The last 20 years have seen a transformation in the way contract and commercial management are viewed. Growing complexity in business and markets is driving an appreciation of the need for increased competency, streamlined processes and advanced technologies to support successful contracts and relationships.
IACCM is widely credited with influencing this shift in understanding. Our global presence has brought together a powerful community of practitioners and change agents. Our research has provided previously unavailable data and insights. Our training and certification programs have raised standards and status. But this is just the beginning. New technologies are starting to drive truly fundamental change and transformation, where contract and commercial competencies will move center-stage. ‘Relationship Resource Planning’(RRP) is the strategic concept developed by IACCM and the idea that underpins our thinking and services for the year ahead. It is through RRP that businesses and organizations will realise a quantum leap in performance, cutting operational costs and increasing revenues by 10% or more.
To lead us into this new era, IACCM itself needed a generational shift and change of gear. Today, it has announced the appointment of Sally Hughes as its CEO. After nearly 19 years at the helm, Tim Cummins is stepping aside, though will continue in a role as President of the Association, leading its research and providing advisory support to members.
Over recent months, IACCM has seen impressive growth, enabling substantial strengthening of its staff and management team. Sally brings the vigor, enthusiasm, leadership and subject-matter skills that will ensure IACCM continues to advance the status and role of its members.
Once again, IACCM demonstrates one of its most compelling characteristics – providing a vision and path to the future. I’m sure readers of this blog will join me in congratulating Sally – the new (and much younger) face of global contract and commercial management. She can be contacted on LinkedIn or shughes@iaccm.com.
The latest reports on job opportunities in procurement and supply management provide interesting reading – because in general they make no reference to procurement or supply management.
The skills in demand are very different from those provided in traditional procurement certification programs. Increasingly, the focus is on lifecycle proficiency, with strong emphasis on services and knowledge of IT. Businesses need people with strong category management and capital project experience – with particular demand for experienced contract managers. They need staff who appreciate and can assist in driving successful outcomes, driving value rather than often theoretical savings.
For CPOs, commercial acumen comes top of the list for required attributes, followed by competence in stakeholder management and experience outside Procurement.
At IACCM, we have been highlighting these shifts for several years and equipping a growing number of members with the lifecycle contract and commercial skills now in demand. That success and relevance is reflected in our most recent salary survey, where those with an IACCM certification are on average earning some 12% more than those with more traditional procurement qualifications.
The volatility of today’s business environment represents an exciting opportunity for those with robust commercial and contracting competence. High demand is not surprising – and in part reflects the shortage of supply. With IACCM core programs so easily accessible and taking just a few months to complete, they offer many experienced procurement practitioners an easy and low cost top-up to existing skills and knowledge – a ready transition to the new world of trading relationships.
This month’s Harvard Business Review features an article, ‘The Case for Plain-Language Contracts’, by Shawn Burton, General Counsel at GE Aviation. In his introduction, Shawn observes: “The contracts used in business today are long, poorly structured and full of unnecessary and incomprehensible language”. He rightly makes the point that contracts are business documents and should therefore be understandable to the audience for which they are relevant.
This point seems glaringly obvious and the article comments that the push for plain-language contracting goes back many years. One likely reason that progress has been so slow is highlighted in a recent opinion piece published by Forbes, in which Mark Cohen – a Fellow at Northwestern University School of Law – challenges the fact that law operates ‘as a guild, rather than a competitive market’. The system of licensing that this involves means that lawyers ‘have fostered a ‘bespoke myth’ that maintained all legal matters were unique, inherently complex and worthy of premium rates’. Using archaic and complicated language, decipherable only by an expert, is of course a key element of that myth.
Ken Adams, guru of contract style, has unsurprisingly piled in on this topic and makes some justifiable comments about the simplification undertaken at GE Aviation. He suggests some worthy improvements to the wording of the agreement. However, he also bows to traditional thinking when he suggests that because contracts deal with complex matters, they must therefore themselves be complex.
Why does this matter?
Contracts today are pervasive. For a variety of reasons, both the volume and size of contracts have grown dramatically over the last 30 years and this has been accompanied by greater complexity – for example, the increasingly frequent need to to operate across languages, legal systems, cultures, as well as dealing with complicated, long term relationships on challenging and innovative projects – and in an environment of rapid change, heightened uncertainty and growing regulation. However, it is worth noting that the vast majority of those factors are not in themselves anything to do with ‘law’. Contracts – and the process by which they are developed and agreed – shoud be assisting in generating clarity and shared understanding for all those who they affect, not adding to the mystery or uncertainty and being decipherable only by one specific interest group.
