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Crossing boundaries: the challenge of lost value


I was recently running a workshop to assist in designing the governance terms for a major contract. The overall program lifecycle will be around 30 years, so change is inevitable. Among those changes will be shifts in the contracting parties themselves, as well as the roles that need to be fulfilled.

In this particular case, we were struggling to even reach consensus on goals and objectives. The client wanted to think about designing for whole-of-life value. The contractor (who had no security of tenure beyond the initial construction period) was thinking only in terms of the first 5 years. It quickly became evident that this difference of horizons was creating incompatible positions and interests. For example, the client wanted delivery of a solution that would maximize affordability and adaptability in the asset-management and sustainment phase, but they didn’t want to commit at this time to a sustainment contract. That left the contractor thinking only in terms of how they could gain an acceptable return on designing and building the asset.

While the example is extreme, it is indicative of the challenge we face in designing and negotiating contracts and relationships. And each time that information has to cross a boundary, the potential for misalignment or misunderstanding arises. This may be during internal transfers, between different stakeholders, or it may be extenral, to contractors, or onward to sub-contractors.

‘Contracting excellence’ is arguably about the management of boundaries, about ensuring understanding and appreciation of differing viewpoints or conflicting interests and ensuring they are addressed and reconciled. I’m not sure how much work has been done specifically to address this issue. It certainly isn’t evident in the way most organizations manage their contracts. Hand-offs are often quite casual, often to untrained or ill-equipped resources. There is rarely any check on the competence of the counter-party in the way they manage such transitions, or flow terms through to their sub-contractors or suppliers.

Overall, this is a truly fascinating aspect of business performance and it is becoming more critical as organizations increasingly depend on complex supply netorks and as acquisitions continue to shift from products to longer-term solutions or intangible services. The quality of understanding, analysis and communication is becoming more and more critical. Technology will play a big role in smoothing over the bumps of transition, but more highly skilled people will remain the real answer to resolving boundary challenges and disputes.

Do you have access to facts? Commercial capability in an era of ‘alternative truth’


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?

Competing on risk


One of IACCM’s ‘big themes’ for 2017 is the idea of competing on risk. That means, rather than working to avoid risk, instead embracing it as an opportunity.

We are not suggesting that risks are simply taken on board without thought and evaluation, but we are suggesting that commercial competence requires attempts to better understand and evaluate risks. And whenever it proves attractive (i.e. a source of competitive advantage), we should find ways to accept that risk through creative terms or capabilities.

Far too many commercial groups – whether lawyers or contract managers – tend to evaluate opportunities by listing all the things that are wrong – and often passing the list to the opportunity owner with the attitude ‘job done’. Such an approach is not risk management; it is not even risk avoidance, since the result of their action is itself endangering the future of their business and all too often the list is ignored.

Competing on risk can begin in quite a simple way; for example, by better understanding market norms and behaviors. In a recent survey of the technology sector, IACCM discovered wide variations in the risk appetite between companies. This appeared to be largely attitudinal or cultural, nothing to do with relative propensity to handle the risks concerned. We are talking here about the response to clauses such as liabilities or rights to audit – significant issues, but while a high proportion of the companies surveyed reject certain terms out of hand, others do not. A quick review of the profitability and performance of those companies revealed no real differences – so this appears to be simply a matter of policy and risk appetite. However, guess which of the businesses is seeing faster growth.

When they were asked whether this risk appetite was based on specific market or competitive knowledge, the answer was no. These companies were unconsciously competing on risk. How many more opportunities might they have had with some market research and evaluation of customer needs and priorities?

A different example of competing on risk came from an article in Strategy+Business and concerns car manufacturer Hyundai. In the depth of the financial crisis in 2009, car sales plummeted and several of the industry’s giants filed for Chapter 11. They moved into a highly defensive mode, expecting (rightly) a collapse in sales. But Hyundai saw opportunity. It realized that consumers were fearful of losing their jobs and were therefore deferring expenditure. It tackled that concern by offering a buy-back guarantee in the event that a purchaser lost their job; it gained sales accordingly.

A simple example of how one term can make a real difference. More fundamentally, a great example of how we can choose to see risk as a threat or as an opportunity. Neither may be right all the time, but those who persist in seeing risk as a negative will certainly not turn it into revenue and competitive edge.

 

 

Businesses no longer buy things


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.

Contracts and agility: an oxymoron?


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.

What is a contract?


It may seem amazing to ask, but what is it that constitutes a contract? More specifically, how would the average person in business answer this question?

Every day, there are millions of transactions around the world, each covered by some form of contract, but often no clear view of the elements that formally constitute part of the binding agreement. I have even heard a lawyer say “Oh, you mean the scope of work …. I was talking about the contract”.

Or take this example, which comes from one of the world’s biggest business software companies, which claims to cover the contracting process: “Typically contracts are focused on language and wording.  Although there is negotiation on some terms, the primary focus of contract negotiation is to finalize the wording.  In Sourcing, the primary focus is to get agreement on pricing, terms, and what is being sourced.”

I understand there are different sections of ‘the contract’, but ultimately it needs to operate as a coherent basis for performance. The driver for establishing an agreement is economic, because there is a belief that mutual value can be achieved. A contract defines that value, it sets the terms under which it is to be delivered, the responsibilities the parties have to each other and the consequences if they fail. Negotiation may or may not be needed – but shared understanding and commitments are essential. That is about far more than ‘finalizing the wording’.

Today’s confusion creates a wide range of problems – many of which are outlined in IACCM’s ‘ten pitfalls’ and analysis of the cost of poor contracting. It leads to absence of understanding, late engagement of commercial resources, a focus on risk transfer rather than risk management …. the list goes on.

Contracts are a reflection of business intent and capability. In my experience, organizations that place little value on contracts are often among those that experience low growth and margin, quite simply because they lack internal discipline and cooperation. While this may have limited impact in the world of commodities and catalog buying, it spells potential disaster for more significant acquisitions.

 

 

 

Facts, opinions and informed judgment


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.