Yesterday I received an invitation from HR.com to attend a webinar entitled ‘Disagree agreeably to boost productivity’. The theme of the session is that disagreement is sometimes inevitable, but it does not have to create disharmony or argument. When we operate with openness and respect, disagreement can be a learning experience that boosts value. On the other hand, handled the wrong way, disagreement creates chasms, it undermines cooperation and respect.
Certainly these points are important for all of us to remember, in both business and personal life. However, it strikes me there is a different twist to this principle, which is ‘Agreeing disagreeably undermines value’. And for those of us involved in contract negotiation, this is an equally important principle.
How often have you emerged from a negotiation feeling somewhat annoyed or disgruntled, perhaps not even feeling committed to the result? Far too often, we reach agreement through a process of contention and grudging compromise. Just because we have agreed does not make the process itself agreeable – and that surely is a point also worthy of reflection as we consider our objectives and decide on our negotiating style.
Sustainability and ‘corporate social responsibility’ are the new, fourth dimension of supplier selection criteria (the other three being price, quality and time).
That’s according to Sylvain Guyoton, Vice President of Research at EcoVadis, who spoke today on an IACCM webinar. Sylvain described the evolution of sustainability and the extent to which it is now becoming integrated into procurement practices and, increasingly, a fundamental issue for suppliers. One element of this is the ability to demonstrate CSR standards; another is acceptance of additional contract terms and obligations.
EcoVadis has seen strong growth as corporations deal with the challenges created by high risk global supply chains, geopolitical instability and increased regulatory pressures and reporting requirements. Cost pressures force business to operate in this complex environment; CSR is the tool through which they manage the resulting supply and reputational risks.
In reality, sustainability has proven to be about much more than compliance. As the discipline has grown, it has resulted in major areas of cost reduction (for example, in more creative approaches to packaging or to logistics) and value creation (for example, through competitive differentiation). But this, to me, is where it becomes interesting that sustainability is still perceived as an area driven by Procurement / Supply Management, whereas in my mind it is much more about Marketing. To succeed, businesses need increasingly to be able to show their CSR credentials and to demonstrate their capabilities proactively. Therefore, I see a growing interest by those responsible for sales contracting, as they look to anticipate market needs and embed CSR principles as a source of competitive difference.
Going beyond this, we are also observing a growing realization that good CSR practices demand different thinking about contracts. Sustainability depends on embedded behaviors and practices within a business, not just words on a contract. This need is adding to the momentum for contracts as effective tools for communication – in other words, they need to be designed and written in ways that ordinary people can understand. It is this which is driving momentum for user-based contracts and the evidence suggests that compliance rates soar as a result.
Therefore I believe the issues that are driving sustainability are indicative of a much wider change in society and business, towards greater openness and transparency – and this means not only new terms and conditions, but also quite fundamental rethinking of the way we develop and communicate our contracts.
The need to manage change is becoming more probable and more frequent. Markets, customers, regulators – it is a challenge for business today to remain competitive and to remain compliant. And that situation is often made worse by the extent to which we depend on our external trading partners to facilitate (or even originate) that change.
Why is it that reliance on external providers would make change more complicated? Surely a key argument for outsourcing is that it offers greater flexibility, that it removes the pain associated with internal change programs – so is outsourcing not working?
A recent blog by The MPower Group focuses on the factors that are needed for effective change management. They highlight the essential elements of leadership, employee engagement and honest, open communication. Immediately we start to see the problem. Far from facilitating change, many of the contracts we put in place today operate as barriers to it. There is frequently an attitude that change is risky and represents a potential win-lose game, associated with concepts such as ‘scope creep’.
Since most changes rightly need to be negotiated, it is appropriate that contracts place controls on the way this will happen. But in today’s business environment, it is essential that the mechanisms are fast and adaptive, ensuring the right data and conversations, the right stakeholder engagement and appropriate levels of sponsorship. Many times I find contracts do not define these mechanisms and are either vague or bureaucratic, reflecting poorly defined internal procedures.
