Tomorrow, January 30th, is an important date in my personal calendar. It is the 370th anniversary of the execution of King Charles I of Great Britain, who fell victim to a fundamental disagreement over scope and obligation management. Many would argue that he also suffered from a lack of negotiation skills. Unfortunately for him, neither he nor his followers were members of IACCM and the records suggest that in any case he would have ignored advice. Ultimately, he paid a heavy price for his failures at dispute management.
What should he have done differently?
The 17th century was a turbulent era, with levels of social discord growing as the economy shifted from largely agrarian to early industrial. Traditional relationships and loyalties became fractured as values altered and new skills came to the fore. As trade expanded, wealth increasingly moved from the land to the merchant classes.
Charles saw it as his duty to maintain many vestiges of the past and was influenced by his belief in the divine right (and duties) of kingship. These led to core concepts around the preservation of power, protection of assets and resistance to change – concepts that resonate with much that is happening today. New forces, driven to a large extent by economic and social interests but dressed up as religious belief, increasingly challenged the scope of a king’s role and the established order. Those forces were often unclear and divided over what they wanted to achieve, but were united by opposition to Charles’ view of his rights and obligations. Eventually, the country split, descending into civil war. Charles chose not to negotiate, essentially stifling efforts to achieve peaceful change. Instead, he insisted on compliance – and lost.
The contract between king and people may not have been in written form, but it existed none the less. Those in positions of power, whether as governments or as large corporations, ignore the fundamental principles of good and fair contracting at their peril. To maintain position and status, there needs to be an underlying consensus over a common purpose and roles and responsibilities in its performance. There need to be effective mechanisms for review and change, with a readiness to make adjustments for altered conditions. King Charles failed to grasp these fundamental elements of contracting and in consequence became seen as a tyrant. His experience provides a critical lesson for those who are charged with developing, negotiating and managing key stakeholder relationships – and even more for the leaders who wish to flourish and survive.
How effective can public procurement be in achieving social and political goals?
The leadership of the Australian Labour Party is just the latest in a long line of politicians promising a boost to the national and local economy through imposing requirements for the use of local firms and workers when awarding public contracts. It’s a policy that grabs headlines and is in many ways laudable, but is it realistic?
First, there is the challenge of the international trade rules that apply to public procurement and seek to prevent anti-competitive selection criteria. Whether or not one feels that the current rules are appropriate to the modern economy (and in general I don’t believe they are), it is pointless to deny their existence. Indeed, the Labour Party announcement acknowledges this when it says that “public service departments would still be required to prioritise value for money in major government contracts”. In practice, this always tends to mean ‘the lowest price’, since public procurement officers seem to struggle with finding an objective measure of ‘value’ that would avoid competitive challenge.
Understanding the numbers
Second, there is the issue of capability. It would certainly be nice to find small and medium enterprises and pockets of highly skilled local labour both available and with the capacity to fulfil major government contracts. But this is a real chicken and egg situation and in general those capabilities simply don’t exist. Where they are present, we run into the third problem, which is the unattractive nature of much government business. The time, cost and complexity associated with bidding and performing on public sector business is daunting. In general, small and medium enterprises simply find it impractical to engage. The United States has superficially been one of the most successful countries in driving SMB activity and social inclusion through public procurement policies, yet research shows this is often misleading. For example, many small businesses are owned by former government employees who know their way around the system and have inside connections. Many of the larger awards are fronted by a small local business, yet actually performed by a major enterprise as a sub-contractor. Too often, the numbers may look great, but the reality is very different.
A waste of time?
This does not necessarily mean that political efforts to drive policy initiatives through public procurement are a waste of time. Indeed, the need for innovation in service delivery means that public procurement has a key role in identifying suppliers and solutions that can deliver social benefit. Encouraging local enterprise, growth and employment are important and laudable goals, but they require a level of analysis and understanding that is typically missing from politically-inspired initiatives. If the Australian Labour Party – and indeed Governments more generally – are serious about expanding the mission of public procurement, they must recognise the need for fundamental reform of the role and its underlying policies and practices.
Contracts ‘set the tone for the relationship’, especially in more strategically important interactions. The design of the contract, the way it is worded and negotiated, all have a psychological impact on the parties, influencing the way they perceive the counter-party and subsequently behave.
