Almost 80% of contract and commercial managers have a high level of job satisfaction, but 62% feel that they lack a clear career path.
This uncertainty over future opportunity is reflected in the top challenges facing the contract and commercial management (CCM) community. They are:
- Providing measurable business value
- Operating with consistent skills and standards
- Gaining status and recognition
- Demonstrating leadership
- Attracting and retaining quality staff
It doesn’t take long to see the connection between these challenges. Many contracts and commercial groups lack the leadership needed to fix these problems and to develop a strategy that tackles the core issue of ‘providing measurable business value’. Inspirational leaders are those who grasp the potential to influence business direction, based on the wealth of data that can be generated from the contracting process. Those leaders also appreciate that need to provide consistent skills and standards – they recognize the diverse backgrounds of the typical CCM function and turn this into a strenght by super-imposing a training and development path that leads to common methods and techniques.
Through steps such as these, the challenges of status and attracting quality staff are rapidly addressed.
Why is leadership so often a problem? It is one of those ‘chicken and egg’ situations. Many times, those promoted to leadership positions are good practitioners, but come from a background of transactional excellence, rather than strategic thought. Some dismiss the need for consistent training, taking the view that contract and commercial management is an art, rather than a science, and is something learnt through experience, rather than teaching.
IACCM surveys regularly reveal a high level of dissatisfaction with functional leadership – so while practitioners love the work, they also fear that it is a dead-end. Fixing this issue is a priority for IACCM and various steps are being taken. For example, we are working with a growing number of business schools to develop MBA and executive education programs. Our training and certification programs include a growing emphasis on leadership and influencing skills and methods. Our research and conference programs are increasingly focused on highlighting the sources of value – current and future – for the CCM community. We are also working to finalize development of ‘the IACCM Way’ – a blueprint for excellence.
The challenges we face can be fixed – and the opportunities before us make the journey worthwhile.
Enterprise Resource Planning – or ERP – was designed during the era of the big, integrated enterprise. It streamlined internal business operations and drove efficiency through high levels of standardization. To a large extent, against that specific objective, it was successful. Now, it has become a constraint.
I recall being at the heart of one of the big ERP implementations. The people involved with sales contracting and negotiation were torn in their emotions. On one level, it was clearly necessary to eliminate the needless variations in policy, practice and process that had arisen in the typical multi-national, multi-divisional structure of most large corporations. But at the same time, the rigidity created by ERP systems was a source for concern. It seemed we were going from an inability to make commitments due to infinite variability, to an inability based on imposition of standards.
That fear was in many ways justified. Lack of flexibility arose in part due to the software and in part due to the eradication of human resources that resulted from automation. It meant that non-standard commitments became increasingly harder to manage and were therefore a source of risk.
The standardization of business processes also enabled large-scale outsourcing – so, ironically, a by-product of Enterprise Resource Planning has been the disaggregation of the enterprise. Today, business performance relies predominantly on the strength and efficiency of external relationships, with both customers and suppliers.
It is therefore surprising that many organizations continue to push ERP-related systems (such as ‘procure to pay’) ever deeper into their fabric. This fixation on internal control, rather than external enablement, is surely a mistake. The systems that businesses need today are very different. They must support collaborative working, sharing of information and data, not just on a one-to-one basis, but across value networks. Organizations must stop thinking about individual contracts and relationships and instead design around low cost, reliable delivery of customer commitments.
Putting it simply, we have entered an era where our focus should move away from the software that fuelled the integrated enterprise (ERP) and shift instead to solutions that support the virtual enterprise – what IACCM is terming ‘Relationship Resource Planning’, or RRP.
“Trust is in crisis around the world. The general population’s trust in all four key institutions — business, government, NGOs, and media — has declined: To rebuild trust and restore faith in the system, institutions must step outside of their traditional roles and work toward a new, more integrated operating model that puts people — and the addressing of their fears — at the center of everything they do.”
This quote, which comes from the 2017 Edelman Global Study, should be of major concern to each of us, whether as citizens or employees. Trust lies at the heart of economic progress and human welfare. And we all have a role in restoring it.
Given the theme of this blog site, my focus will be on the contribution of contract and commercial management. These are fields that could be making a positive difference.
First, let’s think about commercial policies and practices. These reflect the over-arching organizational or industry culture and the extent to which honesty and respect are inherent values. They include things like the way we define, measure and reward success. For example, when we use power to impose unfair terms or to drive unrealistic prices. Or when we fail to reward customer loyalty by offering them the best deal. Or when we deliberately withhold data that leads our counter-party to make poor decisions. Or when we fail to take responsibility for a performance issue that was clearly our fault.
