Compared to other world regions, Australians sees less purpose in contracts – and those expectations are mirrored in the results they perceive themselves achieving.
IACCM’s recent study, ‘The Purpose of a Contract’, is generating many interesting findings. Participants were offered eleven areas of possible purpose, ranging from value as a support for marketing, to finance, to operations and risk. In every category, respondents from Australia rate the performance of their contracts lower than any other region, by an average of almost 20%. The only areas where the sense of purpose is close to the worldwide ‘norm’ are:
- defining rights, responsibilities and obligations. Australia is in line with the global average for purpose, but 8% below average for results.
- governance and performance management. Australia is again in line withe the global average for purpose, but 14% below average for results.
- a framework for a mutually successful business outcome. Australia is marginally below the global average for purpose and 18% below average for results.
Why the difference?
The only immediate clue for this variation from norms comes in the form of the write-in comments. These reveal a possible divide between views of the contract as a legal instrument, as opposed to an operational tool. There is a sense that the contract fails because of a lack of authority – and this is especially strong among those who work for large multi-nationals, where contract terms and models are perhaps imposed from elsewhere. Some comments also reflect a degree of cynicism about the role of lawyers, especially in areas such as the contract’s effectiveness as a communication tool or operational guide (each being a category where effectiveness is rated especially low).
These findings are interesting because Australia is also among the most innovative in approaches to contracting. The focus on alliances and collaborative relationships goes back almost 20 years and today there has been tremendous success in raising the quality of performance management through better contracts. So ultimately I am left with the hypothesis that these differences are a matter of culture – that the general approach in Australia tends towards greater collaboration through strong and well-defined relationships, but that this approach is often frustrated by external forces. Limited local empowerment reduces the overall effectiveness of the contract and therefore gives it a reduced purpose. This is especially notable when it comes to the role of the contract in supporting the brand and corporate values: for Australians, that certainly is not something that their contracts achieve.
We all know that people have different views about the purpose and value of contracts. But what about industries? Do they also have distinct perspectives?
Based on IACCM’s recent survey on ‘the purpose of a contract’, the answer appears to be yes. And for any negotiator – especially when working across industry borders – those variations are important to understand. There is only one area in which there is unanimity of purpose – and that is in defining rights, responsibilities and obligations.
Those in Engineering and Construction and Outsourcing and Consulting place the highest overall value on contracts; those in Retail and Aerospace and Defense place the least. Why might that be?
- The Engineering and Construction industry has a long history of fractious relationships. The contract is of major importance in communicating roles and responsibilities (including definition of scope). And given the traditional adversarialism of relationships, it also scores very high for its role in apportioning risks.
- In the world of outsourcing and consulting, there is no tangible product, so the contract takes on a far more significant role in defining the business relationship, governance and performance management. People in this industry are also more likely to see the contract having a role in promoting their brand and its values, providing an instrument that generates trust.
- Those in Aerospace and Defense do not see the contract as unimportant, but they are more selective in the areas where they see a strong purpose. In particular, they rate its role in supporting communication, risk management and operational guidance significnatly lower than others.
- Retail is perhaps no surprise; in general, retailers are working with less powerful suppliers and in many cases place limited value on the relationship. Contracts are primarily focused on risk alloacation and the rights of the customer.
The table below shows the industries that considered each ‘contract purpose’ least and most important. It is just one of many discoveries that will be contained in the IACCM research report on the purpose of a contract, to be issued to IACCM members later this month.
| Lowest score (Scale 1-5) |
Highest score (Scale 1-5) |
|
| Providing protection and remedies in the event of a dispute | 4.1 – Outsourcing / Consulting | 4.8 – Eng’g & Construction |
| A framework for a mutually successful business outcome | 4.3 – Technology | 4.8 – Aerospace & Defense |
| A tool for risk apportionment | 3.9 – Outsourcing / Consulting | 4.6 – Technology |
| Support for a business relationship | 4.1 – Eng’g & Construction | 4.5 – Outsourcing / Consulting |
| Governance and performance management | 4.0 – Technology | 4.5 – Outsourcing / Consulting |
| A tool for risk management | 3.5 – Aerospace & Defense | 4.4 – Technology |
| An effective communication tool for those with a need to know | 3.7 – Aerospace & Defense | 4.5 – Eng’g & Construction |
| Providing operational guidance | 3.4 – Aerospace & Defense | 4.2 – Eng’g & Construction |
| An instrument for generating financial benefit | 3.5 – Public Sector | 3.9 – Technology |
| Demonstrating brand and corporate values | 2.5 – Aerospace & Defense | 3.5 – Outsourcing / Consulting |
To view the IACCM survey, visit https://www.research.net/r/Thepurposeofcontract.
