As we enter 2018, the divide between today’s outdated contract management practices and tomorrow’s technology-enabled reality is becoming starkly obvious. It was Warren Buffett who segmented the business world into innovators, imitators and … the rest. Right now, we are in a phase led by innovators. But once momentum begins, adoption movees fast and within 12 months, I expect the dominant group will be the imitators. ‘The rest’ will rapidly become history.
What is the technology impact?
When I use the term ‘contract management’, it is meant in a lifecycle context, from inception of requirement to completion or termination of performance. The new technologies – artificial intelligence, natural language processing, blockchain – are starting to impact every phase of this lifecycle. Here are a few examples:
- A blockchain-based pilot that handles the entire contract award process, from loading of bid through supplier selection to executed agreement. In this pilot (involving some 5,000 suppliers), the award cycle was reduced from an average 110 days to 4 days, eliminating the need for manual interventions.
- An AI system that evaluates contract terms against established standards or ‘norms’, highlighting variations for review / risk mitigation. It then learns from the mitigations and is now starting to propose responses to non-standard terms.
- AI and NLP systems that undertake mass-scale analysis of contracts, identifying trends or extracting common elements. Analysis of thousands of agreements is often complete within hours, enabling informed business decisions, or identifying areas for update or improvement. For example, the system undertook analysis of a portfolio of real estate contracts and established relative value of leases related to operational costs and revenues, supporting renegotiation of the leases.
- Digital technologies such as chatbots and animated videos that increase user efficiency and reduce operational costs, including a reduced the need for review and approval.
Pressure for change
A recent survey by IACCM illustrates the limitations of today’s typical process when compared with these innovations. Even when automated, systems in many cases rely on standard templates and provide limited data. For example, more than 65% of organizations admit that they do not reconcile the financial performance of their contracts. Contrast this with advanced systems that not only track precise financial data on individual agreements, but can also undertake analysis to understand how contract terms or models impact profitability.
Contract-related activities represent a major source of operational cost in most organizations and this is not only becoming increasingly visible, but also increasingly avoidable. For those who undertake contract management today, 2018 represents tremendous risk or tremendous opportunity, depending on approach. Many of the innovations are not being sponsored or driven by contract management or procurement groups – a situation which puts them under very real threat.
It is time to understand and embrace the changes now occurring, to become a visible advocate and innovator within your organization.
In a year-end report, IACCM highlights the continuing immaturity of most Supplier Relationship Management (SRM) programs. While a minority of organizations are generating substantial benefits, for most the investment in SRM is minimal, leaving it often fragmented and under-resourced.
The IACCM report, based on a survey conducted in December 2017, reveals that top-performing programs are yielding returns equivalent to 11% or more of spend, in particular through progress in innovation and efficiency. For these leaders, negotiated price reduction takes a back seat. However, this enlightened approach is far from being the norm. In most organizations, SRM either does not exist in any formal context, or is seen as a sub-element of Procurement, often driven by the same motivations and measurements.
It is this subservience to Procurement that raises real questions. Many commentators agree that the era of squeezing suppliers for price reductions is coming to an end. If they are right (and it could be argued that in fact a new era based on automation is about to begin), then Procurement needs to shift its focus towards lifecycle costs and value. This requires an understanding of how to evaluate and sustain high performing relationships.
Those who have developed successful SRM programs recognise the need for skills and tools that are rarely found in Procurement functions. That is why, when operating as a sub-group in Procurement, SRM has generally struggled to make an impact. Frequently it becomes entangled in political battles over role and authority, resulting in limited internal impact and leading to confusion for suppliers.
Yet for Procurement to flourish – some would say to survive – it desperately needs to raise its business contribution and SRM is the most obvious source of additional value. 2018 looks like it may be a pivotal year when we will start to see more intelligent discussion about the positioning of SRM. For example:
- can SRM prove effective within a traditional Procurement function and if so, how should roles, responsibilities and authorities be divided?
- should Procurement itself be sub-divided, with traditional roles increasingly automated and outsourced and a new management group established for key suppliers and major contracts?
- as businesses become steadily more dependent on their ability to form and manage external relationships, should major elements of SRM and CRM merge, to become an integrated function that oversees and enables trading relationships in every form?
IACCM will continue to lead research and discussion on these important points, as well as offering its members the training and advisory services they need to handle the critical changes affecting every organization.
For those who prepare, 2018 promises to be an exciting year, with many opportunities for growth.
Organizational culture is becoming an increasing area of focus for every business. As recent events have shown, the speed and power of social media activity demands heightened sensitivity and rapid response mechanisms. Shifts in social expectations (as well as global variations in those expectations) result in often unpredictable pressures that can instantly impact corporate reputation.