And then let’s think about contracts themselves and the overall contracting process. To what extent do we draft and negotiate agreements that are by design fair and balanced? What efforts do we make to ensure that the terms we put forward are understood by the counter-party? Do we view our agreements as a framework for mutual success, or as a weapon to be used when there is disagreement?
To quote again from Edelman: “With the fall of trust, the majority of respondents now lack full belief that the overall system is working for them. In this climate, people’s societal and economic concerns, including globalization, the pace of innovation and eroding social values, turn into fears, spurring the rise of populist actions now playing out in several Western-style democracies”. This decline can only be averted if we make changes in the way we operate. If each of us waits for someone else to make the first move, we are consigning ourselves to continued decline.
That is why IACCM is so vehement in its calls for change. The commercial community should be at the forefront in considering the negative impacts that will arise from declining trust and take a position of leadership in proposing solutions. Many of us know what needs to be done. It is time to take responsibility.
Making sense of digital requires first an appreciation of its different forms – digitization, digitalization and digital transformation. Bertrand Maltaverne[1] recently wrote an excellent article on this topic and made the following definitions:
- Digitization is the conversion from analog to digital (e.g. digitization of data).
- Digitalization is the process of using digital technology and the impact it has (e.g. digitalization of a process).
- Digital transformation is a digital-first response that encompasses all aspects of business …. It leads to the creation of entirely new markets, customers and businesses.
The challenge facing those who are responsible for contract management is that without digitizing their contracts and without digitalizing their process they will increasingly become barriers to the digital transformation of their business.
A core problem – identified in many IACCM studies and capability assessments – is that contract management is not typically viewed in the context of a life-cycle. Contracting policies and terms and conditions are frequently established by different departments; specific agreements or negotiations are undertaken by various groups or specialists who may or may not operate with consistency. Once signed, those who were responsible for creating the contract are generally not involved in its on-going management. With such diversity of participants and (often) limited clarity over roles and responsibilities, it is not surprising that coherent approaches to digitizing and digitalization are proving difficult to achieve. Unfortunately, as IACCM’s recent report on automation observed, contract management software is similarly fragmented and its adoption constrained.
Consumer businesses face a much easier time since they can largely dictate the way they form and manage contracts with both customers and many of their suppliers. It is much harder in the b2b environment, where relationship types are more varied, levels of relative power differ and underlying processes are inconsistent. However, market forces will drive the need for digitization since without it, organizations will be unable to compete. Those forces will result in a new ‘contract management revolution’, even more fundamental than the changes that globalization caused some 15 – 20 years ago. This time, it will drive three major changes:
- the development of a life-cycle view of the contracting process, from inception of requirement to completion or close-out of the agreement
- an appreciation that digital enablement of contracting is not only about internal process and data flows, but that it is fundamentally about enabling interactions outside the organization
- the identification of resources dedicated to oversight and maintenance of digital trading relationship terms and capabilities, covering all relationship types
The IACCM Automation Report is available to IACCM members at http://www.iaccm.com
Business leaders call for more collaboration; workers confirm that they prefer collaborative environments; researchers point to the benefits of collaboration. Yet consistently it proves hard to achieve and sustain – almost always (of course) due to failings by ‘the other side’!
The big challenge is that collaboration generally requires significant behavioral change at an organizational level. Indeed, this is recognised in the newly announced ISO standard, ‘Collaborative Business Relationships’.
The problem is that any large, established organization struggles to implement behavioral change and in this instance the problem is of course much bigger, because the ability to collaborate is not just a matter of internal capabilities. You must also find organizations to collaborate with, others who share your values and methods.
So if there is indeed an overall will to collaborate, how can we bring practicality and meaning to collaborative relationships?
While we can certainly refer to the ISO standard as an aspirational model for organisational design, we also need to understand why the past is littered with anecdotal examples of success, but very few where those successes have been sustained or replicated.
Why is that? Embedded attitudes towards suppliers and customers are hard to change; they are often founded in a history of disappointments and tensions. Management and measurement systems frequently drive contention. Contracts are typically unbalanced and rarely act as a unifying force (‘we collaborate in spite of the contract’). Overall, factors such as these undermine trust and repetitive experiences confirm that collaboration is the exception.
