Information is critical to business influence. In business, unlike in the world of politics, facts, not opinions, are increasingly demanded to support decision-making. Yet for most of us in legal, procurement or contract management, reliable data remains elusive – and that in turn limits our ability to operate strategically and exert influence.
Those are among some of the early conclusions from IACCM’s on-going study on information enablement (to participate in this study, click here). It is clear that organizations are mostly struggling with inadequate and fragmented systems support – in part because they are caught in a cycle where the lack of data means that it is hard to make the business case for investment in the systems that would generate that data. But the biggest barrier may be our own attitudes; survey participants feel that commercial functions need ‘a general mindset shift towards efficiency and effectiveness’ – in other words, many may not yet have grasped the importance of driving change and the need for data to support it.
Today, the survey tells us, there is growing availability of information about compliance rates (especially within Procurement), but the sort of data that could transform the commercial functional role is still hard to find and extract – for example, obligation analysis and tracking or insight to term and condition norms in the market.
There is no consistency in where such information is gathered and stored; most organizations do not have a point of consolidated ownership and whatever data is available will typically be scattered across multiple and disconnected systems. Without a clear champion for change, it is hard to see how improvements will occur. Yet for those few who have taken steps to consolidate information, the benefits are obvious. They are seeing increased agility, greater speed and quality of commercial support to the business, and overall reductions in costs. They are also able to act more strategically and exert greater influence over business decisions.
Overall, the survey results show that the commercial community appreciates the critical importance of information enablement to themselves and to the business. They also recognize that needs are changing, with a requirement for more information, better analytics and an ability to look deeper within individual contracts and across portfolios of agreements. But they continue to struggle with how to progress because they remain fragmented along organizational lines as well as through the diversity of underlying technology infrastructure. Most have multiple systems, very few of which are internet or mobile-device enabled. Therefore information entry, collection and dissemination remain at best problematic and at worst impossible.
With today’s need for more agile and adaptive trading relationships and growing urgency for business to be more commercially innovative, information enablement promises to be an increasingly critical issue. If you would like to compare where you stand in the competitive race and to receive a copy of this important report, participate in the survey at https://www.research.net/r/IACCMIE
Of course, there is another road that leads to fame and fortune – that is to manufacture ‘alternative facts’, traditionally the preserve of poor and dishonest sales people. But ultimately, is such a path sustainable and will it not prove destructive?
As recently as the mid-1990s, 81% of business spend was on goods. By 2015, that number had dropped to 44%. The growth of services procurement has therefore been spectacular – and the capability of business to handle this change lags far behind.
The differences between acquiring tangible goods and intangible services is significant. For example, it is relatively more easy to define the requirements for a tangible product and to determine at the point of delivery or acceptance whether it is fit for purpose. In many cases, the source of supply is less important than the price and the need for a sustained relationship with the supplier is often of limited significance. However, for more critical products, or in situations where they are being packaged for inter-operability, buyers have learnt that it is smarter to hold suppliers to account for performance – and in this way, they have driven many former product contracts into being service-based contracts for performance or outcomes. Add to this the growth of outsourcing and professional services and it is easy to see why the transition to a services-oriented economy has occurred.
Services, however, are often much more difficult to define and the criteria for ‘success’ can be complicated and take time to measure. Essentially, we are no longer buying ‘things’, but rather we are buying ‘relationships’. And that doesn’t fit well with the adversarial, price-based negotiations of the past. Control, compliance and commoditization do not align with the need for commitment to long-term value delivery and the importance of agile, adaptable supply relationships. Therefore the three new ‘Cs’ of procurement must be cost of ownership, cooperation and collaboration – factors that demand new criteria for selection and for managing performance.
But the challenge (and the opportunity) goes deeper than simply reforming procurement skills or methods – and it applies to both buyers and sellers. For 20+ years, organizations focused on driving out cost through internal efficiency. They outsourced extensively (to cut fixed costs) and streamlined what remained through massive investments in technology. Today, with most businesses spending 60+% of their revenue on external supply, the room for internal cost cutting is limited. But the opportunity to drive similar efficiencies in external relationships is enormous. That’s because most organizations continue to interface with the outside world as if they were buying products, rather than acquiring relationships. The inefficiencies and tensions in most buyer-seller relationships create enormous value loss and erosion – according to IACCM research, an amount that is on average equivalent to 9% of revenue.