As someone running a small business, that quote might be mine – but actually it isn’t. The comment came from a project manager responding to the recent IACCM survey that explores the purpose (and effectiveness) of contracts.
Overall, the survey shows that those who draft and negotiate contracts are aware of the diverse purposes they serve. They are communication tools, methods of allocating and managing risks, a vehicle for establishing roles and responsibilities. Interestingly – and of concern to some – is the relatively lowly rating of the contract as “an instrument for generating financial benefit”. The fact that this purpose comes so low on the overall list is remarkable when you consider that the key drive behind relationships and transactions is economic; without financial benefit, contracts would not exist.
But what about our project manager? He spoke for many of the operational staff who responded to the survey, reflecting a degree of cynicism about the role and purpose of contracts. In his experience, contracts often fail to give effective operational guidance. Although it may be intended to offer definition of roles and responsibilities and a governance framework, many times the contract is ineffective. That may be because it is incomplete, or perhaps simply too complicated to read and understand.
In fact, many of those responding from Legal or Contract Management roles do not entirely disagree. They too reveal a substantial gap between aspiration and reality. One question in the survey asks whether a contract should provide the framework for a mutually successful business outcome. While over 60% strongly agree that it should, only 11% feel that is what actually happens.
So unfortunately, our project manager is right to be disapppointed. But doesn’t he deserve better and could we not do more to make our contracts truly ‘fit for purpose’?
The series ‘Game of Thrones’ reveals competition at its most cut-throat. Family is pitched against family in their efforts to gain power, exert influence and protect assets and interests. In spite of all the pressures and demands this imposes, one thing that is notable by its absence is moaning. These arch competitors are not heard complaining about their position or their fortunes. None of them expect someone else to fix their problems. If things aren’t the way they want them to be, they take action.
The business world is also by its nature highly competitive – not just between organizations, but also within organizations. Indeed, it is often the case that internal tensions and politics are more challenging than the competition between businesses. Functions and departments frequently compete for attention, for resources, for power and influence. Complex organizations are driven through contention systems. But unlike the response in Game of Thrones, it sometimes seems that this functional warfare is accompanied by a ‘Game of Moans’.
The Game of Moans is typified by a number of characteristics, for example:
- Everything would be great if we were given more power
- Everything would be great if we were given more resource
- Everything would be great if (function x) had power taken away from it
- Everything would be great if only the executives understood us and the value we provide
I could carry on the list, but you probably get the gist. The point is that far too often, it is more comfortable to complain and expect others to act than it is to take personal responsibility. In today’s volatile business conditions, that is a high risk approach – status (perhaps even survival) depends on becoming a proactive agent of change.
At times like this, I am always reminded of my conversation with a successful entrepreneur based in Turkey. We all know the turbulent conditions in that country, so it was not unnatural that I would sympathise with him and the challenges he must face in running his businesses. Yet to him, my comments brought only a look of incredulity. “It is at times of uncertainty that opportunities are at their greatest”, he replied.
I guess he is a good candidate for Game of Thrones. Are you?
Wherever we look, the business world is obsessed by change, an urgent need for innovation. In many cases, commercial innovation leads the way, driven by new technology platforms, new charging models, new commitment capabilities, digitisation of business processes, even new regulation. This translates into endless ‘calls to action’ – leaving many who perform commercial roles bemused and confused, wondering ‘Does this really apply to me?”
The truth is, behind all the frantic activity, working life for many carries on much as before. To the extent change happens, it is incremental and, in many cases, inconvenient. Should you wait to see what happens or ought you to take action now?
I am strongly of the ‘take action now’ view. Why? Because real changes are happening. They are starting to affect your business and therefore your job. By being amongst those ‘in the know’, you have the chance to be among the leaders or influencers of change.
Why am I so confident that the pace of change is now so rapid? In large part, it is because of my role at IACCM where I work with and advise such a wide array of leading thinkers and organisations. We aren’t just talking – we are doing.