The ISO standard is helpful in providing an approach for measuring eventual success. But in isolation, I dont believe that it offers a practical method for moving forward. As with all change initiatives, organizations need evidence of success; people want to understand more precisely how they should change working practices and they want to see the benefits.
That is where IACCM’s relational contracting model comes into play. It is realistic, practical, relatively easy to implement – and successful. The relational workshops help people see how they as individuals can make a difference and result in the sort of small steps that are fundamental to realising a big vision. The collaboration resulting from this approach generates a working environment that others then wish to replicate. From being an isolated example or pilot, the relational approach can rapidly gather steam and become THE way of working.
By its very nature, trade is a collaborative activity. It also lies at the heart of human progress and economic advancement. To quote from a recent article in Fast Company: “Collaboration is no longer just a strategy: it is the key to long-term business success and competitiveness. Businesses that realize this sooner rather than later will be the ones who win the game and succeed in the new global economy”. Relational contracting provides commercial and procurement teams with the chance to show leadership in this field, rather than being seen as a potential barrier.
Technology lies at the heart of every modern business. Yet increasingly organisations don’t own their technology – they buy in services from a range of providers. The job of the CIO has shifted to that of a business enabler and innovator, knowing less about the technology, but much more about its business impact and needing to understand the requirements of the market.
With this steady shift comes a substantial change in success factors and dependencies. One priority is selecting suppliers that do not create major reputational risks (British Airways is a good recent example of that problem), regulatory exposures or uncontrolled costs, including switching costs. Another is ensuring reliability, ease of use, adaptability and supporting innovation.
These are hard factors to balance – and they depend on sound commercial judgments and effective selection, negotiation, contracting and relationship management. But in addition to these issues affecting the overall technology platform, it is important to recognise that core business capabilities increasingly depend on the underlying technology platform. Digitization, for example, is understood to be a key market differentiator, enabling linkage and dynamic information flows across entire supply networks, facilitating relationships, executing smart contracts, overseeing compliance and performance.
So has contract and commercial management at last found a natural home – an executive whose success and future depends on the quality of these functions? It certainly seems possible. Indeed, we are seeing a growing number of CIOs who appreciate that poor contracting undermines not only their personal position, but is a broader constraint on business agility. Hence they are starting to promote or lead ‘hackathons’ to reengineer contracting practices and processes.
And even if that shift of role does not happen, it is surely time that commercial teams build strong connections to the CIO, helping him or her to understand the extent of their reliance on strong contract and commercial support. Perhaps with that understanding will come a new level of prioritization for investment in contract management technology.
One of the biggest problems with contract management is imprecision in its definition. What exactly is its purpose; where does it begin and end; who is responsible for its overall performance? It is an activity where the answer to these questions varies not only between companies, but between functions and individuals within a company. It is therefore inevitable that there can be confusion, overlaps – and in many cases, areas that simply aren’t tackled since they are either no-one’s (or everyone’s) job.
A leading example of this is communication. Time and again, when IACCM is asked to assist members with improving their contract management, we find poor communications lying at the heart of problems. This can – and usually does – take a variety of forms. It may be the inadequate data flows generated from technology. It could be a failure to engage with stakeholders or to keep them informed. It might be poor handover from the pre-award team to those responsible for performance. It is frequently the complicated wording and structure of the contract itself, leaving 88% of business people complaining in a recent survey that ‘contracts are difficult or impossible to understand’.
Each of these issues reflects the observation in the opening paragraph – roles and responsibilities are frequently unclear, therefore the problems are not addressed.
But the issue with communication goes much deeper because it is also about the ways we communicate. Ensuring contract performance is critical to any organization, yet in many there is little thought given to the methods by which this can best be achieved. Our cost-cutting world has typically assumed that the best model for business operations is in many cases remote. Indeed, with many project teams and supply networks now scattered across time zones, physical meeting and co-location are often impossible. Pressure on travel budgets has ruled out even occasional physical meetings. Technology for contract management is frequently limited because no one is clear about the investment case. As a result, people often rely on email – which is increasingly recognised as a major source of confusion, misunderstanding and inefficiency.
Contract management desperately needs a complete overhaul of its associated communications strategy. As IACCM dives deeper into its analysis of the causes of value erosion, it is clear that inappropriate forms of communication lie at the heart of many problems. There are numerous examples – here are just two:
- Suppliers were regularly failing to meet regulatory standards on health, safety and hygiene. This was leading to high levels of staff turnover at those suppliers and resulting in poor quality and productivity. Contract terms were amended, introducing more detailed clauses and more onerous penalties. There was no measurable improvement in performance – until someone realised that the contracts were the problem. No one could understand them. Through redesign, the contract became a means of effective communication, rather than a weapon to punish non-compliance.
