Many people ask “what is blockchain?”, but much more important is to understand “what can blockchain do?”
One answer to this question is that blockchain can act as s foundational layer that sucks data from multiple sources and creates an accurate, verifiable record, based on which many of today’s manual decisions can be automated.
In that context, blockchain has the potential to remove delays, cut costs and reduce the need for specialists. It has massive implications for any activity that requires verification or validation – for example, in acquisition processes, in transactional records and exchange, in contract management. Arguably, for example, it could automate many aspects of world trade, cutting through laborious procedures such as customs and documentation checks.
An answer for Brexit?
It seems probable that blockchain will gain rapid publicity through some role in resolving the issues created by a post-Brexit world. It would be surprising if it is not being considered as a potential answer for the dilemma of a reconstituted border in Ireland. Blockchain could make that border ‘virtual’ and a successful pilot there would rapidly spread across international markets.
But much more broadly, there are already exciting pilots underway, a number of which were discussed at this week’s ACT-IAC forum in Washington DC. The use of blockchain can overcome the complexity of gathering and reconciling data from multiple sources – and the beauty is that it overlays those sources, it doesn’t replace them. Hence the cost and politics associated with its implementation can be low. Contract award procedures, compliance checks, performance management, identity verification, ownership rights – the areas which today cause extensive costs and delays are all within the potential scope of blockchain-based solutions.
This ‘democratization of data’ has massive impacts on business and society. Those impacts must be evaluated. But the answer for those who are affected is not to ignore blockchain and hope that it goes away, but rather to understand how it can benefit your area of activity and the nature of your work. Certainly, at IACCM we are closely involved with the development and use of blockchain, providing our members with the insights and understanding they need to ensure that blockchain is indeed ‘an answer’, rather than a threat.
I hope we will see you at one of our forums – be inspired!
Larry Fink, CEO at Black Rock – the world’s largest asset management firm – has built the business around diversity. But he brings a new context to this theme, which he describes in a recent interview.
“People who are engineers like to be around other engineers. People with a background in political theory are generally around other people in political theory. People who have an affinity with one political party or another are generally friends with people in that political party. There are so many places where you see congregations of people around ideals, around education, around race. We have to break that down. Firms fail when you have groupthink. You generally have groupthink when you have replicants all around you.”
Fink goes on to welcome diversity – but makes the point that one critical aspect is frequently missing and that is ‘diversity of mind’. He illustrated this with the following comment: “It’s very easy to see across a business and ask, how many women are there? What’s the gender mix? It’s very easy to see if there is a diverse group of men and women with diversity of race. We don’t spend enough time asking: Do we have an organization with diversity of mind? I think this is where most companies fall down.”
Contracts – groupthink – what can you possibly mean?
Are those of us in contract and commercial management – those of us who produce contracts – guilty of groupthink, of both lacking AND ignoring diversity of mind? If you are not sure, consider for a moment this quote from a recent blog by Stefania Passera, an expert in design:
“As an information designer, my job is to solve complex communication problems. Contracts seemed to be a genre of documents in dire need of a user-centric makeover. We can pick any contract, and, at a glance, they just look and feel and read the same. This, from a design point of view makes no sense: why so much sameness in different documents for different users with different needs and skills, produced by different organizations to regulate different transactions with different goals? At best, we are foregoing the opportunity to create a meaningful touchpoint and build positive relationships and experiences with suppliers and clients. At worst, we are leaking economic and relational value!”
When you consider the diversity of people who need, use or are affected by contracts, it is indeed remarkable that ‘groupthink’ has remained so powerful, that the legal community, backed up by contract managers, has succeeded in perpetuating uniformity of approach in an area of such importance to business and the wider population.
Many organizations do not have a well-defined, end-to-end contracting process. Frequently, contract-related activities appear as sub-elements in other processes – for example, in Product Lifecycle Management, Procurement or Project Management. Activities are therefore often ‘functionalized’ and this leads to a lack of cohesion and poor data flows. Ultimately, it means that no one has an overview of who is really responsible for producing a complete contract, nor how well the contracting process is performing.