Essentially, in streamlining internal processes, businesses have generated inevitable conflicts when they try to work together. Without extensive human resources, they struggle to adapt and work together in any harmonious way. That is why the contracting process is rising to the fore as the next big area for business transformation. Disciplined contracting can deliver high-performing relationships – but right now, few organizations have that discipline and many continue trying to drive value through dysfunctional processes and adversarial risk transfer.
A recent webinar by Vodafone and SirionLabs was a refreshing example of new thinking and new capabilities. The supply management team at Vodafone have recognized the importance of building contracting and performance management capabilities and have redefined organizational roles and skills. At the same time, they have introduced the dynamic software provided by SirionLabs, designed to facilitate collaborative buyer-supplier relationships through shared governance and performance management data and techniques. In addition to the webinar, you can discover more about this ground-breaking partnership at the IACCM Europe conference in Dublin, May 8th – 10th.
As with so many fundamental shifts in business conditions, it takes time to recognize what is going wrong and how it can be fixed. But any impartial observer could quickly point to the chaotic and fragmented state of buyer-supplier relationships and recognize that there is room for massive improvement. We must indeed stop thinking about buying things and instead start to buy the relationships that we need for success – and of course, equip ourselves to manage them.
Agility – the ability to move quickly and easily – is not an attribute many would apply to contracts or the contracting process. For many, the need for a contract is seen as an impediment, a barrier to getting things done. Executives are among those who regularly call for simplification and speed.
These pressures create a real conundrum for any responsible contracts or legal professional. How do you align the demands for streamlined decisions with the need for due diligence, for protecting the interests of the business or client? A variety of techniques have been tried, with the most common being the use of standard templates and attempts to use power (or frustration) as a means to stifle or curtail debate.
But templates have their limits. Certainly they are not traditionally respectful of the counter-party’s needs or interests. As such, they carry hidden costs – perhaps a premium on price, or missed opportunities, or negative performance incentives. The conversations they stifle can often be of real value.
So today, there seems to be a trade off between agility and value – if you want it fast, you lose quality and eradicate judgment. You also guarantee contention when dealing with another powerful company or trying to handle a more complex transaction or relationship. In other words, one size does not fit all.
Does it have to be this way?
IACCM research suggests that much of the difficulty in contracting arises from the failure to think of it as a life-cycle process. It is instead a series of disconnected activities that feature as steps within other processes – for example, bidding, or sourcing, or sales or project management or finance or fulfilment ….. The terms come from a multitude of stakeholders, the physical components are similarly created in various places and brought together, often at the last minute, in a frenzy of document assembly. Attempts at streamlining are typically frustrated because the stages are in fact interdependent – so for example, if you digitize the form but leave the rest of the process untouched, you have actually introduced greater complexity.
Modern systems support new approaches. For example, a database of terms and term options, rather than fixed templates, can link to opportunity management systems upstream and to obligation extraction systems downstream. Such systems can be adaptive to different industry customers or jurisdictions and to different types of acquisition. The work by IACCM and its corporate members on ‘contract principles’ can streamline negotiation and cause a focus on value, rather than risk transfer. Terms and conditions can be designed to facilitate post-award efficiency, through more adaptive approaches to change management or issue resolution.
Contracts can and should lie at the heart of business value. The failure to develop a structured process has reduced their purpose and relevance – and in parallel threatens the perceived purpose or relevance of those who are charged with their production. There really isn’t an innate contradiction between the terms ‘agile’ and ‘contracts’; it’s a matter of choice and imagination.
When it comes to decision-making in business, what’s of greater value – a person with facts or a person with opinions? The answer, of course, is something of a blend. Good decisions often rest on the use of informed judgment.
Trading relationships are often established through a combination of fact and opinion – but unfortunately not an effective blend. This is due to a variety of factors, rnging from difficulty in establishing the facts through to internal processes or managemnt systems that impose narrow criteria and little room for judgment.
As examples, Procurement, has tended to operate a supplier selection process that demands facts, but only a selective few, which in themselves may not be good indicators of real value. Sales teams, also driven by highly focused incentive schemes, tend to do the same. Lawyers, on the other hand, often base their recommendations or decisions on ‘professional opinion’, a narrow view of risk that may be entirely consistent with classical legal theory, but may have little direct relevance to the overall business situation in hand.