Underlying this is the problem of attitude and the view of too many contract negotiators and managers that change is something that will bite them, that facilitating change will mean either a hit on margin or an exposure on price or budget. What we must understand is that without change, we will not be able to compete. This is just one example of the areas where contracting practices and attitudes can operate against the interests of the business – and the people who work there.
When it comes to contract and commercial management, what does good look like? With some 83% of business people in a recent poll dissatisfied with their organization’s contracting process, you might think that this would be an important question and that businesses worldwide would be seeking answers.
By and large, they are not.
In past blogs, I have made efforts to describe ‘excellence’ in both areas. Yet to be helpful, organizations often need ways to measure current capability and performance. That is where tools such as capability maturity models and assessments can be useful. At their best, they offer not only an insight to current state, but also a benchmark against other organizations and a route-map for improvement.
Certainly that is the way the IACCM capability assessment works. It measures process, rather than organization, since ultimately it is process effectiveness that matters – and the quality of organizational performance will become evident as part of the results. It offers a variety of benchmarks, ranging from global, geographic or industry averages, through to comparisons by quartile. It also challenges organizations to ensure that contract and commercial practices are aligned with the strategic goals and objectives of the business (which often they are not).
The most common weaknesses are in leadership and technology. In many ways, the two are intertwined. Without technology, processes remain manual, time-intensive, resistant to change – and most important, they remain largely transactional and lack good management information or data. Because of this, the process (and people related to it) generally have limited status or influence, except at a transactional or deal-based level. As a result, it is a role that rarely attracts natural leaders and where top management fails to see the purpose that good leadership would serve. Lack of investment (in both people and technology) is an inevitable result.
IACCM data has shown very clearly the costs that are associated with poor contracting and the absence of good commercial data. Capability assessments reveal the nature of current weaknesses and the steps required for improvement. With these insights available, it should not be difficult to achieve solid progress. In a world where management claims to seek continuous improvement, you might expect rapid and immediate attention being paid to this area of business operations. Yet in general, it is not. There is an embedded reluctance to grasp the opportunities that come from change.
In part, the reasons for this go back to the already mentioned issue of leadership. But organizational politics and fear of disruptive change also play a major role. Many different groups claim an interest in contracting and commercial management. While none may be willing to take ownership or accept accountability, they are stubbornly determined to prevent anyone else from doing so. As a result, there is generally inertia, broken only when there is a major error or disaster. This is followed by a flurry of activity, perhaps some new form of control mechanism or addition of contract terms that protect against an event that is unlikely to recur.
Improvement will come. In most cases, this will be in spite of incumbent contract and commercial practitioners. It will be driven by technology – not the contract management software of the past, but tools and systems that inject powerful data analysis and enable new ways of contracting and new insights from contracts. ‘Good’ is already starting to look very different from the past.
At times of uncertainty, the role of contracts in both protecting and delivering value becomes even more evident.
That is one clear result of Brexit, the unexpected decision by the UK to leave the European Union (EU). Law firms in particular have been quick to issue thoughts and guidance on the possible consequences for future trade and existing relationships. IACCM members have been anxiously seeking guidance on ‘which terms are impacted?’
Digging beneath the surface, the answer is itself mostly uncertain because there are many possibilities regarding what may happen. Volatile markets could move favorably or unfavorably; new trade treaties or revised regulatory environments may or may not emerge. And in reality, Brexit is just one example of a world where growing interdependence makes disruption and uncertainty both frequent and normal. In other words, good contracting now demands focus on how unexpected change and unpredictable events will be handled.
Many of the clauses that are impacted by volatile conditions are not new. Obvious examples are Force Majeure, payment and price adjustment terms, clauses relating to new or revised regulation, taxes or tariffs, rights of termination or renegotiation. But sophisticated negotiators are recognizing the growing importance of better structured governance provisions, bringing greater definition to the ‘rules’ under which the relationship will operate. David Frydlinger touches on this in his recent blog and IACCM highlighted similar points in a webinar that it ran just days after the Brexit vote.