Fragmentation carries a cost
This fragmentation is inevitably reflected in many of the automation products, since their development has been guided by functional users and driven by what they see as operational reality. The IACCM Automation Report in 2017 reflected the consequences of this perspective – a high level of dissatisfaction with performance, in particular due to the challenges of gaining user adoption. From conversations with many contract management technology providers, I understand their frustration in trying to assist their clients. All too often, software is being implemented to support a poorly defined process, with little analysis of user needs and limited appreciation of the true potential ‘return on investment’.
Where do contracts come from?
I realise that one of the issues here is the absence of an authoritative and over-arching view of the entire Contracting Lifecycle. As a result, there are multiple versions, using a variety of terminologies and with varying degrees of completeness. Most focus on the transactional phase and ignore the more strategic aspects – for example, where exactly do contracts come from? How and where are decisions made regarding individual terms or the commercial policies that affect them? Who defines and monitors the connection between customer contracts and required sub-contracts? It often seems that contracting is rather like the ancient mystery of childbirth – delivered by the stork!
It is time that we start to operate with a consistent view of the contracting lifecycle and therefore I am publishing the following overview. This will be discussed across the IACCM member community and I welcome comments and suggestions. The purpose is to have common reference point and the reason is that the growing importance of contracting demands a more coherent and consistent understanding of how it operates. Based on this, we will also be better able to support the development of automation and to measure value delivered.
Defining a contracting lifecycle
I have broken the lifecycle into two major phases, one related to the oversight of the process itself, the other related to transactional activity. Clearly, there will be variations in the steps required depending on the nature of the agreement (for example, a commodity purchase is unlikely to involve any drafting or negotiation) and a fully detailed procedure will require inclusion of activities such as signature or storage.
Contracting Lifecycle: Operational Phase
- Define – oversee development and define responsibilities and authorities within the contracting process
- Develop – establish standard clauses / options and templates based on policies, practices and market strategies / requirements
- Maintain – monitor issues, undertake research, propose improvements, update process or standards for shifts in internal or external conditions
- Equip – ensure suitable tools, training for those performing activities within process
- Analyze – undertake regular reporting on effectiveness of process in supporting business goals and priorities
Contracting Lifecycle: Transactional Phase
- Evaluate – identify contract model required to support specific bid or proposal OR review counter-party proposed terms for acceptability (determine go / no-go)
- Approve – evaluate non-standards and interdependencies (e.g. subcontractors, related contracts, resources); engage stakeholders required for review and approval
- Draft – prepare required transactional documents or variations to standard
- Negotiate – establish strategy, fall-backs, trade off; seek to reach consensus (go / no-go); redraft as required;
- Implement – communicate signed agreement and obligations to all affected parties
- Manage – oversee and report on performance; handle claims, disputes; negotiate and record changes
- Close – manage termination or renewal, identify continuing obligations
Comments, suggestions, improvements – all are welcome. The important thing is that we develop and agree a standard.
Whenever I run workshops about successful contracts and projects, there is always someone who raises the question of trust. There’s a widespread view that trust is the critical ingredient, making the difference between success and failure.
We can certainly debate whether this view is valid, but I think few would disagree that trust is a helpful ingredient and certainly, once lost it is hard to restore. But trust is also something you earn and is not automatically present. Within trading relationships, the extent to which trust matters is highly variable, but when it is absent we take a variety of steps to protect ourselves. First, we might undertake extensive investigations into our potential counter-party, asking questions, seeking references, undertaking searches. Then we may enter into a bidding process in which we are testing and evaluating capabilities and competencies, before moving into a formal negotiation in which we aim to extract specific promises related to performance – and consequences for non-performance.
Just because we are competent does not mean we can be trusted
But does any of this really build trust? Probably not. It may increase confidence, but that is not the same. Trust is ultimately much more about character and proven performance. It is also influenced by typical experience within or between cultures – hence we have significant variations due to different social value systems.
How well are corporations and government agencies doing when it comes to levels of trust? Not very, if all the surveys and indicators are to be believed. And much of that is because there is a real disconnect between what they say and what they do. Nowhere is this more consistently obvious than in commercial and contracting policies and practices. Here are a few examples:
- Executives regularly claim that customers are the core focus of the business, but in reality they concentrate on cutting costs and maximizing shareholder returns.
