The Royal Commission on Financial Services in Australia continues to unearth unprincipled and sometimes illegal activity within many of the industries leading players. These include the enormous scale of commissions paid for the sale of useless products.
In Sweden – yes, the land of ethical leadership – a former General Counsel is on trial for using bribes to win business in Uzbekistan. In the US, a pillar of society is accused of fomenting drug dependencies and seeking to benefit from the invention of an expensive remedy.
No matter where you turn, the stories of malpractice abound. Has it always been this way? The answer is surely yes, but today there is much greater exposure and stories that once were local are now global.
So on one level, you might say that things today are better because at least we know more about what is going on and there is some degree of accountability. Yet is that enough? Will society in general simply shrug its shoulders, or is this undercurrent of unethical business behavior eroding public trust to such a point that it threatens social structure?
These are big questions and I pose them on this blog because it might be argued that it is the duty of the modern commercial function (and each professional within it) to challenge the practices that lead to these unethical activities. In some instances, we have become part of the game. There are certainly lawyers who take the view that it is not so much about doing the right thing, but rather doing the things you can get away with. Procurement functions, when measured on savings, are too often complicit in manipulating the system to meet their measurements rather than the business interest. Contract managers may observe underlying dishonesty in the claims or commitments being made, even sometimes questionable payments, but do they question, or do they turn a blind eye?
Of course, one answer is ever greater levels of regulation, but is that really where we want to go? What sort of world will that create? Another view might be that since most of the unethical practices in business occur in the setting up and management of trading relationships, commercial staff are in a unique position to observe them. The big question, therefore, is what role might we play to raise the integrity of business dealings?
At the start of this week, I had two very different conversations. In each case, the conversation was with the global head of the Commercial & Contract Management function and in each case they were handling major outsourcing and services agreements. But at this point the story starts to diverge. They are summarized below:
Organization #1
- Has been instructed to cut Its resources by a third
- Is struggling to demonstrate specific value or explain what impact the headcount cut will have
- Has been ‘too busy providing operational support’ to develop a forward-looking strategy
- What technology?
Organization #2
- Is experiencing sustained growth in functional status and budget
- Has documented contribution of $60m cost reduction / revenue growth in first half 2018
- Has an approved strategic plan and executive sign-off for forward investment
- Has implemented technology to drive data, efficiency and value delivery
So what did they do differently?
Organization #1 is typical of so many – hard working, industrious, committed, but ultimately invisible in terms of value. When reviewing opportunities for cut-backs, executive management simply asked the question “Will it have any effect if we reduce headcount?” Even though there certainly will be an impact, there is no data to quantify this or to support the continued level of budget.
Organization #2 also kept busy – but with a somewhat different focus. Following a capability assessment undertaken by IACCM in 2017, it embarked on a program to ensure functional alignment with corporate goals and strategies and to gather data to demonstrate its business contribution. This led to a rapid review of the tasks being performed and ensuring that these were connected to quantifiable benefits. A business case for small technology improvements that would streamline workload and support delivery of those benefits was approved in the summer of 2017.
As a result, the function has been able to show tremendous progress in the value it is adding.
• An average 25% reduction in contract cycle time due to easy search capabilities
• Regular management reporting on key business and commercial indicators
• A single, harmonized global process for document management
• A range of validated savings and revenue improvements through:
o Avoidance of de-scoping through contract interpretation and close client obligation management
o Obligation management – spotted and collected on missed rights that were not being exercised
o Avoidance of service credit payments
o Capturing service level earn-backs
o Cost avoidance via a decrease in maverick spend
o Improved oversight of renewals and consolidation opportunities
The Lesson
The lesson from this is rather self-evident. Don’t just assume that being busy translates to value. Far too often, groups fail to challenge what they are doing or how they are doing it. As a result, their work may fail to keep pace with changes in business strategy or priorities and almost certainly they lose visibility at senior levels.
It can be hard to self-challenge, which is why most successful groups gain some sort of extenral input. This could be through techniques such as a capability assessment, or it might be through gathering external benchmark data – simply finding out what others are doing. That could be through formal research, or more simply by attending roundtables, industry conferences or member meetings. IACCM offers all these things to its members – yet in common with other professional associations, we find only around 20% take advantage of what is on offer.
