For 15 years, IACCM has been publishing a list of the most frequently negotiated contract terms – and highlighting how these are more focused on risk consequence than on risk probability.
In a workshop last week, a participant asked “So what are the most risky terms”.
To a degree, this depends on the definition of risky, and the nature of the supply, but if we mean those provisions where disagreement most often occurs (impacting financials and relationship) they are probably scope and goals, change management, acceptance, KPIs/service levels, termination.
That answer is certainly true across services contracts. But if I was answering this in a pre-award context, I’d think a little differently because I’d want to consider risk as it relates to the behavior and culture of my trading partner – so things like payment terms, IP, gain share, dispute resolution might be high on my list. In other words, I’d want to be sure the incentive systems were appropriate and that I was taking into account the history of their reliability and integrity as a supplier or customer. Industry or geography would also influence what I deem risky – for example, data protection, cybersecurity, regulatory compliance would be of particular concern in some industries or geographies.
So unfortunately the answer to this question is ‘it depends’. The one certainty is that the most negotiated terms are generally not the most risky – and arguably we worry so much about the consequences because we are not very good at assessing / judging where the greatest risk likelihood will occur.
“Today, it seems to me, we are competing on our ability to take on risk.”
Those are the words of a Chief Operating Officer with whom I met last week. They encapsulate perfectly the trend in thinking that I have observed this year. To win in the market, organizations need to distinguish themselves through a readiness and demonstrated competence at risk acceptance.
Why is this happening and why does it matter? I think it is happening because of the growing shift to ‘as a service’ offerings – the continued extent to which suppliers are stepping up to responsibility for their customers’ operational performance. It matters because those services reduce costs, raise reliability and introduce innovation. In other words, they lie at the heart of the customer’s value proposition.
It is almost 10 years now since IACCM started talking about ‘the end of caveat emptor’ and this current trend is part of that continuing journey. The implications to commercial functions – buy and sell – are fundamental. They need to become highly proficient at understanding the factors that underpin competitive advantage and how, through their contracting practices, those factors can be enabled.
For those on the sell-side, this means it is not enough to identify the risks inherent to customer or market requirements or to monitor challenges to compliance. The role instead must be to identify how those risks can be contained and managed. It is about defining the capabilities needed to meet requirements and leading projects to deliver them.
For those on the buy-side, the need is to ensure understanding of market requirements and opportunities, then ensuring requirements and supplier selection criteria are developed accordingly. Procurement’s responsibility must be to confirm that they have assembled the right suppliers, on the right terms and with the right on-going performance and governance regime.
Essentially, for commercial teams, risk is opportunity. It represents a field that demands innovative thinking and where the prize is differentiated business capability and value.
It is widely accepted that innovation is important for survival; it is unquestionable that adaptation is essential.
In a fast-changing business environment, it’s easy to become confused, to be unsure of the right direction, to be tempted to wait and see what happens. That is a risky strategy because, like many in the past, those who do nothing and fail to adapt tend to become irrelevant.
In some respects, practitioners in legal, procurement and contract management can be especially susceptible to this inertia. Since a major element of our job is to focus on compliance and protecting our business from ‘risky events’, it’s easy to see any pressure for change as innately risky – and therefore something to be resisted. Certainly there are many who do not go out there actively looking for opportunities to act differently.
Key to the future – key to innovating and adapting – is a readiness to ask questions. Improvements come as a result of curiosity, a belief that things could be done differently and better. Some people are naturally more gifted at this than others. They are not necessarily leaders of people, but they are leaders of thinking. Others may imitate those leaders, either replicating or building on their innovative work. And then we have the third – and largest – category, who simply feel they are too busy to question or to change. Among this group (which covers all job levels) there are those who actively resist and a rather larger ‘passive majority’.
What questions might we be asking? It is of course essential that the areas we challenge are relevant and bring value. Therefore a good place to start is to relate them to business strategies – speed, ease of doing business, improved revenue or reduced costs, innovative commercial terms or offerings. So the sort of questions we need to answer relate to cycle times (which can be dramatically shortened), comparison of terms to market norms and market leaders (which can be assessed), the impacts on costs and revenues of different term options or contract structures (which can be analyzed), the elimination of errors or repetitive areas of complaint ….. Since contracts touch every part of the business and lie at the heart of revenues, profits, competitive differentiation, the opportunities for change and innovation are myriad. Even the underlying information is not that hard to find, when organizations like IACCM have built such an extensive network and database. Indeed, the only real constraint is our own lack of imagination – or questioning.