The research is available
For at least 30 years, academic research has indicated the importance of the contract to subsequent performance. IACCM’s studies, especially those related to ‘The Ten Pitfalls’, have confirmed both the elements and the impacts of poor contracting. In one study, ‘Using Psychological Theories to Shape Partner Relationships through Contracting’, the authors observed: “if a firm can develop specific competencies in the contractual process, particularly in the more complex end of the contract spectrum, then it is possible for it to create a competitive advantage based on these contracting capabilities. This idea is akin to that of alliance capabilities, in which some firms develop competencies in creating and managing alliances that other firms cannot imitate (Kale, Dyer & Singh, 2002). One way for firms to develop a contracting capability is to first identify what type of relationship it desires with the partner, whether arms-length or a trust-based relationship, and then use psychological theories to guide the framing that it uses in the contract. Although this process seems straight-forward and therefore imitable, it is, in fact, difficult to determine the type of relationship that is most appropriate and the best approach to accomplish this end”.
I have highlighted the sentence regarding the type of relationship because it is remarkable how frequently businesses fail to give this adequate consideration. Indeed, a mentality that is based around standard templates and compliance almost inevitably results in a failure to address – or even care about – the psychological impact of the contract. Far too often, behaviors are driven by narrow views of efficiency and risk, rather than the economic or business outcome to be achieved.
Getting things wrong
IACCM’s work regularly confirms the pervasive nature of this issue. For almost 20 years, the annual study of ‘The Most Negotiated Terms’ has indicated the divide between the terms that are most important versus those that receive greatest attention. This in turn explains why many in Sales or within business units consider contracts to be negative or even destructive in the formation of relationships. One result of this is that the type of relationship – and the appropriate contractual framework – is often ignored. Indeed, a common complaint by contracts and legal staff is that they are involved too late, meaning that often they have little or no influence over the contractual framing.
In many cases, technology makes this situation even worse. ERP and P2P Systems in particular typically relegate the contract to a point of little significance, imposing a cookie-cutter standard, almost regardless of its applicability or suitability.
Avoidable costs
All this sums up to the fact that most organizations fail to build robust contracting capability. This results in a whole host of avoidable costs – not only is it intrinsically inefficient, but it generates extensive downstream operational costs, as well as lost revenues, missed opportunities for innovation and damaged reputation.
Unfortunately, the pervasiveness of these failings makes it hard for enlightened organizations to break the mould. Even those who wish to develop sound, productive relationships typically find themselves frustrated by the contracting practices of their counter-parties. This goes a long way towards explaining why the stories of highly successful contracts are so rare and why they are then so hard to replicate.
Achieving change
Although the evidence is compelling, achieving change is not easy. One major factor is education. The facts about contracts and their economic impact are simply not taught. Hence a multitude of stakeholders emerge with little or no understanding of the way that contracts frame their business relationships and as a result, few organizations make the investments needed to build a true contracting capability. Things are improving and new technologies will accelerate the change, but it remains frustratingly slow and sadly is often perpetuated by people who really should know better.
It’s time for all those who care about business results to start shouting the message. If you want successful relationships, contracts matter!
Are you feeling uncertain? Do you watch the chaos of politics, the tensions over world trade, and wonder where we are headed?
The volatility of today’s business and economic conditions is no accident and it isn’t temporary. We are undergoing a period of transformational change, a transition into a new era. Just like the evolution from the agrarian to the industrial world, there is no sudden shift – there is an extended period of large-scale, often unexpected, social disruption.
So what does it mean?
Supply relationships are especially vulnerable at a time like this, with the capabilities of both individuals and organizations facing challenges. This year will bring rapid acceleration of trends that are already underway. Among the most important characteristics of business relationships will be:
- Greater pressure for committed performance, outcomes – buying results
- More flexible, agile, adaptive processes and relationships that focus on value
- Competing on quality and reliability at low cost
The implications are that there will be a greater need to anticipate change, monitor markets, analyze results, proactively improve performance. Contracts will increasingly be designed to avoid problems, which means their terms will include far more focus on active management and their design will assist user understanding. The emphasis for contract and commercial teams will shift to value delivery through reducing operational cost and reducing risk likelihood. The contracts portfolio becomes an invaluable source of management information, key to driving business decisions. Competitive analysis will include focus on benchmarking terms and conditions and comparing commercial policies and practices.