- In a recent workshop assessing performance on a $16bn project, it became evident that working relationships between the many parties were strained. Goals were often unclear and there was a tendency to allocate blame for problems, rather than to fix them. It became obvious that communications across this interdependent ‘virtual’ enterprise were poor. There was heavy reliance on email because no one had alternative contact information – there wasn’t even a shared database of phone numbers. Physical meetings were rare; use of alternative communication techniques had not been explored. A team was established to define communication protocols and to ensure clarity over the behaviours expected from program participants, regardless of which organization they represented. Performance and morale are showing steady improvement.
Communication lies at the heart of human behavior. That means it also lies at the heart of contract performance. So why isn’t establishing and defining communication practices and protocol a fundamental element of a contract manager’s role?
The elements in what we are calling Industry 4.0 are converging – and already proving disruptive in a growing number of sectors. The impact on commercial practices, supply relationships and contracting will be enormous and those changes are coming fast.
Right now, the biggest constraint on business is probably the combination of legacy systems and legacy behaviors. But the elements of Industry 4.0 are now far more pervasive than most of us realise. Consider for example the shift away from sale of goods to the provision of services – with some 25% of external spend now believed to be buying ‘goods as a service’. Look at the pervasive influence of software as a service and the speed with which it has replaced the old licensing model. In manufacturing, the ability to remotely track products throughout their lifecycle is becoming common. Robotics, artificial intelligence, cloud computing, the Internet of Things, data analytics, 3D printing, mobile devices – all are manifestations of the digital revolution and what makes this so different is that they are increasingly being interconnected. Unlike past technologies, we are entering a world where interoperability is the norm.
So why is that significant to those who are involved in commercial policies and contracts? Quite simply because many aspects of our work will be turned upside down. Take issues such as customization. The digital world enables highly customized products to be assembled in units of one, at an affordable price. Take risk, where intelligent products start to anticipate their own faults and problems, where interconnected products themselves suggest ways that efficiency can be improved, based on their experience of use and utlilization. Take pricing models, where more and more products will be sold as services and where charges will be based on monitored use or demonstrated benefits.
Many of the things that we have historically viewed as unaffordable, impossible to monitor or too risky to commit will steadily become norms of business practice. And of course, the winners will be those who spot those opportunities first, who recognize the opportunities generated by interconnected systems, rich data flows and new relationships.
The elimination and replacement of legacy systems is certainly a challenge, but industries such as electronics are making rapid progress with embedded software transforming the role of machines and putting them at the heart of intelligent networks. The demands on aerospace and defense suppliers for more agility, for greater safety, are leading to rapid development of new commercial models (for example, this sector leads in the use of collaborative contracting models and procedures). The logistics industry is transforming as technologies such as blockchain capture up-to-the-minute data that can be accessed instantly by the entire network of related parties. Emerging economies, unconstrained by legacy systems and technologies, often stand the best chance of short-term transitions – for example in the delivery of health services. And business start—ups no longer face the challenge of developing vast infrastructure – they can instead buy scalable services, whether in technology or systems or physical assets and infrastructure.
Legacy behaviors are therefore in many ways a greater threat. Businesses and individuals are struggling with the question of when do they ‘throw the switch’, dispensing with old attitudes towards functional specialism, controls, compliance and risk. There are few places that this will be felt more than in areas such as legal and contract management. Yet change they must, because traditional approaches will operate as an impediment to competition in the Industry 4.0 world. Market understanding, creativity, empowerment and opportunity enablement will become the hallmark of 21st century commercial competence – and that is why these are such major themes of IACCM training, research and conferences.
Therefore it is imperative that those who wish to prosper in this new world invest in better understanding it. Understanding the skills, knowledge and methods of the digital economy is the best way to become an adaptive, agile professional, capable of moving between the old world and the new, exercising judgment on which commercial models and values should be applied.
The Financial Times recently published an analysis of Europe’s fastest growing companies during the period 2012 – 2015. Perhaps the most interesting point is the industry segmentation of the list and the extent to which it reflects issues of market competition, disruption and opportunity.
In reviewing the list, it is notable that many of the fastest growing companies are new entrants – clearly pointing to disruption. In those circumstances, suppliers are likely to face a situation where demands for innovation are accompanied by significant pressures on margin, leading to a demanding market environment. Other sectors may see a higher ratio of growth for established leaders, reducing the challenges in negotiating agreements.