- Many organizations now have a ‘reputation management strategy’, yet if you ask how that aligns with their legal strategy, you will typically receive a blank look. There is no better example of this than the efforts to transfer contract risk. In a recent survey, the idea that contract terms should be aligned with brand image was soundly rejected by over 70% of participants.
- Surveys of executive priorities show no alignment with public priorities. For example, big issues for business tend to be productivity growth, coping with market uncertainty and integrating digital technologies. The public reflects reduced trust, greater activism and concerns over the honesty and integrity of business and political leadership.
Within business, there is a big – and understandable – focus on competence and capabilities. Without these, it would indeed be hard to survive. But survival also increasingly depends on perception and experience – honesty, fairness, integrity and alignment with customer and social interests are the barometers that ultimately impact levels of trust. The single biggest driver of reputation is the extent to which there is a gap between what you say you do and what you actually do.
And when it comes to commercial practices and terms and conditions, the gap is frequently quite large.
Compliance is important. In any large organization, rules – and clarity over the authority to deviate from them – must be defined. But in today’s business environment, where the speed of change is so rapid, how do we ensure that those rules are the right ones? How do we prevent compliance from becoming outdated, irrelevant, a source of competitive disadvantage?
This dilemma is nowhere more true than in the field of contract terms where an absence of data typically means that standards are based on opinion, rather than hard facts. Most term standards and templates are based on what organizations (and in many cases lawyers) view as ‘the norm’, yet they rarely have data to back up their opinion, nor do they have reliable sources to know when change is needed or could generate greater value. A system that measures and rewards people on compliance rates is not the sort of system that supports challenge or welcomes alternative facts.
The focus for compliance in today’s contracts tends to be on those terms and conditions related to minimizing risk consequence – for example, liabilities, indemnities, intellectual property rights. This is the simple – and lazy – way of protecting the business. In the volatile and uncertain environment we now face, do we actually understand our risks? It is quite clear that in many cases, either the answer is ‘no’, or alternatively that we decide to ignore them. Hence we often produce contracts that in theory protect us against failure, yet fail to address the much bigger and more prevalent risk that we will not achieve success.
The question we should regularly be asking is not “Are we compliant with our corporate policies?”, but “Do we know our risks and are we confident that we are addressing them responsibly and pragamatically?” It is through periodically addressing this question that we develop an organization which seeks data and information, which captures and records actual experience, which develops cross-functional teams to test and update established rules and policies.
Simply ‘being compliant’ is a mindless activity, performed with much greater reliability and accuracy by machines. Real and measurable value comes from knowing when not to be compliant, or when the rules of today need to be changed. In many organizations, I do not observe enough people questioning and challenging the status-quo. Perhaps just ‘going with the flow’ is more comfortable – but it rather depends on where that flow is taking you.
“Sourcing without SRM is like selling without Account Management”.
That statement from Future Purchasing was the subject of a tweet last week. But is it true? The answer, I suggest is both yes and no.
First we have to deal with the problem that SRM, unlike Account Management, seems to be a rather confused discipline, unclear about its scope and its purpose. That is not to say that consultancies – and professional associations like IACCM – have not tried to give it definition; it is just that organizations implementing SRM have taken very different approaches. For some, it is a method of segmentation and leads to a planned approach to the way it handles its supply base. For others, it focuses only on a select group of strategic suppliers and ignores the rest. And in many cases, it is a term used to enable Procurement to continue its pressure on supplier pricing.
The reasons behind this confusion help us to understand the core difference between SRM and Account Management.
Corporations have implemented account management in order to maximize sales. They do this through better understanding of customer segments and ensuring the right forms of interface. Account management takes many forms – for example, it may be physical, in the sense of dedicated teams, or it may be through telesales, or it could be entirely virtual through targeted email promotions or apps. Whichever approach it follows, its aim is to delight customers and have them remain loyal and spend more money.