Finally, there is a method that doesn’t even require you to leave your seat. The IACCM Benchmark Study runs every three years and provides participants with comprehensive data (at no charge) which they can use to self-assess and have meaningful conversations with senior management.
So ultimately the lesson is, if you find yourself in the situation faced by Organization #1, there really is no excuse.
At a recent IACCM roundtable, participants discussed the seemingly insoluble issue of maximising value from supply relationships. It was widely agreed that loyalty and collaboration are important characteristics, since they support more open communication and opportunity evaluation. Yet loyalty and collaboration depend on levels of long-term trust and integrity that are rarely achieved. The key issues – especially for buyers – are ‘How do I stop suppliers taking advantage of me and how do I ensure I’m not overpaying or missing out on innovation?’
These questions are typically answered today by the use of regular competitive bids and, to a growing degree, through maintaining a market overview by Category Management teams. The problem is that competitive bidding – rather than keeping suppliers committed to value – actually tends to undermine performance. As with any relationship, behavior is impacted by the sense of durability.
Setting the term
This brings us to the point about a fixed contract term, something that is common in many agreements. In theory, the term sets a balance between the interests of buyer and supplier – long enough to make the supplier investment worthwhile, but not so long that the buyer feels trapped.
New technologies – and in particular new analytical tools – should have the potential to make fixed contract terms redundant. By aggregating all the elements of comparative operational cost (not just price), it ought to be possible to maintain dynamic benchmarks of supplier performance. As we all know, this is actually the critical data that represents a true measure of value. From a contract perspective, it would mean that there was objective assessment of the incumbent supplier and that they could be given clear improvement targets to retain the business.
Maintaining pressure on suppliers to perform is fair and reasonable. Using an arbitrary time period as the incentive is not only questionable in its effectiveness, but also imposes heavy cost burdens that ultimately translate into higher prices.
Competitiive bidding lies at the heart of most procurement strategies. In the case of the public sector, it is foundational to public procurement regulations.
But there is a problem: in many industries, levels of competition are declining and IACCM’s recent cross-jurisdictional study of government procurement found this to be a common theme across the public sector. Without sufficient competiton, does the entire philosophy that underpins current bid and award processes need to be revisited?
What has gone wrong?
There are many factors at play, but fundamentally it is clear that aggressive procurement strategies may yield short-term gain, but ultimately they undermine competition. Globalization created the illusion of endless choice and continuous price reduction. Buyers dispensed with supplier loyalty. They imposed lower prices and increased the levels of supplier risk. Even when agreements were signed, the contract often imposed onerous price reviews and suppliers faced the constant threat of a new bidding round.
In order to survive, suppliers were caught in a curious syndrome. In order to cut operational costs, they had to outsource more and more of their core activities, so while at one level they were trying to resist customer demands, at another they were imposing similar demands on their suppliers. Over time, this has led in many cases to extensive industry consolidation.
Risk transfer is another major issue, especially for the public sector. Once again, governments operate on the principle that they cannot accept ‘sovereign risk’ and therefore seek to impose heavy performance burdens onto their suppliers. In the days when most transactions were for relatively standard products, such risks were manageable. Today, many contracts are for complicated – often highly customized – products and services, where levels of uncertainty are far greater. An inflexible approach to procurement and subsequent contract management means that an increasing number of suppliers simply choose not to bid. Those who do engage face heightened possibilities that they will lose money and emerge with a damaged reputation. Ironically, the fault for failure is rarely clear-cut, so the risk terms that the contract sought to impose are rarely enforceable.
The way ahead
There is still a school of thought within some procurement groups (and politicians) that all the problems are due to greedy or dishonest suppliers. Fortunately, that attitude is declining and there is a growing recognition that supplier selection and management processes require significant reform. As always, revised contract terms seem to be low on the list, but at least conversations have started.