Business people need practical business instruments that support successful business outcomes. As Paul Lippe, founder of LegalOnRamp, commented to me just this week: “Contracts today are a roadmap for dispute resolution”. This renders them inadequate – and often irrelevant – when it comes to providing a useful or structured framework for overall governance and performance management. Quite simply, they often fail to assist businesses in dealing with the real business risks that arise during the contract lifecycle. Ironically, this lack of clarity regularly means they are not even particularly useful in dealing with disputes.
It is rarely practical to anticipate every incident or uncertainty that might affect contract performance, but it is entirely practical to anticipate that such incidents are likely to occur. It is in this context that well-designed contracts provide clarity:
- for those things where there is certainty, they must offer unambiguous instruction;
- for those things that deal with uncertainty, they must offer clear guidance on how it will be handled.
The obligation for anyone drafting an agreement – indeed, their test of success – should be that the users of that agreement can understand it.
Complexity is no longer an excuse
Throughout the centuries, complicated ideas or tasks have resulted in the formation of specialist groups or associations. The intent is laudable. It has generally been to raise standards and encourage informed debate and improvement (at least within that specialist group or community). But over time, such groups have always become resistant to change and sought to maintain mystique – the use of Latin within the Catholic church was a case in point, or the Luddites smashing machines was another.
When it comes to contracts, simplified langauge is no longer enough. The world has moved on. Traditional written documents are for many people a thing of the past; they operate in a digital age where communication is through emojis, text-talk, graphics and videos. In many cases, these methods generate far greater understanding and consequently far greater compliance. To take an example, engineering drawings are complex. Just like contracts, they require experts for their interpretation. And that is why engineering drawings in their traditional form are becoming a thing of the past. Whether it is for kitchen re-design or for smart city construction, virtual reality programming has taken these innately complex concepts and made them fully understandable to the wider public.
Specialists and professionals remain important to human progress, but in order to survive and stay relevant they must focus on how they make their expertise accessible and affordable. In the case of engineers, they may still develop drawings, but these operate as templates for the virtual reality program. Either they expand their skills (to include programming) or they partner with programming experts.
A key measure of future value must surely be that we enable the success of others by making complex things simple for them to understand and implement. Contracts will not be an exception. Already, we are seeing the emergence of more standard terminology and the development of machine-based analytics (the end of the bespoke). We are also seeing growing use of graphics and video – methods through which contracts serve a broader business and social purpose. These developments are exciting to observe – and indeed, many lawyers share that excitement and are operating at the forefront of those changes.
In a year-end report, IACCM highlights the continuing immaturity of most Supplier Relationship Management (SRM) programs. While a minority of organizations are generating substantial benefits, for most the investment in SRM is minimal, leaving it often fragmented and under-resourced.
The IACCM report, based on a survey conducted in December 2017, reveals that top-performing programs are yielding returns equivalent to 11% or more of spend, in particular through progress in innovation and efficiency. For these leaders, negotiated price reduction takes a back seat. However, this enlightened approach is far from being the norm. In most organizations, SRM either does not exist in any formal context, or is seen as a sub-element of Procurement, often driven by the same motivations and measurements.
It is this subservience to Procurement that raises real questions. Many commentators agree that the era of squeezing suppliers for price reductions is coming to an end. If they are right (and it could be argued that in fact a new era based on automation is about to begin), then Procurement needs to shift its focus towards lifecycle costs and value. This requires an understanding of how to evaluate and sustain high performing relationships.
Those who have developed successful SRM programs recognise the need for skills and tools that are rarely found in Procurement functions. That is why, when operating as a sub-group in Procurement, SRM has generally struggled to make an impact. Frequently it becomes entangled in political battles over role and authority, resulting in limited internal impact and leading to confusion for suppliers.
Yet for Procurement to flourish – some would say to survive – it desperately needs to raise its business contribution and SRM is the most obvious source of additional value. 2018 looks like it may be a pivotal year when we will start to see more intelligent discussion about the positioning of SRM. For example:
- can SRM prove effective within a traditional Procurement function and if so, how should roles, responsibilities and authorities be divided?