This challenging environment means that organizations must increasingly review their commercial policies and practices. For example, traditional measurement systems have often led to damaging behavior – whether it is placing unfair pressure on small suppliers or using unethical practices to win sales. Partnering programs and the selection of suppliers are also high risk areas, with potential ‘guilt by association’. In some cases, policies and practices are driven by regulation – for example, the use of conflict minerals or child labor. In others, it is about avoidance of possible litigation – for example, discrimination or sexual harassment. But there is also a growing need to exercise judgment on a wide range of decisions that impact organizational image and these, it is suggested, are in many ways best addressed through a clear and common ‘culture’ – a set of norms and values espoused by all employees.
There is current debate over where ‘cultural responsibility’ should reside. For example, given the frequent role that the General Counsel has over compliance issues, should they also be the ‘custodian of culture’? Ultimately, the tone may be set by the Board, but there needs to practical oversight and implementation.
It seems to me that there are two linked but distinct aspects to this topic. One is the internal manifestation of behavior and the other is external – the link to society and markets. It is this latter aspect that is especially relevant to commercial teams, who are in many ways uniquely placed to be making the sort of balanced judgments needed to manage reputational risk. Lawyers and the law are fundamental considerations in making ethical and reputation-enhancing decisions, but this is only one aspect. Recent incidents that are damaging corporate reputations are mostly not illegal – they are simply reflecting corporate values and cultures that are increasingly alien to societal norms. Trying to keep pace with those trends and making smart commercial decisions requires careful and inclusive analysis and counsel.
Twenty years ago, many corporations had powerful commercial groups with clear responsibility for business practices and ethical standards. The forces of globalization destroyed most of those groups because they were seen as an impediment to getting business done. Management focus shifted to ‘growth at all costs, ethics be damned’. Steadily, the world has come to realise that such approaches destroy environments, undermine society, drive inequality and dishonesty. So we are at a point where we need to rethink approaches to decision-making, ensuring that short-term expedients are not at the cost of longer-term interests. Perhaps that means appointing an ‘owner of culture’, but I suspect it is more about designing effective and streamlined review and approval processes that clearly include ‘social impact analysis’ as a core element of risk assessment.
A guest blog by Sally Hughes, Chief Operating Officer of IACCM
Social trust is high on the political and corporate agenda. Open contracting is attracting growing attention as one way to increase public confidence in the transparency and integrity of business and government dealings. To date, the private sector has had limited engagement in the debate on open contracts and many legal and contracts professionals show scepticism about its practicality. But with 23 governments having signed up to the principles of Open Contracting, and with active interest from institutions such as the World Bank, OECD and World Economic Forum, it is surely time to engage.
Last week, I represented IACCM in a fascinating keynote panel discussion at the 2017 Open Contracting Conference held in Amsterdam. The session was moderated by Adrienne Klasa, Editor of This is Africa at the Financial Times Group and my fellow panellists made up a distinguished group, bringing diverse perspectives on the subject of Open Contracting. Dr. Eber Omar Betanzos Torres is the Undersecretary of Public Administration in Mexico, who through 2017 has been the Chairperson of the group of 5 governments, (Colombia, France, Mexico, United Kingdom and Ukraine,) who founded the “Contracting 5”, leading the work to foster openness, innovation, integrity and better business and civic engagement in government contracting and procurement. Last week it was announced that Argentina would join this group, formally making it the Contracting 6; Zuzana Wienk is a member of the Steering Committee of the Open Government Partnership as well as founder and program director of a leading Slovak political watchdog – Fair-Play Alliance; and finally, George Ofori, Deputy Chair of the CoST (Construction Sector Transparency Initiative).
Open Contracting – The Future
The panel’s remit was to look at the future of Open Contracting, to try and cut through the hype and discuss and debate the strategies needed to maximise its impact; can it be the new “normal” in the next 5 years? It is a lofty aspiration. IACCM was particularly requested to comment from a private sector perspective, looking at the role of the private sector in accelerating the Open Contracting agenda and the actions that they can specifically take. The private sector was notable in its absence at the conference and therein lies one of the first challenges – how to get them in the room?
At IACCM we are in the fortunate and privileged position to be working closely with both private sector and public sector; indeed, having started out 18 years ago as an Association that was founded in conjunction with a small private sector group, the percentage of our membership from public sector has grown exponentially over the last 7 years, the reasons for which are the subject of many other blogs. There is no doubt that governments around the world are driving commercial reform initiatives, from upskilling staff, streamlining processes and even attempting to simplify contract documentation. However, when I speak about these initiatives to companies that supply in to government, the response is universally along these lines, “It all sounds very interesting, but the reality is that our experience working with governments hasn’t changed, it’s still the same old unwieldy and unnecessary complex documentation seeking to allocate unreasonably onerous risk to the supplier, still the same old bureaucracy, still ultimately the same old lack of transparency.” So, no wonder then that the private sector is sceptical.