SRM programs also undertake segmentation. But after that, their purpose becomes rather murky. Are they trying to maximize the amount of business placed with a particular supplier? Are they trying to drive improved performance by that supplier? Are they in some way the supplier’s advocate within their business? And ultimately – most importantly – who is ‘the customer’ when it comes to SRM? In account management, the objectives are clear – a happy customer is a loyal customer who will likely spend more money. But SRM rarely seeks to make suppliers ‘happy’, even if it should. The logical customer for SRM is the business unit or function that will benefit from improved supplier performance – and this is where we reach the heart of the dilemma, because unlike account management, the views of what makes SRM ‘good’ will vary. Some want supplier loyalty and commitment; some want innovation or continuous improvement; some want lower prices ….
None of this invalidates the fact that supplier segmetation is worthwhile, but it does show that attempts to make a direct comparision with CRM or with account management are misleading. SRM is different and it is complicated. It will do much better when it addresses those complexities and clarifies its purpose.
In the context of human exchange, when do we need contracts and what should we use them for? I’ve been pondering those questions in the context of two very different situations – one being an article on commercial contracting in South Africa’s informal sector, the other being the recent collapse of Carillion, a major outsource provider based in the UK.
Contracts and ‘norms’
The first article, written by two South African academics, contrasts the use of formal contracts by the corporate sector with the use of social norms in ‘the popular economy’. It observes that humanist values – which have no basis in law – govern the informal transactions and trading relationships that operate within the native community. The authors (both being lawyers) are asking whether there should be a ‘dedicated indigenous law of contract’, distinct from the ‘centralized law of the state’.
The examples of the South African social norms that make contracts unnecessary seem to me rather universal. For example, local reputation is important within any integrated community and the creation of alternatives to the formal banking, insurance and financial services sector has been quite normal for many years. ‘Private law’ operates not only within physically conjoined communities, but also across whole areas of commerce, such as diamond traders. As I have observed in other blogs, the ubiquitous nature of contracts is a relatively recent development and has in large part been driven by the erosion of more localized relationships and the need for honorable behavior.
Contracts and power
And this brings us to Carillion, which is a sad story of commercial ineptitude and – in the view of many – less than honorable behavior. It is a story in which contracts abound – and perhaps illustrate the extent to which many contracts today are not instruments of integrity, but rather instruments of power and imposition. In Carillion’s case, the value of contracts was overstated; it appears that customers did not care about the reasonableness or practicality of the terms they were imposing. Carillion seems to have had little concern about its workers or its sub-contractors, operating with zero-hour contracts for the former and draconian payment terms for the latter.
What can we gather from this? Certainly contracts have a valuable purpose. They are needed to memorialize transactions and prevent disputes. They should also be a reliable and auditable record of obligations and value, which would enable effective assessment of the health of a business. At their best, they provide an operational framework that supports a mutually successful outcome for the transacting parties.
But often contracts are not like that. They are in fact established precisely to override social norms and reasonable values. In these cases, they are about power and distance – and ultimately they undermine sustainable economic growth and social development. Carillion is a prime example, where those with existing power and wealth seem to have emerged better off and those with little power or wealth have been left with nothing.
A nobler purpose?
If contracts are going to increasingly regulate human interaction, it seems to me that we can no longer ignore the extent to which they should be reflecting ethical principles. Equally, they should be structured in a way that allows effective economic analysis. Until then, it seems to me that South Africa – and indeed most other communities – might be better off sticking with social norms.
And finally, is it time that contract and commercial professionals start to operate with a more formal ‘Code of Practice’?
According to IACCM’s most recent benchmark survey, some 92% of corporations operate with standard template agreements. In the traditional ‘battle of the forms’, the buyer templates are generally the winner. That typically means that both sides lose.
Why are templates a problem?
Templates exist because they supposedly bring greater efficiency to the process of agreeing terms and conditions. To a degree, that is of course true – it would make little sense to start every transaction with a blank sheet of paper. But unfortunately the complexities of the contracting process have often been ignored when designing templates and they have become symbols of power and authority, rather than carefully considered business interest.
Most templates are produced by law firms or legal departments and are based on classical legal theories over the allocation of risk (that is, we want as much as possible transferred to the other party). Variations from the template are typically discouraged. As a result, there is often little or no feedback regarding the impact that the template has in the market – it’s a case of ‘no news is good news’.