In combination, such blends of fact and opinion regularly undermine business results. They lead to the wrong supplier, or suppliers with the wrong motivations, operating under inappropriate or incomplete contract terms. The result is frustration within business units, who may perceive support groups like contract management, procurement and legal as an impediment to their work. Indeed, in a study currently being conducted by IACCM, the business groups in one major corporation see contracts as irrelevant and contact with their in-house legal team as something to be avoided at all costs. This is hardly a healthy perspective.
For many relatively standard transactions, the absence of ‘informed judgment’ may be of minor impact (though cumulatively it could be significant – few people know). But in larger and more complex relationships, it is frequently lethal. It’s also bad news for the commercial teams that are supposedly supporting the business because their reputation is important for their future.
It doesn’t have to be this way. Support groups must look outward, to discover not only the thoughts and needs of their business units, but also beyond, to the leading practitioners in competitors or other industries. The potential to change measurement systems, to introduce new sources of data, to undertake work on benchmarks and norms, has never been greater, so there really is no longer an excuse. ‘Informed judgment’ should be the mantra.
Anyone involved with public procurement knows that the terms and conditions of contract are often onerous and inflexible. Past IACCM research indicated that a substantial price premium results from these terms – essentially, a cost of risk aversion. We also know that the rigidity of contract structure can contribute to costly failures and overruns.
But to what extent do public procurement rules limit competition? Ensuring fair and open competition is, after all, at the heart of these regulations, so it is ironic if the impact actually reduces market participation. A major problem here – as with so much regulation – is its inability to keep pace with change. Over recent years, we have seen growing public sector reliance on the private sector and a massive shift in the volume of services acquired. The change has also been in the nature of what is acquired – moving from a world of largely direct, commodity acquisition to an environment where growth has been in the procurement of complex – often unique – services and solutions, especially in areas of technology and outsourcing. The levels of risk are fundamentally different. the extent of IP investment and the duration of the commitment can also be extreme. In such circumstances, the extent of market engagement and the skills required to oversee commissioning and delivery have been challenging – but standard contract models do not take account of this fast-moving environment.
Another big question is the extent to which national governments consider the procurement rules to be sacrosanct. Their rigidity is supposed to create a level playing field, but the inability of negotiate is clearly an impediment to good commercial decisions. So do some governments exercise greater levels of flexibility and judgment than others?
To build on its research in important areas such as these, IACCM is exploring the competitive impact (to what extent firms decide not to bid and the particular terms that most impact that decision) and also the consistency (or inconsistency) in major EU countries (both of response and also the extent of negotiability). Our focus is on IT, software, telecommunications and related outsourcing / services since it is in these areas that the greatest tensions (and many of the most visible failures) occur. Early returns show that there are interesting variations between the way companies deal with procurement rules and in the way that governments interpret them. Given the nature of the research, replies to this survey will remain entirely confidential and it will not lead to any published report except to those who participate. The survey can be accessed at https://www.research.net/r/EUterms
When you aren’t sure what purpose something has, it is impossible to measure whether it is fit for purpose. Or alternatively, when it is multi-purpose, we run the risk that it does many things, but none of them especially well.
That is precisely the problem that we have with contracts. Are they instruments designed for court rooms, or perhaps they are financial assets, or possibly operational guides? Whose interests do they reflect – the buyer, the seller, individuals or functions that form part of the buyer or seller; or are they perhaps communicating the interests of third party advisers or of regulatory authorities?
The answer, of course, is that they are to some extent all of these things and hence have multiple purposes. It is this that often results in complexity or confusion, the challenge of melding multiple interests and perspectives which are themselves often in conflict. But beyond this challenge of reconciling and agreeing views, there is also the question of who they are designed for and the difficulty this generates in making them easy to use or understand. A consequence is that they really are not very good at meeting anyone’s interests and that is why so many are tempted to consign them to a drawer (or the technological equivalent).
Does it have to be this way? Certainly it is in the interests of business to think differently, because for all their importance, contracts do a very poor job. Research shows that in process, form and content, they fail to drive optimum business results – and often do not even do a good job of protecting interests in the event that litigation occurs.
The pressure is growing because the nature of what we are contracting for and the environment within which we are contracting continue to change. For the contracts professional, those changes manifest themselves in the form of ‘complexity’. But much of the complexity is again because the process, form and content is no longer appropriate.