Ultimately, we need a fresh approach from both buyers and sellers. Organizations must work together to reduce the many costs sssociated with today’s highly inefficient trading relationships. Procurement practices and Sales incentives require significant reform. Performance – and related data architectures – must shift focus to monitor and measure outputs and outcomes.
These steps and more lie at the heart of a new IACCM study and report on the commercial practices that must replace the flawed theories of endless competition that have driven us to the challenges we now face.
Elon Musk is on a mission. Writing on Twitter, he said: “We’re trying to get rid of contracts completely. Should just be ‘tap here & you get your car’. Then, if you don’t like it for any reason, just return it like any other product.”
Unfortunately there doesn’t appear to be any specific plan or timeline for eliminating contracts for Tesla customers – but might it be that Mr Musk is actually shooting for the wrong target?
Eliminate or energize?
The issue which provoked this statement appears to be linked to ’ease of doing business’. Mr Musk was frustrated by the difficulties and delays that some customers apparently faced in getting contracts in place. Many other executives share this view and see contracts as a source of complexity. Frequently they are right, but that’s a matter of choice and, with greater focus, much of that complexity could be eradicated – a much better solution than ‘elimination’ of contracts.
Contracts SHOULD provide a mutual and mutually understandable framework of rights and responsibilities. They should offer an acceptable level of balance that protects interests. Tesla has legitimate interests, as does its customers. For example, it expects to get paid. It expects to be able to enforce rights if it is not paid. A customer wants undertakings regarding quality and clear rights in the event that there are defects.
But none of this means that the resulting terms and agreement need to be complicated to understand or to access. They could be available via a video, in multiple languages. They could even be entertaining. I am sure that Mr Musk’s creative4 mind could come up with some amazing ideas on how to make Tesla’s contracts a reputational asset. And that would far better serve the interests of his company and its customers than simply eliminating contracts entirely.
So have you any creative ideas for designing contracts that would best fit the Tesla brand and image? Perhaps we can turn this into a competition for IACCM members!
IACCM has recently announced the formation of the IACCM Council, an elected body of members who will be key in the Association’s governance and value delivery. Council delegates will benefit from their unique connection to a powerful network of professional thought-leaders and their access to world-class research. This article provides background to this exciting new development.
It was back in 2016 that the Nobel Prize for Economics was awarded to Oliver Hart and Bengt Holmstrom for their work on contracts. At that time, the awards committee observed:
“Modern economies are held together by innumerable contracts. As such relationships typically entail conflicts of interest, contracts must be properly designed to ensure that the parties take mutually beneficial decisions”.
This quote is just one that is illustrative of the growing realization that contracts are of fundamental importance to business success and social welfare. From being almost an administrative after-thought, they are rapidly emerging as critical economic instruments – and the contracting and commercial processes that underpin good contracting are gaining increasing executive and political focus.
A community racing to keep pace
All of this explains the massive growth of IACCM – the only global, cross-functional non-profit association dedicated to contract and commercial management. The growing demands on this community to drive increased value, to enable greater collaboration, to design and implement new commercial models and deliver high-quality outcomes has placed tremendous stress on a limited resource pool and demanded urgent investment in tools and skills development.
A coherent response to these pressures depends on the continuing rapid development of professional skills and a readiness to do things in new and different ways. Fresh approaches to negotiation, the adoption and deployment of technology, creation of new commercial and financial models, greater focus on usability, simplification and problem elimination – these are just a few examples of the steps that must be taken to deliver value and manage risk.
The IACCM Way
IACCM supports its members through a commitment to thought-leadership and research. This requires strong and pro-active member engagement, plus a readiness to develop and adjust the association’s governance framework to keep pace with the times and ensure value – a challenging issue for an organization that embraces every industry and operates in 165 countries. The IACCM Council is a new body that offers the opportunity for members with personal ambition and commitment to engage with their peers on a global, cross-industry basis. Elections to the Council will be undertaken on the basis of geographic regions, industries and topical interest groups to ensure a balanced and representative mix within this important and influential body.
For more details about the IACCM Council, or to register interest in becoming an elected member, please click here.