Procurement templates are frequently either generic in nature, or fail to reflect the terms that would be most appropriate for a specific type of acquisition. However, because ‘deviations’ are discouraged, no one has authority or interest in tackling these deficiencies. The supplier’s sales staff similarly prefer to yield to the customer terms because they want to close the deal.
The consequences are becoming more visible
The data generated from new technologies is starting to make the consequences of today’s approach more visible. For example:
- Non-legal staff often have no sense of what the templates cover. In one instance, product development teams thought that an NDA was all they needed to cover joint R&D projects.
- Templates encourage ignorance. In a recent IACCM project, we discovered that more than 60% of procurements were using the wrong template – staff believed that using the most extensive and complex version would reduce risk.
- Templates encourage lack of awareness. In another project, we found that the types of acquisition being made by an organization had shifted dramatically, moving from goods to services. The templates had not adjusted and reflected business needs from almost 10 years ago – over 50% of the contracts were deficient in the terms being applied.
What needs to change?
In a blog this week, Ken Adams and I debated contract design and the role of automation. That is certainly part of the story. But the issue of templates is much bigger because it is actually about business attitudes and behavior. At its heart is the need for lawyers to abandon classical legal theory and eliminate the battle of the forms. This means an acceptance that the key purpose of contracts should be to safeguard the likelihood of success, rather than focus on the consequences of failure.
Both buyers and suppliers need to step up to the plate on this issue. Templates can be effective only if they are balanced in their allocation of risks and appropriate to the nature of the transaction or acquisition. In this context, it is clear that suppliers generally have a much better understanding of the issues that need to be covered in the contract, but buyers are rightly concerned that if they accept the seller’s terms, their interests will not be protected.
That is why initiatives such as the IACCM contract principles should be welcomed. Equally, we are increasingly being asked whether – as an association – we will be prepared to provide a ‘stamp of approval’ to indicate that terms have been reviewed for their balance and suitability. It is clear that other independent entities – for example, Thomson-Reuters – could fulfil a similar purpose. But at its heart, real change depends on a shift of attitude – a recognition by the lawyers who ultimately control templates that today’s practices not only bring inefficiency, but actually often increase risk.
This week’s news that artificial intelligence is now beating qualified lawyers at contract interpretation should come as no surprise. New technologies are steadily proving their superiority in a whole range of contract-related tasks, ranging from review, to data extraction, to analysis and discovery.
Automation has a dramatic impact on speed, as well as cost. But the real drive for automation comes when it can be shown that technology reduces risk – and that, of course, is where these contests between machines and humans become so important.
As the evidence mounts, some organizations are moving fast to trial and introduce new technologies. Blockchain is a leading example, providing not only a robust and reliable record of contractual agreements, but also capturing performance data and introducing automated execution of contract terms.
In a current IACCM survey, it is clear that blockchain (or smart ledgers) is the technology with which contracts and legal professionals are most familiar – at least in terms of awareness. About one third state that they are thinking about or planning trials, with around 4% already trialling in some way. Just over 3% have smart ledgers in operational use.
So where does that leave you? And what about the many other technologies that are now starting to streamline contracts and supply chains? If you want to know where you stand relative to others in your industry or market, you can participate in the IACCM survey by visiting https://www.research.net/r/SmartLedgers.
Results will be issued within the next two weeks.
The Adams/Cummins Debate: Tim Says “Yes”
Ken Adams is an authority on contract drafting. Over the years I’ve discussed with Ken the future of contracting. After a recent exchange of emails, we decided to try a more formal approach. We agreed to address on our respective blogs the following proposition: We want new technologies to sweep away traditional contracting, so we can have faster, more efficient, and more cost-effective contracting. In this post on his blog, Ken gives a hearty “No” to this proposition; below, I give an equally hearty “Yes”! We invite you to chime in, whether on Ken’s blog, my blog, LinkedIn, or Twitter.
I start my case for fundamental change with several observations about contracts and contracting, past and present:
- The underlying purpose of a contract goes back several millennia. It is to memorialize and give structure to an agreement between two or more parties, under which those parties anticipate a mutual economic benefit.