What are the incentives?
There are certainly incentives for the private sector to get on board with the Open Contracting initiative; those organisations that care about trust and integrity, care about their reputation, should be at the forefront. However, if they are not observing any change from governments, despite the work that is clearly underway, then the incentives largely disappear, it’s viewed as one way traffic. There are so many other questions to pose: What are people going to do with the data if it is publicised; are they really ready for it? What about the arguments for the need for confidentiality in situations of national security? How can we make “data” open and useable without significant investment in technology? Even with the challenges that private sector is navigating in implementation of appropriate technology, this remains an area where public sector is woefully lagging in comparison.
Open Contracting is a complex issue and whilst I sincerely hope that it will have made significant progress in 5 years’ time, for it to be the new “normal” I fear is over ambitious; but we certainly shouldn’t be disheartened or distracted from maintaining that objective.
A need for open dialog
So, what is the role of the Private Sector in Open Contracting? Firstly, it needs to come to the table and take the opportunity to influence the conversations on this important debate, but importantly the Public Sector needs to listen to the real challenges that are still experienced when working with government institutions; this won’t happen without open dialogue and greater publicising of the case studies demonstrating the successes that can be achieved through greater openness and transparency. Sanjay Pradhan, CEO of the Open Government Partnership gave a moving opening presentation at the conference; he reminded us all that we need to move from commitments to credible implementations and we need courageous and committed leadership.
As digital communication steadily transforms social expectations, it should come as no surprise that there are growing demands for ‘open contracting’ – an end to the secrecy and complexity that masks business dealings and performance.
This week, a global forum in Amsterdam confirmed that Open Contracting truly is on the International agenda, raising understanding of the critical role that contracting plays in delivering fairness, transparency and value in trading relationships.
The players in this growing movement wield tremendous influence – organisations that include the OECD, the World Economic Forum, the European Commission, the BTeam, CoST, a myriad of national governments – and of course IACCM.
What’s it about? Increased efficiency, improved standards of governance and ethical standards are high on the agenda. While the drive may be largely from public sector, there is tremendous relevance and benefit for private companies. Greater consistency will reduce costs. Transparent processes will open opportunities to greater competition. Simplification will increase the chances of successful outcomes.
Ultimately, Open Contracting demands increased competence from both public and private sector. It requires a focus on skills, resources and systems that drive integrity in data flows and fact-based decision making. It is a program that has potential to deliver benefit to every citizen, everywhere. At last, high quality contracting has been recognised as a critical ingredient for global economic growth and success.
The IACCM vision and mission has taken an enormous step towards realisation and contracting is steadily moving up the government and business agenda!
IACCM’s recent study of the state of contract management automation revealed low satisfaction ratings and poor levels of adoption. While there are some very successful instances of implementations led by the Legal function, in general systems selected by Law Departments were especially prone to failure – in fact more than 40% more likely to be underperforming.
Contract management software takes many forms, but is tending to be bundled into the overarching category of ‘Legal Tech’. This is misleading and problematic. In a corporate environment, lawyers are just one group amongst many on whom successful contracts depend. In fact, in terms of the overall workload associated with creating and managing contracts, the Law Department typically represents well under 5%. By branding what is quite obviously business technology as ‘Legal Tech’, we simply undermine broader business understanding and adoption.
’Legal Tech’ is certainly an entirely appropriate term in the context of technology used by law firms – in the same way that FinTech is used to describe technology for the financial services industry. But in-house Law departments are not separate and independent businesses. They need technology that integrates them into the business, not that separates them from it.
So as a profession that likes clear and appropriate use of language, it’s time for lawyers to recognize the boundaries of the term ‘Legal Tech’.
Contract success is directly impacted by the motivation of the parties. Research increasingly shows that traditional forms of contract are demotivating and therefore can be directly responsible for under-performance. The way that terms are expressed, the extent to which they mandate specific actions and the degree to which they provide a relational structure are of particular importance.
A growing number of studies indicate a strong link between levels of autonomy and the quality of performance. Essentially, the less people feel they have autonomy, the lower their level of motivation and the greater the risk of unethical or dishonest behavior.
When we write contracts, we face many choices in how prescriptive they are. The same is true in the way we approach their negotiation or management and the associated communications with the counter-party. An approach that is rigid, formulaic and inflexible does not promote or allow the type of conversations and incentives that encourage innovative ideas or alternatives that increase value. The imposition of unreasonable levels of risk or unilateral demands for price reductions are similarly demotivating. They undermine goodwill and any sense of ‘we are in this together’. So what should we be doing differently?