At its simplest, the word ‘negotiation’ means no more than having a discussion that is aimed at reaching an agreement. In this context, it seems safe to say that negotiations will survive; it is the current approach to negotiating that, while not yet dead, is in terminal decline. That’s because most negotiations today are inefficient and a high proportion are ineffective.
The real purpose of negotiating
It is certainly true that negotiations aim to reach agreement – even if that agreement is ultimately not to agree. An effective negotiation seeks to explore interests and reach an alignment. To succeed, there must be something for both (or all) parties. A good negotiation also establishes a framework – for example, rights, obligations and consequences – and is often needed to ensure shared understanding of goals or objectives.
A key problem that affects many negotiations is that they are incomplete and they are an exercise in the use of power. Business negotiations often operate to a formula and within constraints that almost guarantee sub-optimal results. In fact, they are often non-negotiations because the more powerful party deploys a team with little authority and with an objective of ensuring ‘compliance’.
A new – and better – way
I am looking forward to a webinar next week, when I’ll be discussing with Chris Halward, former Director of the Global Sourcing Association, how to bring new life and meaning to the field of negotiation. We are planning to explore the extensive influence that technology is starting to have, both in terms of equipping negotiators and – in a growing number of cases – replacing them. But we are also confident that there is a continuing role for humans and will explore how that will change, as the focus shifts from ‘getting the deal done’ to ensuring that we have established the mechanism for a positive outcome.
If you’d like to join us on the webinar, you can register at http://www.iaccm.com/events/register/?id=3169. And if you have thoughts, opinions or questions you’d like to share please write to me or post a comment.
A few years ago, IACCM explored the range of job titles involved in performing the end to end commercial and contracting process, both buy and sell side. We found approximately 65 titles in common use. More recently, we undertook a more comprehensive examination of our member database and found well in excess of 200 titles.
What does this diversity tell us? Is it that there are wide variations in job roles, with perhaps a trend to increased specialism? Is it (as some would contend) that there are few similarities in the work undertaken in different industries or geographies? Or perhaps it is just a matter of preference and taste within individual organizations ….
Are we alone?
While the scale of variation appears excessive and potentially confusing (especially for recruitment), there is a similar situation in other more well-established functions such as finance – with a tendency to categorize/classify jobs and their titles by the nature of the tasks they undertake, eg purchase ledger clerk or accounts receivable etc.
Although at a generic, cross-industry level there are multiple titles, we found an element of industry conformity and to some extent also geographic standards or norms – for example, in the oil & gas industry there are many “contract engineers”, while in the UK (and to a lesser extent the US) “contracts officer” is a common entry position in aerospace and defense, including in the public sector. However, outside defence, other civil servants are typically ‘contract managers’.
Title versus Job Role
Looking beyond the title, how much difference is there in the tasks being performed? Job descriptions obviously vary, as does the role of a contracts or commercial function. But essentially there is a high degree of commonality in the work that needs to be performed. Descriptions and titles are translated down through the operating models embedded in the organization. Influencing factors include examples such as:
- where do contracts and commercial staff report? For example, when embedded in a business unit, they tend to be more focused on business enablement, whereas within Legal or Finance there is greater emphasis on compliance.
- is there a split between pre-award and post-award contracting activities? When consolidated, there tends to be a greater focus on value delivery. When separated, the groups are often seen as more administrative.
- is contracts and commercial activity conducted through an integrated buy/sell team, or do these headline functions operate in different spaces and report through to different executive directors (eg CFO buyside and COO sell side)?
- is the function centralized, center-led/hub and spoke, or a fully devolved model? With the centralized approach it is more likely to operate with greater discipline in titles and career path, whereas more devolved models are accompanied by greater diversity.
Ultimately, a lack of conformity in job titles across industries and geographies does not much matter so long as the individuals themselves operate with reasonably consistent knowledge and methods. Without this consistency, career opportunities are limited since the transition between industries, geographies and perhaps even between companies is often risky for both the individual and the employer. That is a major reason for IACCM’s development and promotion of professional certification standards, raising the status and performance of contract and commercial practitioners no matter what their title may be!
