to support a poorly defined process, with little analysis of user needs and limited appreciation of the true potential ‘return on investment’.
Where do contracts come from?
I realise that one of the issues here is the absence of an authoritative and over-arching view of the entire Contracting Lifecycle. As a result, there are multiple versions, using a variety of terminologies and with varying degrees of completeness. Most focus on the transactional phase and ignore the more strategic aspects – for example, where exactly do contracts come from? How and where are decisions made regarding individual terms or the commercial policies that affect them? Who defines and monitors the connection between customer contracts and required sub-contracts? It often seems that contracting is rather like the ancient mystery of childbirth – delivered by the stork!
It is time that we start to operate with a consistent view of the contracting lifecycle and therefore I am publishing the following overview. This will be discussed across the IACCM member community and I welcome comments and suggestions. The purpose is to have common reference point and the reason is that the growing importance of contracting demands a more coherent and consistent understanding of how it operates. Based on this, we will also be better able to support the development of automation and to measure value delivered.
Defining a contracting lifecycle
I have broken the lifecycle into two major phases, one related to the oversight of the process itself, the other related to transactional activity. Clearly, there will be variations in the steps required depending on the nature of the agreement (for example, a commodity purchase is unlikely to involve any drafting or negotiation) and a fully detailed procedure will require inclusion of activities such as signature or storage.
Contracting Lifecycle: Operational Phase
- Define – oversee development and define responsibilities and authorities within the contracting process
- Develop – establish standard clauses / options and templates based on policies, practices and market strategies / requirements
- Maintain – monitor issues, undertake research, propose improvements, update process or standards for shifts in internal or external conditions
- Equip – ensure suitable tools, training for those performing activities within process
- Analyze – undertake regular reporting on effectiveness of process in supporting business goals and priorities
Contracting Lifecycle: Transactional Phase
- Evaluate – identify contract model required to support specific bid or proposal OR review counter-party proposed terms for acceptability (determine go / no-go)
- Approve – evaluate non-standards and interdependencies (e.g. subcontractors, related contracts, resources); engage stakeholders required for review and approval
- Draft – prepare required transactional documents or variations to standard
- Negotiate – establish strategy, fall-backs, trade off; seek to reach consensus (go / no-go); redraft as required;
- Implement – communicate signed agreement and obligations to all affected parties
- Manage – oversee and report on performance; handle claims, disputes; negotiate and record changes
- Close – manage termination or renewal, identify continuing obligations
Comments, suggestions, improvements – all are welcome. The important thing is that we develop and agree a standard.
Whenever I run workshops about successful contracts and projects, there is always someone who raises the question of trust. There’s a widespread view that trust is the critical ingredient, making the difference between success and failure.
We can certainly debate whether this view is valid, but I think few would disagree that trust is a helpful ingredient and certainly, once lost it is hard to restore. But trust is also something you earn and is not automatically present. Within trading relationships, the extent to which trust matters is highly variable, but when it is absent we take a variety of steps to protect ourselves. First, we might undertake extensive investigations into our potential counter-party, asking questions, seeking references, undertaking searches. Then we may enter into a bidding process in which we are testing and evaluating capabilities and competencies, before moving into a formal negotiation in which we aim to extract specific promises related to performance – and consequences for non-performance.
Just because we are competent does not mean we can be trusted
But does any of this really build trust? Probably not. It may increase confidence, but that is not the same. Trust is ultimately much more about character and proven performance. It is also influenced by typical experience within or between cultures – hence we have significant variations due to different social value systems.
How well are corporations and government agencies doing when it comes to levels of trust? Not very, if all the surveys and indicators are to be believed. And much of that is because there is a real disconnect between what they say and what they do. Nowhere is this more consistently obvious than in commercial and contracting policies and practices. Here are a few examples:
- Executives regularly claim that customers are the core focus of the business, but in reality they concentrate on cutting costs and maximizing shareholder returns.
- Many organizations now have a ‘reputation management strategy’, yet if you ask how that aligns with their legal strategy, you will typically receive a blank look. There is no better example of this than the efforts to transfer contract risk. In a recent survey, the idea that contract terms should be aligned with brand image was soundly rejected by over 70% of participants.
- Surveys of executive priorities show no alignment with public priorities. For example, big issues for business tend to be productivity growth, coping with market uncertainty and integrating digital technologies. The public reflects reduced trust, greater activism and concerns over the honesty and integrity of business and political leadership.