The American Business Law Journal published an article by Todd Haugh which explores the role of ‘nudges’ in driving behavior. It reveals that communications or actions that increase or imply oversight may generate superficial compliance, but ‘workers may want to get back at a regime they see as too strict or overstepping’. Therefore contracts that mandate ‘how’ work is to be done, rather than ‘what’ is to be achieved, are likely to result in poor performance and disappointing results.
In ‘The Goldilocks Contract’, researchers from the Stanford Graduate School of Business investigated the impacts of contract structure and terminology on performance. They also found that the more the contract terms seek to impose control, the greater the impact on motivation. ‘Subtle reductions in the specificity of a contract’s language can boost autonomy, which increases intrinsic motivation and improves a range of desirable behaviors’. A range of experiments showed that less specific and less ‘legalistic’ contracts increase the counter-party’s persistence, creativity and cooperation. This is especially true with regard to the ‘legal’ terms (and methods of expression), which are often drafted in a way that appears threatening. The ‘technical’ or business terms should be designed to offer structure – for example, if they establish clear methods of governance, this will be beneficial.
There are many reasons why contracts are essential instruments, but in order to generate desired results careful thought must be given to the impact they have on performance. Traditional structure and wording is clearly not contributing to success.
Recent years have seen growing interest in approaches to contract design and expression. There are many factors behind this, among them the increased use of contracts and also their greater length and complexity. As vehicles of communication, most contracts are dire, with average reading levels that put them out of the range of mere humans.
Initiatives have ranged from the use of ‘plain language’, to the development of style guides and, more recently, the introduction of graphics and pictures that increase the ability of users to understand and perform contracts. But how much does all of this really matter?
It seems obvious to many people that contracts contain important information and these include rights and responsibilities related to performance. On that basis alone, it appears both reasonable and expedient to make agreements easy to understand. Recent research goes further by suggesting that the nature of the language used in a contract has a material impact on the behavior of those receiving it. Excessive ‘legalese’, for example, is perceived as threatening and is therefore demotivating – hardly a desirable result when the purpose is to encourage performance.
But now, research undertaken at Binghampton University in New York has revealed even more extensive possibilities for future contracts – the use of ‘text talk’, such as emojis, exclamation marks and abbreviations. ‘Textisms’ apparently bring a value typically missing from written documents – they convey the nuanced meaning typically achieved only in spoken conversations, thereby reducing the chance of misunderstanding or adverse reactions when there was no bad intent.
Contracts today frequently generate negative or hostile reactions. That is really the last thing we should be doing when we are embarking on a joint project or trying to generate shared benefit. So perhaps we need a new style guide for contract drafting that brings us into the 21st century and reflects modern methods of communication. It isn’t just that emojis and ‘text talk’ would make contracts more accessible; it would also (according to the research) increase our chances of a successful and harmonious outcome. And that, surely, is what we are all trying to achieve?
Over the years, I have had the good fortune to witness multiple instances of contracts failing to achieve their desired results. Organizations use many different techniques to ensure failure, but I have observed several that seem to be especially popular. I thought I would share them, in case you’d like to try them out. Alternatively, perhaps you would like to contribute additions, or highlight your personal favorite.
The top ten are divided into ‘do’s and don’ts’. We will start with the ‘don’ts’.
DO NOT
- Gather and assess complete requirements: it’s best to surpise the counter-party with your true needs or capabilities after the contract is signed.
- Take account of stakeholder views or interests: they will only create obstacles and cause delay.
- Test supplier capabilities to deliver: it’s price and savings that really matter, so forget those people in the business who demand quality and performance.
- Address uncertainty or volatility when you draft contract terms: it is often obvious that things will change, but that will be someone else’s problem.
- Try to make your contract intelligible: we all know that contracts must be structured and written in a way that no one will readily understand or be able to use.
So what are the ‘must do’ techniques?
DO
- Use power to impose maximum risk on the counter-party: negative incentives and unfair terms will ensure limited collaboration and are useful in creating an environment of blame.
- Use legal terminology which makes your contract threatening and didactic in tone: research has shown that this approach is effective in demotivating your counter-party.
- Specify as precisely as possible how work is to be performed: it is best to ensure that there is no chance of innovation or improvement in how services are delivered.
- Pass the signed agreement to someone with little or no training to oversee performance: not only will this hasten failure, but it also offers someone else to blame.
- Ensure that the counter-party is rapidly held accountable for anything that goes wrong: after all, it is always someone else’s fault.
Commitment Matters 