Trading relationships – just like daily life – can never be free from risk. While some events are predictable, many are not. The longer the term of the contract, the more uncertain it becomes. Our best approach to dealing with that uncertainty is not to try to anticipate each possible eventuality, but rather to agree mutually acceptable procedures through which they will be discussed and equitably resolved.
I want to share a question that appeared this week on the IACCM message board.
“Has anyone had any success in setting up and managing KPIs for Contracts Management. The intent would be to set internal KPIs for our contracts team. Since the ‘success’ of a contract (say a construction contract) is influenced by many factors outside of the Contracts Administrators control I don’t want to set up KPI’s on contract value/growth etc. Some obvious ones are timeline to execute contracts, timeline to review invoices, execute changes etc but they don’t really seem to add much ‘value’ – any thoughts?”
Censeo Consulting Group and the Public Spend Forum recently announced their findings on ‘the required skills of the public procurement workforce’. They discovered under-performance ‘in nearly 70% of identified competency areas’.
I am always a little skeptical about research reports from consultants. While they raise some great discussion points, there is this nagging feeling that the findings may be somewhat self-serving – essentially “Wow, we just discovered this massive problem – and it just so happens we have the services to overcome it”. And in this instance, the published data is actually close to the opposite of IACCM’s rather more extensive findings. Of course, that is not to say it is wrong, at least in the context of the 43 people interviewed, nor do I know what the objectives of the report’s authors may be. So let’s look at the broader questions that these findings raise.
Do skills and competencies matter? On this point, I think we would all be agreed that they do. And given the nature of today’s public services and their dependency on private sector suppliers, I presume there would be broad agreement that areas like negotiation, contracting and relationship management would be high on the list (though we might debate which of these is a skill versus a competency). It should be reassuring, then, that the Censeo research finds that the public sector workforce demonstrates competency in contracting and negotiation. However, anyone who has true competency in these fields may be rather shocked to learn that ‘proficiency decreased significantly for more complex skills, such as stakeholder engagement, risk analysis and problem-solving’.
I have never met a truly competent negotiator or contract manager who did not excel at stakeholder engagement, risk analysis and problem solving. These are fundamental attributes without which subsequent contract performance is almost doomed to fail. IACCM’s research into public sector skills actually shows advanced capability in problem solving and comparable competency to the private sector in risk analysis and stakeholder engagement. Where the public sector falls down is in negotiation (because they generally take the view that their contracts are non-negotiable) and contracting (because they tend to operate from templates which often reflect inappropriate forms of relationship and terms and conditions). And as we all know from the highly-publicized contract failures, contract management is an important area for public sector improvement (as a competency, rather than just a job role).
Today’s challenging business conditions certainly demand renewed focus on required skills and competencies, but pre-requisite is a coherent assessment of which skills and competencies are actually important to the future and then an objective appraisal of current gaps. Given the speed with which change is occurring, there are significant shortfalls in both public and private sector. Some of these will be addressed through training. Others may be filled by new organizational structures (redefining job roles, moving to more team-based structures) and some through automation. It is a demanding, yet exciting, time – and progress will be assisted if we focus on tangible and objective data and creative solutions to performance shortfalls.
IACCM undertakes regular capability assessments for its corporate members. We have data from hundreds of different organizations around the world, enabling individual results to be benchmarked against both global and industry standards.
Out of the nine areas that we test, one always stands out as a source of weakness – and that is the field of automation and knowledge management.
Given the focus by business and government on digitization, this is a serious weakness. It is certainly true that failure to invest in technology means that contract management remains highly inefficient and commercial policies and practices are too often based on instinct rather than facts.