Organizations are awakening to the need for transformation, but are uncertain about how to get started. That will be the subject of my next blog – and is also a focus of the IACCM 2017 conferences, the first of which will be in Dublin, May 8th – 10th.
There are growing voices that predict the death of Procurement. Faced by exciting new technologies, plus the opportunity to dramatically expand outsourcing (for example to an increasingly rampant company such as Amazon), such predictions are easy to understand. But are they right?
There can be little question that the relatively mundane, repetitive jobs in today’s Procurement functions will disappear. Indeed, that extends to many jobs that SHOULD be mundane and repetitive and are only ‘complex’ because we choose to make them so (and it should be noted, this is an issue that is endemic to business activity, in no way specific to Procurement). Those jobs lie at the heart of current activity – things like managing the RFx process, supplier selection, negotiation and award, performance management and compliance.
But there is much that survives and – more important – much that will be enabled because of the changes going on around us. Elimination of the ‘core’ work of Procurement frees the function to move into areas of real value-add, tackling the issues that are limiting business performance and preventing creative supply relationships. Increasingly, Procurement needs to buy relationships, not things.
IACCM research has clearly shown where real value opportunities lie – and they are not at the core of what Procurement does today. Suppliers are fundamental to business success, yet are often treated as if they are hostile aliens. Distrust generates anti-behaviors that in turn justify the distrust. A narrow focus on functional goals can often lead to the wrong requirements, the wrong incentives and, sadly, the wrong supplier. And once appointed, that supplier is passed on to the business, where lack of skills, ownership and discipline combine to undermine results.
Business sophistication is growing, driven by new network management tools that are starting to span organizational boundaries. Supplier relationships are starting to facilitate more adaptive, agile methods of working. Risk management is becoming a shared and collaborative activity, operating to the mutual interest of the parties. Contracts are adapting and shifting to tools for shared understanding, communication and operational control. New capabilities are being fashioned through creative supply networks and partnerships. All these and more are the areas that cry out for leadership and expertise – in many organizations a void, waiting for someone to step in and take ownership.
That, surely, is where world-class Procurement groups are headed. Yes, it demands fresh skills. Yes, it demands new positioning. Yes, it requires some levels of executive support and investment. But in my experience, the executive doors are open; the problem is how few are stepping through them.
If Procurement dies, then it will be through the neglect of its own professional leadership and a failure of imagination. At IACCM, we are committed not to burials, but to a healthy and inspiring future. And we are confident that, together with our members, we understand the path to follow.
For a role that apparently does not exist, commercial management appears remarkably healthy and resilient. Not only are the numbers of commercial managers growing, but so is the pay rate relative to some of the comparable roles within business.
It is certainly not new news that the business world is changing fast and with such rapid change comes complexity. Often that complexity is a direct result of inconsistent or outdated policies, practices and operational models. For example, new regulations or entry to new markets inevitably places stress on existing processes, skills or capabilities. Similarly, fast-changing business models challenge organizational designs and structures – for example, the switch from integrated enterprises to highly outsourced supply networks or the shift from selling products to the supply of solutions or services.
It is in this context that commercial management becomes of such critical importance. At their best, commercial managers are the people who reconcile business needs with capabilities. They do this by ensuring that trading relationships are compatible with the business and with each other. It is, after all, quite pointless to win business on which you cannot perform, or to contract with a supplier for something that doesn’t meet requirements. But the role goes beyond deals and transactions; it also involves testing capability (internal and external) to identify the need for change in policies, practices or procedures. Senior and experienced commercial managers are change agents; they not only challenge the business to operate with integrity and within acceptable risk boundaries, they also promote continuous improvement through their appreciation of markets and the sources of revenue and margin.
Given this background, it is interesting that some professional associations try to deny the existence of commercial management as a role. They prefer to proclaim on the one hand its irrelevance and on the other that ‘we do this already’ – even when it is patently obvious they do not. The reason for this is presumably because they see commercial management as a threat to their influence. That is sad, because it has the effect of limiting the horizons and opportunities for their members.
In my view, the purpose of a professional association is to advance the interests of its members by ensuring their relevance to the world of today and the future, not to remain mired in the past, a constraint on change. As we advance into the era of automation, robots and machine learning, successful professionals will be those who focus on enabling others and streamlining their organization’s operations. They will be at the forefront in creating innovative approaches to knowledge dissemination and automating control, focusing their own efforts on the management of change and the simplification of complexity. They will be people who understand stakeholders, who operate as integrators and synthesizers, who can reconcile perspectives and develop creative solutions. It is these forces that are driving the growth of commercial management – because it is very much a 21st century career.