Take for example this comment from one of our Innovation Award judges: “Thank you so much for giving me the opportunity to gain insight into the remarkable activities that are going on “out there” – it inspires me to strive for even higher ambition. I found it hard to judge the entries apart from one another – simply because of the extremely high standard of the initiatives contributed and amazing business impact made by the large number of brilliant “colleagues” around the globe.”
So what can you do to jump aboard and avoid being left behind? I could provide examples or anecdotes, but I truly believe it needs much more than that – you need to climb aboard the train, not just watch it going past. Here are some practical options:
1. For anyone who can make it, the IACCM Conference in Toronto on October 11-13 is surely a ‘must attend’ event, featuring numerous award-winning innovation case studies as well as dedicated ‘Ted talks’ by many of the technology providers and visionaries who are hard at work transforming commercial, legal and procurement process and practice. If it’s cost that’s inhibiting you, contact lscottheatley@iaccm.com.
2. If you can’t be there to listen, share and network, then a second option is to engage in IACCM’s on-line thought leadership communities. These expert groups are busy exploring and implementing key change programs – within industries or on key topics such as GDPR, contract automation, data analytics and skills of the future. There is no charge beyond membership – so no excuse to be left behind. Wendy Lawson (wlawson@iaccm.com) can provide more details of the many initiatives underway.
3. At the very least, you can surely find time to invest in joining the occasional IACCM webinar, either live or recorded and available in our library. These are packed with ideas, insights and examples of the many changes affecting us – and again, they are free to members (even non-members can access a limited number with no charge).
Finally, if you have specific questions or needs, simply contact info@iaccm.com. Our global team is passionate about commercial innovation and the opportunities it represents for a better future – for us, for our businesses and for society as a whole.
This isn’t just tinkering – it truly is practical and fundamental reengineering. Climb aboard!
The Brexit negotiations are in many ways a classic. Neither side has a unified vision of how they want the future to be, so their negotiation is reduced to haggling over short-term details such as the division of assets. In that sense, it unfortunately resembles a messy and emotional divorce, rather than an example of visionary statecraft.
What can we learn from this on-going negotiation and how might it be done differently?
What are we really trying to achieve?
Successful projects and international treaties are typically marked by a shared level of clarity over objectives and those objectives are in general positive and measurable. Sometimes it takes time to establish a joint vision and requires levels of rehearsal or scenario planning – but one sure route to failure is an unwillingness to even discuss what that shared vision could be.
It is also essential to recognise that any complex situation is surrounded by uncertainties. This means that smart negotiators don’t try to tie down every detail, but rather establish adaptive approaches, similar to those in agile contracts. In other words, settle on the things you know and set milestones and governance procedures to subsequently review what isn’t currently clear or can’t be foreseen.
Focus on the future
Another area that is important to a positive result is to assume a future where the parties still work together to shared advantage – for example, through joint efforts to innovate or pursue areas of common interest. A focus on these positive aspects can reduce tensions over immediate issues of trust and good faith. They also reflect reality – parties do need to find a way to co-exist and finding a way where both benefit is much smarter than trying to win a Pyrrich victory.
Learn from the past
Successful negotiators learn from the past. No matter what is being addressed, there are valid examples to draw from. To again take Brexit as the context, settlements that seek to impose one-sided reparations have a singular lack of historical success and their repercussions often last for generations.
The goal of a good negotiation is to generate benefit for both sides. That is why contracts that impose rigid templates or negotiations that follow a rigid formula (seeking one-sided advantage) consistently fail to deliver optimum results.
Just wishful thinking?
An unfortunate reality in the Brexit situation is that the European Union has no real vision of its future. That was a significant contributor to the UK’s vote to leave, it is why the EU is terrified others may follow suit and it is a major inhibitor in reaching resolution.
But I still feel sure that there are many future goals and objectives that Europe and the UK have in common and which would enable a shared focus. Indeed, by capturing those ideas and concepts, the relevant governments might even inspire a new sense of excitement and aspiration among their currently disillusioned citizens. So my start point as a negotiator would focus on the future, on shared aspirations and investments, because I believe it is the only way that a sustainable and beneficial agreement will be reached.
How much value can be delivered through better contracts and contract management? It’s a question that many people ask and which directly impacts the ability to gain resources.
It is a frustrating question because, even though we have answers at a generic level (for example, the IACCM cross-industry research on value leakage), individual companies generally lack information specific to their business. Without the data, they cannot gain resources; without resources, they cannot establish the data.
