There is extensive discussion about emerging technologies such as artificial intelligence, natural language processing and blockchain, with wide acceptance that they will have significant impact on contracts and contract management. But beyond driving greater automation and streamlining many traditional activities, what other changes might we expect?
The most important impact for business will be the release of ‘big data’ – insights that have until now been hidden inside the contract and associated performance data that defied causal analysis because there are too many variables for the human mind to extrapolate.
The game-changer: data and reporting
So as we design and prepare for the new systems that are starting to emerge, what specific contract and commercial data and reporting will be of value in providing key management information? Here are six suggestions of the things we will soon be able to do and which will represent ‘world class’:
- monitor the correlation between the terms or contract model used and the level of success in business outcome
- rapidly observe shifts and trends in market or industry demand for altered terms – e.g. for risk allocation – or in competitive offerings
- identify repetitive areas of performance inefficiency or shortfall in commercial operations and drive remediation through improved terms, policies or related processes
- be able to immediately analyse and report on the impact of market, geopolitical or regulatory events on contracts (buy or sell) and consequent effect on revenues or profit
- identify and aggregate risk at both transactional and portfolio level (contract type, business unit, market segment etc) to support strategic business decisions
- analyse the financial impact of term and condition variations, concessions and potential negotiated off-sets
The good news? This data will elevate management’s perception of contracts and the contracting process, making it a critical source of strategic business information. The bad news? The machines will eliminate many of today’s transactional and operational roles, leaving opportunities for those who are skilled at interpreting data, developing new ideas and approaches and undertaking impact assessments where judgment is required.
An IACCM member recently asked whether the word ‘shall’ implies obligation to perform. The question inspired lively discussion among my legally qualified colleagues.that wasn’t so much to do with the question of interpretation, but more to do with how ridiculous it is that we even have the debate.
By way of illustration, one of them cane up with this rather amusing example of the importance of plain language (and cultural awareness):
“Should we use “shall” or “will” – a little anecdote:
“I’ve fallen in the water and I will die!” the Scotsman cried. A group of Englishmen there looked on and did nothing, the bastards. In court, it was realised they took the Scotsman’s will to mean that he wanted to die (which is what it means to English people in English usage). Had the Scotsman said “I shall die” or the even better “I am going to drown,” the Englishmen would know he was in imminent danger of drowning and needed saving. Alas, the Dutchman (or German or whatever) sitting in the gallery quietly muttered to himself, “Why can’t he just say, ‘Help me!’?” The sheriff sitting next to him quietly said, “He didn’t say please…”
So the conclusion of this story? For one of my colleagues, it was simply ‘Why can’t we just say what we mean, using normal words?’ But for another the debate represented a source of considerable value – if you happen to be a lawyer. And that took us to another debate – ‘you shall pay my bill’; ‘you will pay my bill’; ‘you must pay my bill’. What’s the difference (apart from the size of the bill!).
Ken Adams, what do you say?
The UK’s National Audit Office (NAO) recently issued a report on government’s use of PFI (private finance initiatives) to support public sector projects. Its findings were not in general positive – and came at a time of increasing scrutiny of private sector contract performance, exacerbated by the collapse of Carillion, a major outsource provider.
Writing in the Financial Times, commentator Martin Wolf observed that the NAO report “investigates the rationale for PFI and finds it wanting. If done in the right way and for the right reasons, PFI is not a bad idea. Unfortunately, this has not happened”. Once again, a key question that surrounds this debate is whether it indicates commercial incompetence by government and opportunism by industry. This issue of opportunism arises because of the perception that suppliers gain excessive benefits in the later years of agreements – sometimes for assets that are no longer in use.
The report examines three of the arguments that have been advanced for using PFI contracts. One is certainty of budget; another is reduction in running costs; and the third is superiority of maintenance. On the issue of budget, it acknowledges that the contracting process offers greater certainty, but argues this does not imply control over price. Suppliers may charge a premium to cover their risk. On running costs, the report found no evidence of greater efficiency, though acknowledged that standards might be higher. And on maintenance, it found there are benefits, largely because government cost-cutting often targets areas such as maintenance costs so private provision protects against this.