However, on a positive note, the lack of past investment means that in general there are few embedded heritage systems, so for many, digitization is a green-field opportunity. This represents a real opportunity and a few leading companies (‘the dynamos’) are pushing ahead fast with transformation initiatives.
The possibilities are exciting because digital technologies revolutionize how we operate and the impacts we can have. There are four areas to consider:
- Operations and efficiency. This is largely about changing processes in ways that reduce cycle times and generate resource savings.
- Business model innovation. New commercial models are enabled by technology. There will also be impact from contract and negotiation analytics and understanding trends in required business capabilities.
- Technology innovation. Digital can reduce costs, change the nature and impact of risks and their management and enable simpler, more rapid integration across systems.
- Customer experience and engagement. Much deeper insight and understanding of purchasing methods and behaviors will create sources of competitive advantage through incremental value and ‘ease of doing business’.
It is essential to recognize that digitization is not a functional initiative; it transforms the approach to doing business. Since winning and awarding contracts lies at the heart of every business, the field of contracting and commercial management is a logical place to start. And that is exactly what happens during our capability workshops – the realization that the contracts and commercial function is transforming from a largely manual, operational role to a position of strategic leadership.
Our globally networked societies and economies have transformed the environment in which we live, yet our political direction, organization and visions have not yet adjusted. Brexit is an indication of the frustrations that many feel in a world they no longer understand, with leaders who lack power and fail to offer a coherent and inclusive sense of direction.
Recent research has shown that those with no history of democracy and who live in relative poverty feel like they are today ‘global citizens’. Those who live in established democracies generally feel less empowered and that their opinions and opportunities are being subsumed; they, increasingly, do not see themselves as ‘global citizens’.
This environment creates openings for populists to peddle policies that are inherently negative, protectionist and divisive. Yet rather than causing despair, this should operate as a wake-up call for those who are educated and economically privileged. It is surely they who must demonstrate a readiness to create a positive vision for the future and engage politically, rather than complain about their fellow citizens democratic choice.
At times of great change, there is typically great turmoil. For those who benefit from any new world order, there is a tendency to drift. Such was true in the 17th century, when a fast-changing society led the British people to rise against the threat of absolutism from their monarch. It is worthy of note that the dividing lines at that time were almost identical to those of the Brexit vote – London and Scotland moving in one direction, the rest of the country supporting tradition and the monarch. On that occasion, it was the agents of change who led the way and created the foundations for modern parliamentary government.
Today, whether in business or society as a whole, we similarly need leadership and vision which is relevant, inclusive and inspires a sense of hope.
Its easy to write about the many areas where contract management could be improved. It is the failures that make the headlines. But sometimes it is important to reflect and recognize the success stories.
IACCM’s current series of in-depth studies on ‘the ten pitfalls of contract management’ offers exactly that opportunity. It is now 2 years since the initial work to identify the major causes of value leakage was undertaken. Many are familiar with the resulting infographic and the average 9.2% contract value erosion that occurs due to weaknesses in the contracting process.
Our current studies are examining each of the ten pitfalls in detail and they show encouraging signs of improvement. For example, the number one issue is lack of clarity over scope and goals. When we first explored that topic in 2013, there were significant disagreements between customer and supplier in 38% of contracts. This year, that number has dropped to 30%. Organizations are developing more sophisticated approaches, including improved contracting models, greater use of templates and checklists and investment in training operations teams. While there is still far to go, the scale of improvement is encouraging.
Subsequent studies have investigated timing of engagement of commercial resources and approaches to involving stakeholders. While both remain problematic, there is evidence that more sophisticated use of technology is leading to improvement. In some cases, this is due to streamlined procedures, in others it is through greater dissemination of knowledge leading to empowerment across the organization.
Each study is highlighting ‘best practices’ that reduce the value being eroded from historic weaknesses in contracting. Pitfall number 4 – protracted negotiations – is currently open for input (participate here) and reports on the other three are available to IACCM members on the website, http://www.IACCM.com.
Commitment Matters 