- should Procurement itself be sub-divided, with traditional roles increasingly automated and outsourced and a new management group established for key suppliers and major contracts?
- as businesses become steadily more dependent on their ability to form and manage external relationships, should major elements of SRM and CRM merge, to become an integrated function that oversees and enables trading relationships in every form?
IACCM will continue to lead research and discussion on these important points, as well as offering its members the training and advisory services they need to handle the critical changes affecting every organization.
For those who prepare, 2018 promises to be an exciting year, with many opportunities for growth.
Organizational culture is becoming an increasing area of focus for every business. As recent events have shown, the speed and power of social media activity demands heightened sensitivity and rapid response mechanisms. Shifts in social expectations (as well as global variations in those expectations) result in often unpredictable pressures that can instantly impact corporate reputation.
This challenging environment means that organizations must increasingly review their commercial policies and practices. For example, traditional measurement systems have often led to damaging behavior – whether it is placing unfair pressure on small suppliers or using unethical practices to win sales. Partnering programs and the selection of suppliers are also high risk areas, with potential ‘guilt by association’. In some cases, policies and practices are driven by regulation – for example, the use of conflict minerals or child labor. In others, it is about avoidance of possible litigation – for example, discrimination or sexual harassment. But there is also a growing need to exercise judgment on a wide range of decisions that impact organizational image and these, it is suggested, are in many ways best addressed through a clear and common ‘culture’ – a set of norms and values espoused by all employees.
There is current debate over where ‘cultural responsibility’ should reside. For example, given the frequent role that the General Counsel has over compliance issues, should they also be the ‘custodian of culture’? Ultimately, the tone may be set by the Board, but there needs to practical oversight and implementation.
It seems to me that there are two linked but distinct aspects to this topic. One is the internal manifestation of behavior and the other is external – the link to society and markets. It is this latter aspect that is especially relevant to commercial teams, who are in many ways uniquely placed to be making the sort of balanced judgments needed to manage reputational risk. Lawyers and the law are fundamental considerations in making ethical and reputation-enhancing decisions, but this is only one aspect. Recent incidents that are damaging corporate reputations are mostly not illegal – they are simply reflecting corporate values and cultures that are increasingly alien to societal norms. Trying to keep pace with those trends and making smart commercial decisions requires careful and inclusive analysis and counsel.
Twenty years ago, many corporations had powerful commercial groups with clear responsibility for business practices and ethical standards. The forces of globalization destroyed most of those groups because they were seen as an impediment to getting business done. Management focus shifted to ‘growth at all costs, ethics be damned’. Steadily, the world has come to realise that such approaches destroy environments, undermine society, drive inequality and dishonesty. So we are at a point where we need to rethink approaches to decision-making, ensuring that short-term expedients are not at the cost of longer-term interests. Perhaps that means appointing an ‘owner of culture’, but I suspect it is more about designing effective and streamlined review and approval processes that clearly include ‘social impact analysis’ as a core element of risk assessment.
A guest blog by Sally Hughes, Chief Operating Officer of IACCM
Social trust is high on the political and corporate agenda. Open contracting is attracting growing attention as one way to increase public confidence in the transparency and integrity of business and government dealings. To date, the private sector has had limited engagement in the debate on open contracts and many legal and contracts professionals show scepticism about its practicality. But with 23 governments having signed up to the principles of Open Contracting, and with active interest from institutions such as the World Bank, OECD and World Economic Forum, it is surely time to engage.
Last week, I represented IACCM in a fascinating keynote panel discussion at the 2017 Open Contracting Conference held in Amsterdam. The session was moderated by Adrienne Klasa, Editor of This is Africa at the Financial Times Group and my fellow panellists made up a distinguished group, bringing diverse perspectives on the subject of Open Contracting. Dr. Eber Omar Betanzos Torres is the Undersecretary of Public Administration in Mexico, who through 2017 has been the Chairperson of the group of 5 governments, (Colombia, France, Mexico, United Kingdom and Ukraine,) who founded the “Contracting 5”, leading the work to foster openness, innovation, integrity and better business and civic engagement in government contracting and procurement. Last week it was announced that Argentina would join this group, formally making it the Contracting 6; Zuzana Wienk is a member of the Steering Committee of the Open Government Partnership as well as founder and program director of a leading Slovak political watchdog – Fair-Play Alliance; and finally, George Ofori, Deputy Chair of the CoST (Construction Sector Transparency Initiative).
