Over the millennia, specialism has served us well. Human progress and economic wealth have been built on increasing division of labor and the development of professional competencies.
But specialism also has downsides. Those ‘professions’ become protective of themselves and operate as barriers to change. ‘Specialists’ like to think they are ‘special’ – they lose context, they become self-important. And these traits soon become sources of cost, delay and barriers to change.
Pro’s and Con’s
Specialism is attractive because it tends to link to higher wages and greater status and power. So people seek to position themselves as specialist and to form tribes with like-minded individuals. On one level, that of research and ‘good practice’, this is beneficial. When it evolves to constraining others, it is not.
Today, we have myriads of specialists. Professions like law, medicine and accounting have splintered into hundreds of sub-areas of expertise. Other job roles have followed suit. We have the theories of Adam Smith operating on steroids.
And the result? For many organizations, it is virtual inertia and incompetence. It becomes almost impossible to build consensus. Expertise rules, at the expense of balance and good judgment. Decisions increasingly flow to the top due to the incapability at lower levels to reach or enforce agreement. Business and government is becoming overwhelmed by the complexity of specialism.
A new approach
The answer, of course, is not to dismiss specialist knowledge, but to deploy it in new and different ways. Much current specialism must be automated. In the same way as machines took the jobs of weavers, blacksmiths, joiners and turners, they will now take those of many specialists. History shows that we move through cycles during which power groups emerge, gain control and then implode under the forces of progress.
Artificial intelligence systems are making specialist knowledge far more accessible and will make it also more reliable and fact-based. But having rapid and immediate access is not the same as interpreting and, more important, collating all that knowledge to reach an informed and balanced decision. And that’s why commercial judgment is becoming increasingly important – an ability to synthesize and reconcile data that may often be contradictory or in conflict and to develop a viable solution.
Mechanization was highly disruptive, yet ultimately drove improvement in social wealth and welfare. It also required a new breed of mechanics to manage it. Automation will be the same. And just as those who failed to mechanize or to hire mechanics went out of business, so will those who are too slow to adopt automation or to build the skills to manage its output.
Payment always feature high in the list of most negotiated terms. The last ten years have seen a steady lengthening of the time it takes to get paid. Recent data showed an average of 57 days, but it is often much longer. Big corporations are creative in the way they measure their compliance with payment terms, with many only starting to count after the invoice has been ‘approved’ – an activity that can add weeks to the cycle.
IACCM research has identified that prompt payment is the number one factor in achieving ‘preferred customer’ status. Paul Humbert recently wrote an excellent article suggesting that this should be a key performance metric, commenting: “There is however at least one purely objective and important metric which is rarely measured; namely, PROMPT PAYMENT of accounts payable. Many organizations routinely fail to pay vendors on time in accordance with the terms of the contract. Why? A lack of priority? An attempt to capture “float”, essentially getting an interest free loan from the vendor? Aside from breaching the contract, failing to pay vendors on time causes serious damage to the relationship. Imagine if someone’s paycheck was delayed by days or even months?”
Business practices cause regulation
Delays in payment are especially damaging for small businesses, which are typically highly reliant on cash flow. Many large organizations remain wedded to a view that ‘might is right’, seeing no problem in using their power to exercise unreasonable – indeed in this case unethical – behavior. It is that inability to make moral judgments that drives the need for regulation.
But morality aside, is it really in a company’s best economic interests to punish its suppliers? What is the cost associated with delayed payment – the administrative cost, the supplier performance cost, the reputation cost? Over time, these costs certainly outweigh any benefit.
There is a lot of buzz about digital reinvention (a term popularized by McKinsey consultants), digital transformation and digital disruption. By whichever name you call it, it’s importance cannot be understated.
According to Mckinsey, only 8% of companies that they surveyed believe their current business models will remain viable through digitization. That’s significant because digitization no longer means simply revamping your e-commerce site or improving the digital customer service experience and calling it a day. Digital reinvention must run deeper. The companies that win will be those that digitally reinvent processes end-to-end.
Digital reinvention should be every bit as important to your contract management process as it is to the rest of your sales or acquisition process. It is, after all, a critical business activity and the quality of the process remains just as important in a digital world as it is today, perhaps more so.
We live in a time when customers’ expectations have never been higher. Research suggests that 58% of a customer’s loyalty is based on their buying experience—not on your product or service. The customer experience starts at discovery and runs all the way through contracting and beyond. A great deal of the customer experience has been digitized, so much so that customers can in many cases complete over half of their buying journey without even talking to a sales person.