This is a complicated area and any assessment is inevitably somewhat subjective. For example, on costs, it seems likely that suppliers will price for uncertainty and risk, but situations such as the Carillion collapse indicate that this is not universally the case. Indeed, the criticism of supplier and government in this example is that pricing was too aggressive and this is not the only instance where over-optimism or hunger to win has resulted in poor decisions on price. If government had retained control and funded these projects, would it really have achieved lower costs? History suggests often not – indeed, the EU found that major public projects have an average cost overrun of 80%.
It seems to me that the real challenge on public sector projects is the need for greater openness and collaboration. Commercial decisions are distorted by policies, perceptions and precedents, which tend to constrain conversations and introduce an unhelpful level of skepticism. Governments do not operate in the same way as private firms and good commercial assessments take acount of that in the way that risks are identified and contracts are structured. As Martin Wolf concludes: “If the government can specify and monitor the contract, can be confident that the private sector will deliver, cannot find a superior organisational form and wants to bind itself to delivering the service over the term of the contract, then it can make good sense”.
So once again we come back to that key skill, for so long ignored, of effective commercial analysis supported by strong contract management, both in design and implementation. And when it comes to shortage of supply of those skills, governnment does not have a monopoly.
Indirect procurement remains for many a problem child. It may have grown bigger, but has it grown up? Research shows that services are now the dominant element in business-to- business trade, with the transition to ‘goods as a service’ continuing this shift, yet they often seem to be treated as the unwanted step-child.
Several times recently I’ve worked with IACCM members to review the maturity of their indirect procurement process. Almost without exception, they are struggling to measure value and to build strong supplier relationships. The main reason is that they are still using procedures, systems and contracting models that were developed to support direct procurement- and they simply don’t work.
Suppliers faced the pain
Many suppliers went through the pain of transitioning from a predominantly product-based to a service and solution-based model. It is a tough transition. The pricing models, contract terms, sales approach, monitoring systems, need for performance management, variability of costs … dozens of factors impose a need for fundamental reengineering of commercial and business operations.
What I find when I look at buying organizations is that the shift of volume from direct to indirect has been gradual and therefore often unplanned. Indirect procurement frequently remains a ‘bolt-on’ activity, deprived of the investment in systems and skills that it needs.
What’s the consequence?
Lack of focus means that opportunities are missed, costs are increased, value is eroded. To give a couple of examples:
- A recent IACCM project for an organization in North America involved analysis of almost 10,000 contracts. It has unearthed a myriad of data, including the fact that well over 50% of their spend is indirect. Yet they have no contract templates for services and solutions; everything remains based on products and therefore contracts require extensive tailoring or, in many cases, an inappropriate contract is used. Soem terms simply make no sense; other key terms are omitted. Supplier complaints are ignored because procurement staff have never been trained to handle indirect agreements or relationships.
- A capability assessment for a large international corporation revealed that the indirect team have no visibility to the overall acquisition process. Service levels and statements of work are produced by anyone who feels like producing them, without review. The underlying P2P system was set up for direct purchases and e-procurement, which simply does not work for many indirect acquisitions. The consequence is that there is essentially no visibility to performance data or costs – even though this corporation is in a highly margin-sensitive industry.
I am sure there are some organizations that have grasped the fundamental difference between direct and indirect. But based on the comments I hear from suppliers and the assessments that IACCM undertakes, they are relatively few and far between. It’s time this was changed. Procurement groups need to re-assess their priorities and recognise that in future indirect will be the dominant element in their work and potential value. That’s good news – because the automation of direct procurement means there will be a rapid drop in the number of people needed.
The last 20 years have seen a transformation in the way contract and commercial management are viewed. Growing complexity in business and markets is driving an appreciation of the need for increased competency, streamlined processes and advanced technologies to support successful contracts and relationships.