Open Contracting – The Future
The panel’s remit was to look at the future of Open Contracting, to try and cut through the hype and discuss and debate the strategies needed to maximise its impact; can it be the new “normal” in the next 5 years? It is a lofty aspiration. IACCM was particularly requested to comment from a private sector perspective, looking at the role of the private sector in accelerating the Open Contracting agenda and the actions that they can specifically take. The private sector was notable in its absence at the conference and therein lies one of the first challenges – how to get them in the room?
At IACCM we are in the fortunate and privileged position to be working closely with both private sector and public sector; indeed, having started out 18 years ago as an Association that was founded in conjunction with a small private sector group, the percentage of our membership from public sector has grown exponentially over the last 7 years, the reasons for which are the subject of many other blogs. There is no doubt that governments around the world are driving commercial reform initiatives, from upskilling staff, streamlining processes and even attempting to simplify contract documentation. However, when I speak about these initiatives to companies that supply in to government, the response is universally along these lines, “It all sounds very interesting, but the reality is that our experience working with governments hasn’t changed, it’s still the same old unwieldy and unnecessary complex documentation seeking to allocate unreasonably onerous risk to the supplier, still the same old bureaucracy, still ultimately the same old lack of transparency.” So, no wonder then that the private sector is sceptical.
What are the incentives?
There are certainly incentives for the private sector to get on board with the Open Contracting initiative; those organisations that care about trust and integrity, care about their reputation, should be at the forefront. However, if they are not observing any change from governments, despite the work that is clearly underway, then the incentives largely disappear, it’s viewed as one way traffic. There are so many other questions to pose: What are people going to do with the data if it is publicised; are they really ready for it? What about the arguments for the need for confidentiality in situations of national security? How can we make “data” open and useable without significant investment in technology? Even with the challenges that private sector is navigating in implementation of appropriate technology, this remains an area where public sector is woefully lagging in comparison.
Open Contracting is a complex issue and whilst I sincerely hope that it will have made significant progress in 5 years’ time, for it to be the new “normal” I fear is over ambitious; but we certainly shouldn’t be disheartened or distracted from maintaining that objective.
A need for open dialog
So, what is the role of the Private Sector in Open Contracting? Firstly, it needs to come to the table and take the opportunity to influence the conversations on this important debate, but importantly the Public Sector needs to listen to the real challenges that are still experienced when working with government institutions; this won’t happen without open dialogue and greater publicising of the case studies demonstrating the successes that can be achieved through greater openness and transparency. Sanjay Pradhan, CEO of the Open Government Partnership gave a moving opening presentation at the conference; he reminded us all that we need to move from commitments to credible implementations and we need courageous and committed leadership.
As digital communication steadily transforms social expectations, it should come as no surprise that there are growing demands for ‘open contracting’ – an end to the secrecy and complexity that masks business dealings and performance.
This week, a global forum in Amsterdam confirmed that Open Contracting truly is on the International agenda, raising understanding of the critical role that contracting plays in delivering fairness, transparency and value in trading relationships.
The players in this growing movement wield tremendous influence – organisations that include the OECD, the World Economic Forum, the European Commission, the BTeam, CoST, a myriad of national governments – and of course IACCM.
What’s it about? Increased efficiency, improved standards of governance and ethical standards are high on the agenda. While the drive may be largely from public sector, there is tremendous relevance and benefit for private companies. Greater consistency will reduce costs. Transparent processes will open opportunities to greater competition. Simplification will increase the chances of successful outcomes.
Ultimately, Open Contracting demands increased competence from both public and private sector. It requires a focus on skills, resources and systems that drive integrity in data flows and fact-based decision making. It is a program that has potential to deliver benefit to every citizen, everywhere. At last, high quality contracting has been recognised as a critical ingredient for global economic growth and success.
The IACCM vision and mission has taken an enormous step towards realisation and contracting is steadily moving up the government and business agenda!
IACCM’s recent study of the state of contract management automation revealed low satisfaction ratings and poor levels of adoption. While there are some very successful instances of implementations led by the Legal function, in general systems selected by Law Departments were especially prone to failure – in fact more than 40% more likely to be underperforming.
Contract management software takes many forms, but is tending to be bundled into the overarching category of ‘Legal Tech’. This is misleading and problematic. In a corporate environment, lawyers are just one group amongst many on whom successful contracts depend. In fact, in terms of the overall workload associated with creating and managing contracts, the Law Department typically represents well under 5%. By branding what is quite obviously business technology as ‘Legal Tech’, we simply undermine broader business understanding and adoption.