The growth sectors are themselves interesting. The dominance of IT services, consulting and software indicates the extent to which the digital revolution is impacting business. By contrast, the technology itself (including provision of cloud services) does not appear to offer such strong growth opportunities, presumably because it is a relatively commoditized sector, suffering pressure on margins.
It is data of this type that can increasingly be used to inform and develop contracting and commercial strategies – where are the major areas of growth, what sort of companies are driving that growth, what is the impact on profitability, what types of relationship will be of greatest value and which terms and conditions will be most important to win business.
Sector analysis of fastest growing European companies (Source: Financial Times 26th April, 2017)
|
Rank
|
Sector
|
Number of companies
|
|---|---|---|
|
1
|
IT Consulting, Services & Software
|
108
|
|
2
|
Retail (including Mail Order & E-Commerce)
|
91
|
|
3
|
Wholesale
|
76
|
|
4
|
Construction, Engineering & Landscaping
|
69
|
|
5
|
Advertising, Marketing & Event Management
|
60
|
|
6
|
Consulting, Legal & Tax Counselling, Auditing
|
48
|
|
7
|
Transport & Logistics
|
45
|
|
8
|
Banking, Financial Services & Insurance
|
41
|
|
9
|
Mechanical Engineering & Plant Construction
|
38
|
|
10
|
Electronics, Electrical & Medical Engineering
|
36
|
|
11
|
Other manufacturing sectors (e.g. Metal or Furniture)
|
36
|
|
12
|
Gastronomy, Lodging, & Tourism
|
33
|
|
13
|
Energy & Utilities
|
31
|
|
14
|
Human Resources
|
29
|
|
15
|
Health & Social Affairs
|
23
|
|
16
|
Telecommunications
|
21
|
|
17
|
Automotive (Dealers, Manufacturers & Suppliers)
|
19
|
|
18
|
Food Production
|
19
|
|
19
|
E-Commerce Technology & Marketing
|
16
|
|
20
|
IT Hardware
|
16
|
|
21
|
FinTech
|
15
|
|
22
|
Packaging, Waste Management & Recycling
|
15
|
|
23
|
Real Estate
|
14
|
|
24
|
Education
|
12
|
|
25
|
Facility Installation, Services & Management
|
12
|
|
26
|
Media (Print, Digital, Broadcasting)
|
12
|
|
27
|
Security Technology & Services
|
12
|
|
28
|
Chemicals & Pharmaceuticals
|
11
|
|
29
|
Cloud Service Provider
|
11
|
|
30
|
Gaming, Betting & Entertainment
|
11
|
|
31
|
Big Data & Data Analytics
|
10
|
|
32
|
Manufacturer of Textiles, Shoes & Accessories
|
10
|
|
Grand total of companies in the list
|
1000
|
Much is written about the importance of developing leaders and last week, at IACCM’s European conference, the concept was turned into action.
Based on a program created and designed by IACCM’s Chief Operating Officer, Sally Hughes, twenty high fliers – all under the age of thirty – gained the chance to step into a new and challenging environment. Stepping out of their normal roles in legal, supply management, contract management and commercial, they were able to appreciate the true meaning of ‘commercial thinking’ by interacting with each other. They benefitted from direct interactions and mentoring by ‘leaders of today’, they were exposed to transformational ideas and emerging technologies, they networked with each other, gaining an appreciation of commercial roles in Europe’s leading organizations. And at the conclusion of the conference, each team presented on their view of the future, how the commercial role will look five years from now.
Not surprisingly, there were many applicants for this program and those selected took real advantage of it. The feedback from their employers has been tremendous, immediately recognizing the insights (and outsights) that these future leaders gained. “The program is so important, something I feel so passionate about,” commented Sally. “There is such change going on around us – we desperately need young ambassadors, advocates for new thinking and a readiness to embrace the future. I see so many professional associations trailing behind the needs of their members; at IACCM, we are determined always to stay ahead and help our members prepare.”
The presentations were impressive and reinforce the IACCM vision of commercial teams that are increasingly integrated, breaking down some of the functional boundaries that inhibit business performance today. But they cannot yet be shared because teams from Asia and the Americas will shortly be undergoing similar experiences at IACCM’s up-coming conferences – and then IACCM members will have the chance to vote for a global winning team – future leaders who have a vision of the role they will be playing five years from now.
Commitment Matters 