You aren’t alone
At IACCM, with insight to thousands of corporations and public sector agencies, we have the ability to observe trends at their inception. It drives our change agenda, our strategies for member services. Next week we meet with executives from a range of leading organizations to review and sign off the strategy for 2019 – and already we are working with many member corporations and governments, providing input to their change agenda.
It’s big. It’s exciting. It’s important. Are you ready?
As the world’s only non-profit Association for Contract and Commercial management, IACCM leads the way with research and advisory services for its members, who represent more than 17,000 organizations in over 170 countries. Discover more at www.iaccm.com
In 2018, the International Association for Contract & Commercial Management grew by more than 25%. Growth came from multiple sources – so what are the factors that have resulted in a total membership now exceeding 53,000?
Trade is at the heart of what we do
In simple terms, there are four forces driving the evolution of trading relationships and forcing increased focus on contracting and commercial capabilities.
The most significant is the continued disruption caused by the evolution to a global networked economy. Not only has this destroyed many traditional trading patterns, but it is creating dynamic and unpredictable market and geopolitical conditions, including the rapid formation and dissolution of complex supply networks.
At the same time, society and business are increasingly focused on the quality of outputs and outcomes, as we move from a world of traditional products to one of customer experience, services and solutions.
There is also continued growth of regulation and associated levels of transparency and accountability. In all cases, organizations have recognized they need to make better decisions in selecting their trading partners and they need to improve the oversight and segmentation of those relationships. Commercial judgment and contracting competence are fundamental to financial returns, business controls and management visibility.
Finally, the digital revolution is having an impact on all businesses. For example, the growth of connected devices through the Internet of Things (IOT) is forcing businesses to rethink how they are structured and organized, and the growth of social media is challenging the way businesses deliver to customers and how they interface with, and work with, their supply chains.
Consequences
Commercial and contract disciplines are shifting towards a greater balance between their legal and compliance focus and their contribution to economic value and financial returns. This need – and the solution – is embodied in the increased volume of Capability Maturity Benchmarks that IACCM has undertaken for its corporate members, supporting process and system updates and improvements.
This fast-changing environment is stretching the skills of existing practitioners, many of whom lack the access or the influencing skills to make effective representations to management about the needs or impact of change. In some organizations, a new breed of commercial executives is emerging, often drawn from other business disciplines. Many are flourishing because of the training they receive from IACCM learning programs and continuing professional development.
As for 2019, it promises to be an even more exciting year … about which I will write more soon.
If your job involves writing, negotiating or managing contracts, should you be worried about automation?
IACCM set out to answer that question by first analyzing the major tasks associated with contract management, then exploring how new technologies are starting to impact them. The conclusions – shared in a new thought-leadership paper – are that there will be fundamental changes to today’s procedures and extensive opportunities for new sources of value-add. That means significant change to the nature of the role and the skills needed for its performance.
One of the most significant points to come from the research is the extent to which so much legal and contract work is highly repetitive, yet practitioners delude themselves into thinking each situation is unique and requires human judgment. Substantial workload is generated by things like inconsistent terminology or personal preferences that determine contract structure. Machines quickly spot similarities that are invisible to the human eye. Modern systems are also more objective and are happy to work 24 hours a day, undertaking tasks such as performance monitoring and automated payments.
In a webinar last week, I co-presented on this topic with IACCM CEO Sally Hughes. Many found it helpful, giving them greater understanding of both the speed and nature of the changes automation is bringing. Some, however, remain in denial. One webinar attendee made the comment “There was too much about technology”.
The webinar and the research paper are both available on the IACCM website.
As we enter a new year, it is a time when many people wonder about their future. The holiday period causes many to reflect on whether they are doing the right thing, in the right place, with the right people.
So for those who are already working in Contract and Commercial Management, or those interested in entering this field, it is a good moment to consider not only what this role looks like today, but also how it will develop this year and beyond.
To assist your thoughts (and personal development plans), IACCM has published a new fifteen page guide “Contract & Commercial Management: Role & Direction”. It draws from IACCM’s extensive research and insights from its 52,000 members, who represent more than 17,000 different organizations around the world.
As the guide explains, there is no question that these roles face a time of major change – a characteristic in common with many other job roles. But with change also comes opportunity – especially for those who are willing and ready to adapt. Many IACCM members are already progressing on the path to a higher value, more influential role, having invested in IACCM training and certification programs. From the number registering over the last few days, it is clear that many more have commited to a New Year resolution to raise their skills and profile!