’Legal Tech’ is certainly an entirely appropriate term in the context of technology used by law firms – in the same way that FinTech is used to describe technology for the financial services industry. But in-house Law departments are not separate and independent businesses. They need technology that integrates them into the business, not that separates them from it.
So as a profession that likes clear and appropriate use of language, it’s time for lawyers to recognize the boundaries of the term ‘Legal Tech’.
Contract success is directly impacted by the motivation of the parties. Research increasingly shows that traditional forms of contract are demotivating and therefore can be directly responsible for under-performance. The way that terms are expressed, the extent to which they mandate specific actions and the degree to which they provide a relational structure are of particular importance.
A growing number of studies indicate a strong link between levels of autonomy and the quality of performance. Essentially, the less people feel they have autonomy, the lower their level of motivation and the greater the risk of unethical or dishonest behavior.
When we write contracts, we face many choices in how prescriptive they are. The same is true in the way we approach their negotiation or management and the associated communications with the counter-party. An approach that is rigid, formulaic and inflexible does not promote or allow the type of conversations and incentives that encourage innovative ideas or alternatives that increase value. The imposition of unreasonable levels of risk or unilateral demands for price reductions are similarly demotivating. They undermine goodwill and any sense of ‘we are in this together’. So what should we be doing differently?
The American Business Law Journal published an article by Todd Haugh which explores the role of ‘nudges’ in driving behavior. It reveals that communications or actions that increase or imply oversight may generate superficial compliance, but ‘workers may want to get back at a regime they see as too strict or overstepping’. Therefore contracts that mandate ‘how’ work is to be done, rather than ‘what’ is to be achieved, are likely to result in poor performance and disappointing results.
In ‘The Goldilocks Contract’, researchers from the Stanford Graduate School of Business investigated the impacts of contract structure and terminology on performance. They also found that the more the contract terms seek to impose control, the greater the impact on motivation. ‘Subtle reductions in the specificity of a contract’s language can boost autonomy, which increases intrinsic motivation and improves a range of desirable behaviors’. A range of experiments showed that less specific and less ‘legalistic’ contracts increase the counter-party’s persistence, creativity and cooperation. This is especially true with regard to the ‘legal’ terms (and methods of expression), which are often drafted in a way that appears threatening. The ‘technical’ or business terms should be designed to offer structure – for example, if they establish clear methods of governance, this will be beneficial.
There are many reasons why contracts are essential instruments, but in order to generate desired results careful thought must be given to the impact they have on performance. Traditional structure and wording is clearly not contributing to success.
Recent years have seen growing interest in approaches to contract design and expression. There are many factors behind this, among them the increased use of contracts and also their greater length and complexity. As vehicles of communication, most contracts are dire, with average reading levels that put them out of the range of mere humans.
Initiatives have ranged from the use of ‘plain language’, to the development of style guides and, more recently, the introduction of graphics and pictures that increase the ability of users to understand and perform contracts. But how much does all of this really matter?
It seems obvious to many people that contracts contain important information and these include rights and responsibilities related to performance. On that basis alone, it appears both reasonable and expedient to make agreements easy to understand. Recent research goes further by suggesting that the nature of the language used in a contract has a material impact on the behavior of those receiving it. Excessive ‘legalese’, for example, is perceived as threatening and is therefore demotivating – hardly a desirable result when the purpose is to encourage performance.
But now, research undertaken at Binghampton University in New York has revealed even more extensive possibilities for future contracts – the use of ‘text talk’, such as emojis, exclamation marks and abbreviations. ‘Textisms’ apparently bring a value typically missing from written documents – they convey the nuanced meaning typically achieved only in spoken conversations, thereby reducing the chance of misunderstanding or adverse reactions when there was no bad intent.
Contracts today frequently generate negative or hostile reactions. That is really the last thing we should be doing when we are embarking on a joint project or trying to generate shared benefit. So perhaps we need a new style guide for contract drafting that brings us into the 21st century and reflects modern methods of communication. It isn’t just that emojis and ‘text talk’ would make contracts more accessible; it would also (according to the research) increase our chances of a successful and harmonious outcome. And that, surely, is what we are all trying to achieve?
Commitment Matters 