The contract process, on the other hand, is behind. The overwhelming majority of companies — 85% in fact– are using manual processes to manage sell-side contracts. Contracting remains analog. It’s yet to be digitized. Not only is this slower, it also translates to lost revenue. It is estimated that a typical business with 1,000 employees wastes $2.5-$3.5 million each year searching for and re-creating lost documents. Recent IACCM research highlighted the average cost associated with creating and agreeing a contract – and even for relatively low risk agreements, that came to $6,900.
Does digitization of contract processes really matter? The short answer is, yes. As other pieces of the business digitize, the lack of digitization in contracting becomes that much more evident. Already we know of CEOs demanding ‘no-touch’ contracting – a fully automated, end-to-end process. While the rest of the journey speeds up, contracting will be the bottleneck unless we make some pointed changes. That means all eyes will be on you when a seemingly fast sales deal stalls at contracting.
We need to evolve beyond basic contract management and legacy systems. By digitally transforming the sales experience and refocusing our resources to deliver high value contract management, businesses can improve profitability by up to 9%.
It’s time to act. That’s why IACCM is so focused on helping the contracts and commercial community to understand the exciting technologies that are fast becoming available. Join us this Thursday for one of those sessions and see how contract lifecycle management technology can streamline your contract process in the webinar: Digitally Reinvent Quote to Contract to Maximize Revenue.
EU regulation: the European Commission is proposing action in two areas that would have major impact on business. One is the threat of introducing a universal code that would allow consumer class action lawsuits. The other is specific to the retail sector and would be legislation related to unfair terms imposed on suppliers, in particular in areas such as payment terms and unilateral rights to change contracts.
Procurement as a partner: according to a survey released by the Buying Legal Council group, collaboration between in-house legal and procurement yields average savings on legal spend of 21% a year. This drops to just 7% in organizations where collaboration is absent or weak. Of those surveyed, just 25% say that there is a good partnering relationship between legal and procurement.
‘Big Law’ under threat: Corporate Counsel magazine reports a shift away from the largest law firms. A survey by the Economist Intelligence Unit found that concerns over fees and increasing need for deep local knowledge is pushing more business to smaller and more specialized providers – 40% of large corporations surveyed expect this trend to increase over the next 5 years. At the same time, the Financial Times pointed to the continued consolidation of major law firms, predicting that we will soon see the emergence of the ‘$5 billion law firm’ – itself a response to those growing pressures on traditional fee structures.
NOTE: IACCM is currently conducting a survey on law firm fee structures and the success of negotiators in achieving alternative pricing models. To participate (and receive a copy of the report) visit https://www.research.net/r/legaldepartmentspendmanagement.
Cloud security: a report by HelpSystems highlighted the dangers of assuming that cloud infrastructure and applications are secure. It emphasizes that “IT teams, cloud providers and trusted vendors need to work together to establish and implement well thought-out policies to keep data secure”. IACCM’s conversations with leading corporations suggests they are giving thought to these ‘relational’ mechanisms in their selection of provider and within their contracts.
Machines v. Humans: in the continuing debate over whether machines can be trusted to exercize judgment, I was reminded of an article in the Economist from 2011. Researchers monitored over 1,000 applications by prisoners to parole boards. They discovered a direct correlation between the number of applications granted and the timing of lunch and snacks. A full stomach had a major impact on the level of clemency. Bring on the machines!
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There is extensive discussion about the cost of hiring a lawyer. At the Codex event last week, hosted by Stanford law school, a number of presentations focused on ways that new technology will tackle the issues of cost and accessibility to the law. Several speakers spoke of the inevitable pressure on hourly rates and alternative charging arrangements.
Broad issues of social access to the law are not the only questions affecting the legal community. In-house groups are also facing increased pressure to control their spend – and this is at a time when workload demands are increasing.
While some are looking at opportunities to cut workload through delegation (and new technology will increase potential for this), there are a variety of other mechanisms available. These include:
Non-compliance is risky. It leads to fines, job losses, reputational damage, lost sales. Since it is so important, businesses make substantial investments to reduce the chance of breaches – and of course a major element of those investments is people: reviewers, approvers, auditors, compliance experts.
The problem with those resources is that their jobs depend on complexity and, to a degree, their belief that the natural tendency of others is to be non-compliant. Compliance experts are not generally innate optimists who assume that human nature is inclined to ‘doing the right thing’.