- The last 35 years has seen a massive upsurge in the volume and complexity of contracts – in part doubtless linked to an exponential growth in the number of lawyers (for example, in the United States a 600% increase between 1980 and 2016; in the UK, around 300% in the same period), but also due to the breakdown of ‘the integrated enterprise’ and the explosion in regulation and international trade.
- Businesses are in most cases not good at creating or managing contracts. They are difficult to understand; they are often assembled by a disparate group of stakeholders with highly variable skill; and, in their current form, they have proven almost impossible to automate. The result is a massive level of under-performance and value erosion.
- I believe that contracts – and the process through which they are formed and executed – are of fundamental social and economic importance. They bring definition and discipline to trading relationships, which themselves lie at the heart of human wealth and welfare.
It is in fact this final point that convinces me of the need for a radical shift of thinking and approach. As others before me have observed, it is time to move from the ‘artisanal’ to the ‘industrial’ – and that demands the introduction of technology. Current processes are too slow, too expensive and the results they generate are too unpredictable. Contracts are multi-functional, multi-purpose instruments, too important and too complicated to be left to manual production and management processes or the whims of any particular stakeholder group.
Where Ken Adams and I would violently agree is that there is a desperate need for increased quality, driven by the adoption of norms and standards. In this context, a ‘style guide’ or ‘common programming language’ is invaluable. But in my view we no longer need, nor can we afford, armies of artisans, individually crafting custom agreements or templates. My world largely eliminates those artisans and replaces them with automated processes. Human intelligence will be deployed in areas requiring creativity or nuanced judgment – areas of innovation, rather than regurgitation.
Where does this change come from?
Quite simply, we are entering a digital age where there is convergence in media and where technologies such as artificial intelligence, natural language processing, advanced analytics and robotic process automation are transforming what we do, where and how we do it. In designing these new automated processes, historic methods are exposed for what they are – risky, costly and inefficient. The more they are standardized, the more they can be automated – and automation also means improved risk management through monitoring, reporting and controls. In other words, we are moving to an era of dynamic insight into contract performance and, to achieve that, we need to drive front-end efficiency through more consistent terminology and structure.
Thirty years ago, it was argued that businesses could not possibly standardize terms and conditions across jurisdictions. That was wrong. They did. Similarly, we know that standards can be developed across industries; there are multiple examples. But the push-back on those standards has rightly been that they are not adaptive to change or to specific circumstances, that they introduce a level of rigidity. That led to multiple individuals making custom amendments and ‘tailoring’ contracts, whether needed or not. Indeed, corporations that believed they were operating with a small set of standard templates regularly discover that they have, quite literally, thousands of variants.
Networked technology combined with advanced analytics undermines the objection to ‘rigidity’ and eliminates the excuse for endless customization. The new wave of standards will draw from cloud-based clause libraries with established fall-backs, supported by front-end intelligent systems – such as ‘bots’ – that act as assemblers of appropriate term combinations. Those ‘bots’ are the product of the lawyers and the contracts professionals who used to be reviewers, approvers and drafters of term variants.
‘Style’ will increasingly be universal, since battles over words are an expensive and largely redundant use of time and cause of delay. Already we are working with legal teams who are under pressure to develop ‘no touch contracting’ – that is, contract formation suited to the frictionless digital age and post-award management conducted through self-executing agreements in blockchain. Others are using machines to analyze and slash the cost of commercial operations by identifying downstream inefficiencies created by contract complexity – reducing error rates, causes of disagreement, claims.
At SwissRe, automated systems are undertaking analysis of customer terms and conditions, identifying variations from accepted norms and suggesting possible mitigation. Those same systems are helping corporations understand and manage their contract risk portfolio, generating on-demand management reports that previously required armies of lawyers or contracts specialists. At BT, intelligent software is analyzing signed agreements to extract and disseminate contract obligations and monitor performance.
These are among the many examples of organizations streamlining the contracting process – stripping out cost, speeding execution and reducing error rates. The momentum is unstoppable – and the benefits are self-evident. Therewith, I rest my case.
Commitment Matters 