Quality, time and cost are critical indicators for most business functions as they compete for funding and resources. Many contracts and commercial groups struggle to gather reliable data, leaving themselves vulnerable to arbitrary judgments regarding their performance and value. A lack of information frequently leads to unfortunate decisions by senior management.
Where do you stand?
Over the years, IACCM has gathered comprehensive data, enabling its members to undertake industry and competitive comparisons. It is interesting how rarely contracts, commercial and legal groups make proactive outreach that anticipates the need to have data which demonstrates their worth. As a result, many requests are made in desperation, with questions like:
- Can you give data on typical workload / cycle times / expense to revenue / headcount ratios?
- Can you tell us the typical reporting line of contracts / commercial staff and what impact this has on results?
- Can you advise on the effectiveness of different organizational models – for example, centralized, center-[ed, decentralized?
- Can you provide information that shows the financial impact of having / not having dedicated contract and commercial staff?
The list goes on – and we have, or can readily obtain, answers to these questions, split by different industries, company size etc. The problem is that, by the time we are asked, it is often too late. A decision has been made and it is an uphill battle to have it reversed.
So what should you do?
Successful, high performing groups are typically driven by data. They want to know how they are performing – both against their own past and against competitive or industry norms. Increasingly, these groups are not just looking at relative efficiency, but want to assess their effectiveness. New technologies are making that increasingly possible. For example, some of our benchmark leaders have us monitoring market shifts in terms and conditions or in contracting models. Others are assessing the impact of terms and conditions on the cost of commercial operations and the relative ‘ease of doing business’ for their trading partners. Some commission directly comparative research to understand their ranking against competition on key capabilities, such as their approach to negotiation or competence in post-award contract management. Armed with information like this, they are consistently demonstrating their value to senior management and, while this does not guarantee that they are immune to organizational change or budget reductions, it certainly strengthens their position and their voice.
In a forthcoming webinar, we will discuss current standards – for example, what metrics are typical, the impact of reporting line, organizational model and automation, scope of responsibilities, typical cycle times – and also emerging trends, which include more extensive financial measures, the implementation of standards and contributions to innovation or business operations.
If you would like to discover today’s norms and leading trends as organizations gear up their contract and commercial capabilities, simply click here. Participants in the webinar will also be among the first to have the opportunity to participate in IACCM’s 2018 Global Benchmark Study and to receive (at no charge) the resultant comprehensive report on Contract & Commercial Benchmark Standards.
There have been many highly publicized cases where invoicing went badly wrong, especially in the public sector. But the challenge of effectively checking and validating invoices is universal. For example, a recent consultancy report suggests that Small-Medium Business in the UK loses £9bn a year due to invoice errors and fraud. In Australia, news broke in April this year of a multi-million dollar fraud scheme involving employees at one of the country’s biggest banks. The Better Business Bureau and Office of the Attorney-General in the US issue regular warnings about the prevalence of fake invoices.
However, the problem is not only related to deliberate fraud. With businesses increasingly purchasing services, rather than goods, the opportunities and likelihood of incorrect invoicing increase. Many charges today are based on hours worked, or the level and experience of staff deployed. There may be complicated algorithms for payment, related to performance levels or results achieved. These factors make errors more likely and checking more complicated.
In a recent IACCM survey, almost 60% of participants acknowledged that increasing complexity and difficulty in understanding contracts is translating to invoicing errors. In most cases, their invoice-checking capabilities remain rudimentary. Just 12.7% have advanced systems to validate accuracy, leading to an overall estimate that businesses are, on average, losing an amount equivalent to 4.3% of invoice value.
The scale of impact varies, with services agreements especially vulnerable and particular industries – such as construction – reporting higher frequency of errors.
Is this inevitable?
Ultimately, there will always be errors – both unintentional and malign – in invoicing. But that doesn’t mean that customers (or suppliers) are helpless. There is extensive publication of ‘best practise’ advice from governments and NGOs. Increasingly, there are also advanced software packages that can assist. One of those comes from Zen Enterprise and I recently conducted a short interview with its CEO, Brett Petersen. The resulting podcast (and the recent IACCM survey) can be accessed at https://www.iaccm.com/resources/?id=10273
Commitment Matters 