As the volume of regulation grows, traditional control methods are too slow, inefficient and erratic – not to mention the issue of affordability. They have to be simplified – and that demands new thinking and new measurements of success for compliance experts.
Two of the emerging approaches are:
- Outsourcing the basic checking process and collection of data. An example is in the area of supplier validation and monitoring, where there are now a variety of external providers offering a service that eliminates the need for individual companies to run checks. This single point of collection obviously reduces workload and cost for both customers and suppliers.
- Use of technology. A number of exciting solutions are emerging. Recent trials of blockchain have included automation of data collection from a range of internal and external sources, automating supplier validation and contract award, then monitoring continued compliance through feeds from public or fee databases. Another method is through the use of apps or bots provided to users so that they better understand compliance requirements and input data that supports self-monitoring or automates approvals. A third example is machine-based checking – for example, ensuring that proposed contract terms align with policy and highlighting any exceptions, which are then routed for review.
By improving data flows, compliance teams are also becoming far better equipped to identify the likelihood of specific risks, enabling them to focus (and be measured) on specific mitigation measures for those with the highest frequency. Managing compliance is a clear obligation; competitive advantage comes from expert teams that focus on how to do it better, faster and cheaper.
”To use machine learning responsibly, there is a need to ensure values are aligned.”
This comment by a representative of Google sums up a key dilemma with all relationships – no matter whether the intelligence being applied is human or machine-based. In the world of business, ‘mismatched objectives’ (or expectations) lie at the heart of many disputes.
Contracts exist in large part because of these mismatches. In theory, a good contracting process serves two purposes – one is to reduce the chances of misalignment, the other is to deal with its consequences. These are demanding concepts – and contracts are not always good at dealing with them. How could we make them better?
That is a question which goes to the heart of IACCM’s purpose and its research has consistently pointed to answers (and the underlying causes). Among the issues / solutions:
– organisational measurement and reward systems: these typically do not offer incentives that ensure ‘matched objectives’. They should be changed, especially for those involved in designing and negotiating contracts.
– attitudes to risk: for all the talk about risk, the focus of terms and conditions remains weighted towards areas such as liabilities, indemnities, intellectual property – not on safeguarding that objectives are – and remain – aligned. Again, this approach comes from custom and choice.
– coherent governance: change is ever-present and increasingly rapid, yet for many the approach to its management has not changed. Fears of ‘scope creep’ or challenges in budgeting result in failure to use the right form of contract (e.g. agile, relational) and to develop agreed change forums and methods.
Ironically, it may require the discipline of machine programming to overcome these deep-seated problems. One benefit from automation is that it is not subject to the ingrained habits of humans!
Are you confused about the differences between ‘outcome-based’ and ‘performance-based’ contracts? Or perhaps simply want greater clarity on how to form or manage them? Andrew Jacopino, an expert in their use, recently updated his blog articles on these topics, plus some outstanding guidance on defining KPIs.
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“Business contracts need to balance the rights of each party to ensure they aren’t unfair, as smaller firms may not always be in a strong negotiating position.” That statement came from the Australian ACCC in a finding against financial services firm, Cardtronics. It reflects growing pressure from governments around the world on abuse of power by large corporations – an abuse that often operates against both the public and business interest by limiting competition and pushing up costs. Perhaps it’s time to question the fairness (and effectiveness) of your business terms?
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A recent IACCM survey on organization structure for supply chain found that most companies wish they had a different model. The study, which focused on the oil and gas sector, revealed that few people believe that centralization or decentralisation work well; they overwhelmingly prefer center-led or matrixed models, no matter which aspect of supply chain management they are considering. Some 30% of organizations have changed their structure in the last 12 months.
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An initiative by legaltechinnovation.com is measuring law firms on their uptake of technology and the extent of legal innovation. The findings to date are generally not impressive, showing very limited adoption and use – though focus has been on large firms, rather than emerging ‘disruptors’. Analysis has supported the hypothesis that UK law firms are ahead of many others, especially in their use of artificial intelligence and project management technologies. But no sign yet of the major fee reductions that technology should be delivering.
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Are contract and commercial skills adapting to changes in the business environment? An analysis by IACCM confirms that pressures for greater speed, agility and the introduction of new technologies are placing real strains on commercial staff. These are reflected in the skills assessments and benchmarks undertaken by IACCM, which reveal significant shifts in management expectations – but many practitioners are struggling to keep pace. Areas such as problem solving, change advocacy, technology use and financial awareness are among those where the largest gaps are emerging.
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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.
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