Today sees the start of another World Economic Forum, the annual meeting in Davos, Switzerland.
Davos itself is a far from inspiring town – and this year, the selected ‘leadership priorities’ seem all too predictable. They are based around the demands of a ‘complex, uncertain and anxious world’ which requires that leaders ‘must be receptive to signals that are constantly arriving from an ever-changing landscape’. The agenda calls for leaders with ‘vision and a way forward, so that people can imagine a better future’. The overall theme for the Forum is ‘Responsive and Responsible Leadership’. Perhaps it will start with public declarations of massive pay cuts for the executives attending and a promise of new management and measurement systems that inspire ethical behaviour. But somehow, I doubt it.
While not questioning any of the sentiments that underpin this year’s theme, I wonder what hole any leader unaware of them has been hiding in. Equally, I would expect anyone at Davos to be already far advanced in addressing the ‘five key challenges’ that are being discussed. Those challenges are:
- Coming to grips with the Fourth Industrial Revolution, which is ‘redefining entire industries and creating new ones’. This is the theme generated by ground-breaking technologies such as artificial intelligence, self-driving cars, robotics and the Internet of Things. It not only transforms business, but also adds to social divisions.
- The need for a ‘dynamic, inclusive multi-stakeholder global governance system. This represents a call for collaboration and cooperation on a new scale, reflecting the realities of a globally networked world. Perhaps a good start here might be to announce the scrapping of elitist forums such as Davos!
- Restoring global growth. Quite obviously, growth is fundamental to improved living standards and today’s growing levels of structural unemployment challenge social inclusion and stability.
- A reform of market capitalism, restoring the compact between business and society. Leaders are urged to address the challenges of short-termism, wealth inequality and cronyism. Indeed important goals, yet hard to see that those attending Davos will undertake the self-surgery required to shift their own behavior and values. It may be another, newly emergent group of leaders who will eventually create the vision necessary to address these weaknesses.
- “The pervasive crisis in identity formation” is the final challenge – the erosion of traditional norms and beliefs and ‘a sense of belonging’. This, it is suggested, has generated the populism seen in 2016, which threatens social stability and prosperity. Of course, seen another way, it is exactly the challenge that was needed to force today’s leaders to stop taking the world for granted and to demand a rebalancing of power and decision-making – in other words a good and perhaps inevitable uprising of ‘the masses’.
To me, this list simply reflects the extent to which the leaders at Davos are actually devoid of meaningful ideas. Perhaps the real message is that it is time for new ideas and new leaders – perhaps a group of people who do not need the luxury and extravagance of Davos to demonstrate their concern for broader human welfare.
Are Supply Chain, Procurement, and IT on different Planets from Category Management and Operations?
That’s a question posed by Daryl Fullerton in a recent article. Daryl concludes that the answer is ‘yes’ and that this results in the failure of many performance management and relationship management (SRM) initiatives. He offers some great examples and explores where improvements need to be made.
But it seems to me that the real issue is that each of these entities – Procurement, Supply Chain, Category Managers, SRM managers etc. – sees itself as competing with the others. Rather than recognizing they collectively contribute to an integrated process, they instead fight over relative power and status. I had an example of this just last week when speaking with an executive from a major retailer. He explained how there was an on-going battle between Procurement and SRM over who should undertake supplier selection on major projects. His story was typical of the tensions I encounter in so many organizations, where confrontations are about power, not business interests.
I remember the days when I came at business problems from the perspective of organizational design. It seemed that if only you could wrestle power away from those idiots in sales, or project management or wherever, then everything would be great. It took a very wise and seasoned senior executive to help me understand that organization is actually the last thing you should look at, because it is always an area of contention and political in-fighting. He taught me to think in terms of the overall process, since it is much harder for people to argue against improvements to process.
Many of the ‘specialisms’ we see emerging are really more about the urge for individuals to gain influence and security than about a business need. Hence it is not surprising when many fail to improve business performance – indeed, as Daryl observes, they may even damage performance. The complexity of procurement today – and its potential to add value – is being jeopardized by a failure to think in terms of the overall process. As my mentor observed, ‘Never let good business judgment get in the way of internal politics’.
Commitment Matters 