IACCM is widely credited with influencing this shift in understanding. Our global presence has brought together a powerful community of practitioners and change agents. Our research has provided previously unavailable data and insights. Our training and certification programs have raised standards and status. But this is just the beginning. New technologies are starting to drive truly fundamental change and transformation, where contract and commercial competencies will move center-stage. ‘Relationship Resource Planning’(RRP) is the strategic concept developed by IACCM and the idea that underpins our thinking and services for the year ahead. It is through RRP that businesses and organizations will realise a quantum leap in performance, cutting operational costs and increasing revenues by 10% or more.
To lead us into this new era, IACCM itself needed a generational shift and change of gear. Today, it has announced the appointment of Sally Hughes as its CEO. After nearly 19 years at the helm, Tim Cummins is stepping aside, though will continue in a role as President of the Association, leading its research and providing advisory support to members.
Over recent months, IACCM has seen impressive growth, enabling substantial strengthening of its staff and management team. Sally brings the vigor, enthusiasm, leadership and subject-matter skills that will ensure IACCM continues to advance the status and role of its members.
Once again, IACCM demonstrates one of its most compelling characteristics – providing a vision and path to the future. I’m sure readers of this blog will join me in congratulating Sally – the new (and much younger) face of global contract and commercial management. She can be contacted on LinkedIn or shughes@iaccm.com.
The latest reports on job opportunities in procurement and supply management provide interesting reading – because in general they make no reference to procurement or supply management.
The skills in demand are very different from those provided in traditional procurement certification programs. Increasingly, the focus is on lifecycle proficiency, with strong emphasis on services and knowledge of IT. Businesses need people with strong category management and capital project experience – with particular demand for experienced contract managers. They need staff who appreciate and can assist in driving successful outcomes, driving value rather than often theoretical savings.
For CPOs, commercial acumen comes top of the list for required attributes, followed by competence in stakeholder management and experience outside Procurement.
At IACCM, we have been highlighting these shifts for several years and equipping a growing number of members with the lifecycle contract and commercial skills now in demand. That success and relevance is reflected in our most recent salary survey, where those with an IACCM certification are on average earning some 12% more than those with more traditional procurement qualifications.
The volatility of today’s business environment represents an exciting opportunity for those with robust commercial and contracting competence. High demand is not surprising – and in part reflects the shortage of supply. With IACCM core programs so easily accessible and taking just a few months to complete, they offer many experienced procurement practitioners an easy and low cost top-up to existing skills and knowledge – a ready transition to the new world of trading relationships.
It’s not just about simplifying contracts …. it’s about using contracts to simplify business.
Many people in business are frustrated because contracts are too long, or too complicated, or take ages to negotiate. So they demand ‘simplification’, which often means ‘Why can’t it be one page?’
What these demands fail to recognize is that contracts are a reflection of overall business complexity. Certainly there are aspects of them that can be simplified through better design or drafting, but the majority of the content is driven by policies or practices that are outside the control of the contract author. Examples are the terms that finance, risk management, HR, business operations and product management may require. In my experience, these groups often demand the inclusion of multiple pages of text that reflect their fears, concerns and past exposures.
So does this absolve the contract drafter from responsibility? In my opinion, it does not. It actually provides the drafter with an opportunity to deliver real and measurable value to the business, by challenging all those interest groups (or stakeholders) about the complexity THEY are imposing on the business. It is actually these groups who are undermining ‘ease of doing business’ and creating avoidable cost and delays.
A growing number of IACCM members are awakening to the point that the legal, contracts or commercial function must do more than oversee compliance with rules – it must actually challenge those rules or policies and ensure those which remain are implemented in the simplest way possible. Good contracting is actually about testing and improving overall business performance and eliminating the friction points and delays that cause so much frustration.
We don’t have to be the villains and the fall guys; let’s put pressure on the real creators of complexity.
This month’s Harvard Business Review features an article, ‘The Case for Plain-Language Contracts’, by Shawn Burton, General Counsel at GE Aviation. In his introduction, Shawn observes: “The contracts used in business today are long, poorly structured and full of unnecessary and incomprehensible language”. He rightly makes the point that contracts are business documents and should therefore be understandable to the audience for which they are relevant.