When it comes to survival, it isn’t just a matter of whether you personally are asking questions and exploring changed approaches, but whether those around you are pushing towards new boundaries. If you are in a function that simply waits to see what happens, it’s time to move.
Every day there are new examples of commercial innovation. Just yesterday, for example, I read about Electrolux and the ‘uberification’ of washing machines (and potentially other domestic appliances) and the link-up between ABB and Microsoft to transform interactions between suppliers and offer dynamic services to ABB customers.
Many of these initiatives may not succeed; all of them require commercial evaluation and careful structuring of the right contract relationships. Ideas like these also emerge from many places – innovation is not the preserve of executive management and increasingly they are seeking more diversity in commercial leadership.
What are the characteristics of an effective commercial leader? And are these innate, or are they learned? “The Extraordinary Leader”, a book by John Zenger and Joseph Folkman, takes the position that leadership skills can be acquired. Here are five critical areas for focus:
- Integrity. Leaders must be seen as honest (an interesting item to reflect on when it comes to the electoral process);
- Results. Leaders need to show focus and clarity on the right things.
- Change agents. Leaders embrace change, they do not fear or deny it. They visibly focus externally and connect their organization to the outside world.
- Inspire and motivate. While demanding, leaders also collaborate and are clear and effective in their communication.
- Passion for self-development. Leaders who are innovators want to connect with the best and employ the best.
In our connected world, structured around social media, Zenger and Folkman find that top-down leadership is being replaced and that globally matrixed organizations are pushing leaders out from the center and into the business. So if you want to be a leader, or further your current progress, here are some things you should be doing.
- Demonstrate honesty and integrity by speaking up when you think something is wrong – even if sometimes that may be a career-limiting decision
- Focus on results. Most people focus on process or perceptions, rather than on what needs to be achieved, what outcome will represent success
- Be a change agent. Keep up to date, ask leading questions, look for areas of disruption, technology or services that will change your business or what you do.
- Inspire and motivate. A visionary tells stories of how the future might be; they build relationships across the business and beyond, to ensure they understand how to get things done. They collaborate rather than compete and they do not seek to ‘protect their turf’
- Never stop learning. There is always something new to discover – and by focusing on the new, you are not afraid to share credit with others and you will always be someone they want to work with.
Of course, not everyone wants to be a leader and not everyone is ready to take the steps needed to become one. But for those who do, the steps are relatively clear. Indeed, they represent key elements of the IACCM professional certification program at Expert level – as we seek to support our members and executive management through the supply of commercial leaders.
Many organizations have introduced Supplier Relationship Management (SRM). Some are able to quantify the benefits, mostly in the form of ‘savings’, by which they generally mean price or cost reductions. A few point to incremental benefits, such as examples of innovation that may have led to increased revenue or profits.
Why is the picture so vague and so varied? A major reason is the lack of consensus about what constitutes SRM. For some, it means little more than a segmentation exercise. For others, it may be sustaining a focus on control and compliance. At the top end of the spectrum, it can involve extensive joint planning and high value strategic initiatives. No wonder, then, that results vary quite dramatically.
One problem with SRM is that it is often viewed as an extension of Procurement and therefore focuses on issues of power and control – concentrating on the biggest suppliers in an effort to reduce spend. Those suppliers are certainly important, but often they are not the source of major innovation. So the ‘strategic’ relationships, often with much smaller, agile suppliers which deliver market differentiation are managed by the business units.
But the bigger problem is that SRM programs mostly miss the point. They focus on the one-to-one relationship with the biggest suppliers and ignore the many-to-many relationships on which business performance depends. As I look at ‘best practice’, it is increasingly clear that the critical issue is not supplier relationship management, but managing supplier relationships. Those two are fundamentally different. “MSR” is about engendering collaborative behaviors across interdependent supply networks, to ensure benefits for all parties. Of course, it can be further improved by a solid SRM program, but SRM without MSR typically delivers very little value.
IACCM recently developed a presentation on this topic, with examples that illustrate the success that can be achieved. It will shortly be the subject of a webinar. If you are disappointed with the results of your SRM program, it will be worth tuning in.