Within business, there is a big – and understandable – focus on competence and capabilities. Without these, it would indeed be hard to survive. But survival also increasingly depends on perception and experience – honesty, fairness, integrity and alignment with customer and social interests are the barometers that ultimately impact levels of trust. The single biggest driver of reputation is the extent to which there is a gap between what you say you do and what you actually do.
And when it comes to commercial practices and terms and conditions, the gap is frequently quite large.
Compliance is important. In any large organization, rules – and clarity over the authority to deviate from them – must be defined. But in today’s business environment, where the speed of change is so rapid, how do we ensure that those rules are the right ones? How do we prevent compliance from becoming outdated, irrelevant, a source of competitive disadvantage?
This dilemma is nowhere more true than in the field of contract terms where an absence of data typically means that standards are based on opinion, rather than hard facts. Most term standards and templates are based on what organizations (and in many cases lawyers) view as ‘the norm’, yet they rarely have data to back up their opinion, nor do they have reliable sources to know when change is needed or could generate greater value. A system that measures and rewards people on compliance rates is not the sort of system that supports challenge or welcomes alternative facts.
The focus for compliance in today’s contracts tends to be on those terms and conditions related to minimizing risk consequence – for example, liabilities, indemnities, intellectual property rights. This is the simple – and lazy – way of protecting the business. In the volatile and uncertain environment we now face, do we actually understand our risks? It is quite clear that in many cases, either the answer is ‘no’, or alternatively that we decide to ignore them. Hence we often produce contracts that in theory protect us against failure, yet fail to address the much bigger and more prevalent risk that we will not achieve success.
The question we should regularly be asking is not “Are we compliant with our corporate policies?”, but “Do we know our risks and are we confident that we are addressing them responsibly and pragamatically?” It is through periodically addressing this question that we develop an organization which seeks data and information, which captures and records actual experience, which develops cross-functional teams to test and update established rules and policies.
Simply ‘being compliant’ is a mindless activity, performed with much greater reliability and accuracy by machines. Real and measurable value comes from knowing when not to be compliant, or when the rules of today need to be changed. In many organizations, I do not observe enough people questioning and challenging the status-quo. Perhaps just ‘going with the flow’ is more comfortable – but it rather depends on where that flow is taking you.
“Sourcing without SRM is like selling without Account Management”.
That statement from Future Purchasing was the subject of a tweet last week. But is it true? The answer, I suggest is both yes and no.
First we have to deal with the problem that SRM, unlike Account Management, seems to be a rather confused discipline, unclear about its scope and its purpose. That is not to say that consultancies – and professional associations like IACCM – have not tried to give it definition; it is just that organizations implementing SRM have taken very different approaches. For some, it is a method of segmentation and leads to a planned approach to the way it handles its supply base. For others, it focuses only on a select group of strategic suppliers and ignores the rest. And in many cases, it is a term used to enable Procurement to continue its pressure on supplier pricing.
The reasons behind this confusion help us to understand the core difference between SRM and Account Management.
Corporations have implemented account management in order to maximize sales. They do this through better understanding of customer segments and ensuring the right forms of interface. Account management takes many forms – for example, it may be physical, in the sense of dedicated teams, or it may be through telesales, or it could be entirely virtual through targeted email promotions or apps. Whichever approach it follows, its aim is to delight customers and have them remain loyal and spend more money.
SRM programs also undertake segmentation. But after that, their purpose becomes rather murky. Are they trying to maximize the amount of business placed with a particular supplier? Are they trying to drive improved performance by that supplier? Are they in some way the supplier’s advocate within their business? And ultimately – most importantly – who is ‘the customer’ when it comes to SRM? In account management, the objectives are clear – a happy customer is a loyal customer who will likely spend more money. But SRM rarely seeks to make suppliers ‘happy’, even if it should. The logical customer for SRM is the business unit or function that will benefit from improved supplier performance – and this is where we reach the heart of the dilemma, because unlike account management, the views of what makes SRM ‘good’ will vary. Some want supplier loyalty and commitment; some want innovation or continuous improvement; some want lower prices ….
None of this invalidates the fact that supplier segmetation is worthwhile, but it does show that attempts to make a direct comparision with CRM or with account management are misleading. SRM is different and it is complicated. It will do much better when it addresses those complexities and clarifies its purpose.
Commitment Matters 