This point seems glaringly obvious and the article comments that the push for plain-language contracting goes back many years. One likely reason that progress has been so slow is highlighted in a recent opinion piece published by Forbes, in which Mark Cohen – a Fellow at Northwestern University School of Law – challenges the fact that law operates ‘as a guild, rather than a competitive market’. The system of licensing that this involves means that lawyers ‘have fostered a ‘bespoke myth’ that maintained all legal matters were unique, inherently complex and worthy of premium rates’. Using archaic and complicated language, decipherable only by an expert, is of course a key element of that myth.
Ken Adams, guru of contract style, has unsurprisingly piled in on this topic and makes some justifiable comments about the simplification undertaken at GE Aviation. He suggests some worthy improvements to the wording of the agreement. However, he also bows to traditional thinking when he suggests that because contracts deal with complex matters, they must therefore themselves be complex.
Why does this matter?
Contracts today are pervasive. For a variety of reasons, both the volume and size of contracts have grown dramatically over the last 30 years and this has been accompanied by greater complexity – for example, the increasingly frequent need to to operate across languages, legal systems, cultures, as well as dealing with complicated, long term relationships on challenging and innovative projects – and in an environment of rapid change, heightened uncertainty and growing regulation. However, it is worth noting that the vast majority of those factors are not in themselves anything to do with ‘law’. Contracts – and the process by which they are developed and agreed – shoud be assisting in generating clarity and shared understanding for all those who they affect, not adding to the mystery or uncertainty and being decipherable only by one specific interest group.
Business people need practical business instruments that support successful business outcomes. As Paul Lippe, founder of LegalOnRamp, commented to me just this week: “Contracts today are a roadmap for dispute resolution”. This renders them inadequate – and often irrelevant – when it comes to providing a useful or structured framework for overall governance and performance management. Quite simply, they often fail to assist businesses in dealing with the real business risks that arise during the contract lifecycle. Ironically, this lack of clarity regularly means they are not even particularly useful in dealing with disputes.
It is rarely practical to anticipate every incident or uncertainty that might affect contract performance, but it is entirely practical to anticipate that such incidents are likely to occur. It is in this context that well-designed contracts provide clarity:
- for those things where there is certainty, they must offer unambiguous instruction;
- for those things that deal with uncertainty, they must offer clear guidance on how it will be handled.
The obligation for anyone drafting an agreement – indeed, their test of success – should be that the users of that agreement can understand it.
Complexity is no longer an excuse
Throughout the centuries, complicated ideas or tasks have resulted in the formation of specialist groups or associations. The intent is laudable. It has generally been to raise standards and encourage informed debate and improvement (at least within that specialist group or community). But over time, such groups have always become resistant to change and sought to maintain mystique – the use of Latin within the Catholic church was a case in point, or the Luddites smashing machines was another.
When it comes to contracts, simplified langauge is no longer enough. The world has moved on. Traditional written documents are for many people a thing of the past; they operate in a digital age where communication is through emojis, text-talk, graphics and videos. In many cases, these methods generate far greater understanding and consequently far greater compliance. To take an example, engineering drawings are complex. Just like contracts, they require experts for their interpretation. And that is why engineering drawings in their traditional form are becoming a thing of the past. Whether it is for kitchen re-design or for smart city construction, virtual reality programming has taken these innately complex concepts and made them fully understandable to the wider public.
Specialists and professionals remain important to human progress, but in order to survive and stay relevant they must focus on how they make their expertise accessible and affordable. In the case of engineers, they may still develop drawings, but these operate as templates for the virtual reality program. Either they expand their skills (to include programming) or they partner with programming experts.
A key measure of future value must surely be that we enable the success of others by making complex things simple for them to understand and implement. Contracts will not be an exception. Already, we are seeing the emergence of more standard terminology and the development of machine-based analytics (the end of the bespoke). We are also seeing growing use of graphics and video – methods through which contracts serve a broader business and social purpose. These developments are exciting to observe – and indeed, many lawyers share that excitement and are operating at the forefront of those changes.
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.
Commitment Matters 