Last week I suggested that at least 35% of today’s jobs in contract, commercial and supply management will have disappeared within 5 years.
The world of work is changing fast. A growing number of voices are warning about the impact of robotics, artificial intelligence and advanced analytics. Some predict mass unemployment; others suggest that the nature of work will radically change. All are agreed that the future will be very different from the past.
Professor Andrew Brown from the Institute of Education is one of those promoting the message of change. He suggests that the top-end of employment opportunities will be filled by those performing ‘knowledge production jobs’. These are in contrast to the ‘squeezed middle’ – the sort of repetitive, knowledge-based tasks that can readily be performed through automation.
This represents both good news and bad news for the role of contract and commercial management. The discipline of contracting has gathered new momentum in recent years. Contracts bind economies; they impose increasingly complex rights and obligations; they provide a framework for managing change. As globalization, outsourcing and contract labor have gathered pace, the world has needed formal structures for their management. And this is why contracts have become more important – and their inadequacies revealed. It has also led to a growing volume of contract management jobs and training, often performed as an element of another role – for example lawyers or project managers.
All the signs point to a surge in automation in this field. For routine transactions involving drafting, negotiation and performance management – the vast majority of business activity – automation is not just possible, it is desirable. It operates with greater accuracy, efficiency and reliability than human resources. But automation has its limits. It does not innovate, it does not design continuous improvement, it does not undertake research.
Trading relationships lie at the heart of human wealth and prosperity. They are fundamental to survival – and hence a critical field for ‘knowledge production’. According to Professor Brown, key skills for the future will be the ability to propose problems, interpret data and communicate results. Such skills lie at the heart of commercial innovation – indeed, they reflect precisely the areas that are tested in candidates for IACCM Expert certification (and if you aren’t already in the program, it’s time to start).
Hence there is a definite role awaiting those who wish to focus on ‘knowledge production’ and who develop the skills to lead and influence innovation and change. Creativity will be key; control and compliance will be the role of the machine.
“No debate, not a word of warning – just 6 months’ notice that the role is being eliminated.”
That was part of a conversation I had last week with the leader of one contract management group, reeling from the shock of an unexpected announcement.
But contrast that with this conversation which I had on Monday.
“We see accredited contract managers as a critical and growing role for our future. In fact, we see it as perhaps the most important area of our business because almost all other functions can be outsourced – and then we are left with nothing but contracts. Our performance will be totally dependent on our capability to manage those contracts”.
Two very different perceptions of the future? In fact, no. When I dig beneath the surface, I discover that both organizations see contract management as a core competency, but are approaching its creation in different ways. In the first example, management has concluded that capability must be built across the organization and will be led by a Center of Excellence within the Legal function. They have decided that existing contract management staff do not have the necessary skills or attitudes to transition to a future that is far more about contracting strategies and technology deployment. Indeed, when I spoke with their COO, she explained quite simply: “If the existing team had been part of the future, they would have been the ones promoting this change – and they never did. They just sat and waited for the future to hit them”.
In the second example, there is no history of centralized contract management; it is a distributed activity and business units have been responsible for delivering results. Contracting strategies have had no clear point of ownership and were generally based on standard templates managed through Legal and Procurement. This arrangement led to consistent poor performance and the realization that contracting must be elevated to a prominent position and role across the organization.
It is examples such as these that led to my blog last week, How Many Contract Managers Do You Need? There, I highlighted the importance for every contracts and commercial group to step back and develop its strategic plan. Every business function is challenged by the wave of new technologies that are no longer on the horizon – they are at the gate and, in some cases, already inside the building. If you fail to plan, if you fail to visibly lead your own self-surgery, you will most likely suffer the fate of our first example – others will decide your destiny.
The future will look different. To prepare, you can gain extensive insights from IACCM research, from webinars or at member meetings and conferences (see for example the theme of our next member meeting in Washington DC or our next conference in Dublin at the IACCM events page). As an example of that future, we worked recently with a corporate member to undertake a current benchmark (their resources compared with industry norms) and then evaluated the changes needed to convert from a largely operational to an increasingly strategic role. In our findings, the overall budget for contract and commercial management reduces by around 10% over the 5 year period, yet headcount falls by 35%. A combination of automation and more highly skilled staff accounts for that variation.
So the future is by no means bleak – unless you fail to plan.