The guide sets out a useful table, showing the typical tasks that are performed by contracts and commercial staff today and describing how those will change and be enhanced by new technologies. Overall, it describes an environment that will for many be challenging, but which offers exciting prospects for the future.
“Contract & Commercial Management: Role & Direction” is available to IACCM members and can be downloaded from the website.
This year’s IACCM benchmark study of the contracting process shows no improvement in typical cycle times for reaching contract signature. At a time when digitization and robotic process automation are streamlining many other business processes, the continued bottlenecks that delay contract closure are not good news.
Is automation the solution when it comes to speeding up contracts? The answer, based on the benchmark evidence, is at best ‘maybe’. It depends on whether:
a) organizations select the right software solution – something appropriate to the nature of the relationships they form. Too often, we see selections that are incapable of dealing with business needs and which ultimately add to complexity and delay as users battle with the system.
b) organizations try to overlay software onto their current manual process, without meaningful attempts to assess and reengineer underlying activities.
In reviewing the data, I was reminded of a recent article by Kate Vitasek, which highlighted a recent book by Professor Kathleen Eisenhardt, “Simple Rules: How to Thrive in a Complex World”. This title – and the five steps that Professor Eisenhardt suggests – seem especially appropriate in the world of contracting, since ‘complexity’ is the typical excuse for delay. So what should we do to improve?
Identify a bottleneck that is both specific and strategic – the bottleneck should be relatively narrow, a well-defined process or process step, not a broad aspiration. (Contract cycle time seems to be a good example.)
Let data trump opinion – don’t come up with wild, “shoot from the hip” rules; base them on a thoughtful analysis of historical experience. (In other words, gather data, such as ‘what are the actual causes of delay – IACCM has research on this!)
Users make the rules – don’t hand down rules from above, let those involved in implementing the rules develop them. (This requires deciding who the true ‘users’ are – the answer shouldn’t be the lawyers or contracts staff.)
The rules should be concrete – rules should not be difficult to understand; think yes-or-no criteria. (This is where good automation can really help, perhaps via electronic playbooks or apps.)
The rules should evolve – simple rules shouldchange as the company and the market change, and as managers better understand what is actually happening on the ground. (And yes, this is not about rigid compliance; markets change and the new system must continue collecting data and adapting.)
So perhaps a key project for the new year (and a great new year resolution) might be to eliminate contract bottlenecks.
IACCM is pleased to announce that it has been working with the Business School and Law School at Leeds University in the UK to develop a new Masters program (MSc or LLM) in International Commercial and Contract Management. Available as either a two year part-time or one year full-time course, this represents a unique collaboration between a leading business school, law school and professional association.
Discover more and share your views in our brief survey at https://www.research.net/r/MScCCMresearch
The growing dynamism and diversity of trading relationships in today’s volatile markets has elevated the importance of commercial and contract management. They represent essential competencies for purposes both of control and creativity, designing and delivering business-critical outcomes.
New technologies have steadily disrupted traditional business relationships and the way they are managed. This is resulting in continuous change in what relationships are formed, where they are formed and how they are formed. As a result, there is a pressing need for a fundamental shift in the role, purpose and value of contracts, which in turn depends upon continuous challenge and innovation in commercial policies and practices.
Both business and government must develop commercial and contracting competence –the ability to integrate across multiple stakeholder views and interests to develop and deliver required outcomes. This competence will in part depend on having individuals with the skills and knowledge required to lead commercial and contract management transformation and to embed organisational capability at both strategic and operational level.
BACKGROUND TO THE BUSINESS NEED
The importance of commercial and contract management in terms of responding to dynamic markets and supporting the overall strategic goals of the organization cannot be overstated. A failure to do so impacts on financial performance and, perhaps most critically, the organization’s reputation. At an operational level, weaknesses in the contracting process damage external relationships, create delays, undermine innovation and increase costs. Conversely, where commercial and contract management are aligned to the organization’s strategy, where project objectives and outcomes are clearly articulated and well managed, the cost savings and revenue improvements are significant, reputation is enhanced, and problems and risks minimized. The scale of commercial and contract management in both the public and private sector, their economic importance, social role and impact on the bottom line is immense.
This program offers organizations and individual practitioners the opportunity to develop the skills, methods and connections that are needed to modernize commercial competence and compete effectively in today’s demanding markets.
Commitment Matters 