So what can be done? A series of IACCM reports has been examining the likely cost and revenue impacts associated with each of the ‘ten pitfalls’ and identifying steps to achieve improvement. Some IACCM members are finding these sufficient to generate executive interest and gain support for further investigation. But others ask the question “If I want to do an audit, where should I start? What should I look for and what should I do about it?”
Conducting an audit
I thought it would be helpful to share the advice I recently provided to one IACCM member.
- The key areas where I would initially focus are contract change management, amendments and performance issues / liquidated damages and credits. These are the easiest indicators to track and of course represent various areas of leakage which should be analyzed:
- if you are a buyer, are you suffering price increases or excess charges and if so, why? (e.g. poorly defined requirements, badly developed scope, inadequate contract provisions protecting against increases)
- are you recovering compensation for performance shortfalls or are the business units simply waiving their rights to compensation?
- if you are a seller, are you failing to formalise changes and providing ‘free’ services or performance, perhaps due to the issues above? And are your business units failing to challenge customer claims or complaints and perhaps granting additional discounts or providing free services without any formal monitoring or tracking?
- whether you are a buyer or a seller, what are the business costs associated with poor performance? – there is typically a measurable downstream cost and often the issues leading to performance shortfalls are endemic. Going forward, what steps should be taken to remediate poor performance and / or how to embed appropriate measures into future contracts or contract management procedures.
Other areas to explore: 1) are we failing to obtain ongoing price reductions (buyer) or increases (seller) versus market? If so, is that due to poor governance and monitoring; failure to have appropriate review meetings; failure to include reduction or increase requirements in contract or to monitor contract terms: 2) errors in invoicing. Especially in services contracts, many buyers are identifying typical overcharging of 5-7% due to invoice errors, charging at wrong rates, overbilling hours etc. However, sellers frequently undercharge, especially in environments where pricing is highly customized.
These ideas represent a starting point. Please add your experiences or suggestions on how better contract management generates measurable returns. Better still, join us at the next IACCM conference in Toronto and hear first-hand from some of the organizations achieving the best results and from the technology vendors who are equipping them.
We have all heard the demands for simpler, shorter contracts. Most of us sympathize with the view that plain language and thoughtful structure assist with interpretation and understanding. However, many have struggled with the idea that graphics should be introduced (even though there is evidence that even contract experts find them easier to comprehend) and certainly the ‘comic contracts’ that are now openly discussed is, for many, a step too far.
But if you think these ideas are extreme, what about the email I received today from a senior executive, former head of global contracts at a Fortune 50 company? With great delight, he announced the arrival of the emoji contract. I quote:
“I was in a negotiation with a client and they sent me an email with their counterproposal. My response was an emoji. Specifically, a thumbs up. 👍🏻 After I sent that I realized I had just contracted with the client using an emoji! There is no other paperwork for this thing we are doing together.”
Of course, I had to counsel caution – in some parts of the world a thumbs-up has a very different meaning and he might have found he was in a very different form of contract!
But surely the approach he has taken is clear, efficient and enforceable – so what’s the problem?
If you have unusual or innovative examples of contract drafting or management practices, please share them!
In recent years, many buyers have pushed to extend the payment period for supplier invoices. In some jurisdictions, this has led to legislation limiting the number of days within which payment must be made.
With this combination of greater political sensitivity and interest rates at a record low , it seems reasonable to assume that the trend on payment periods would be static, or even downward. A current IACCM survey is seeking the answer – and has discovered mixed results.
This article offers early insights, plus the opportunity to contribute to the study and gain access to the report download (click here to access).
Overall, 29% of those responding say that their organization is planning to extend the payment period. For some, the fact that interest rates are so low makes such a move seem less contentious. Others are seeking the short-term boost to cash reserves.
What is the current average payment term?
The current average is 46 days, with either receipt or acceptance of invoice being the most common trigger. Overall, 41% of companies still operate on terms of 30 days or less, with distinct industry variations. For example, in the oil and gas sector 61% operate on 30 day terms. Negotiability also varies significantly, with those imposing tougher payment terms apparently more ready to negotiate.
But the contracted term does not always reflect reality – the actual period between invoice receipt and payment averages 55 days.
Use of third parties and the link to ‘customer of choice’
At 12%, the extent of outsourcing of accounts payable is surprisingly low. A further 23% work with supply chain finance providers, in some cases using this as part of their negotiation of payment terms.
Separate IACCM research has shown that ‘prompt payment’ is the number one issue when suppliers are evaluating their customers. Many in Procurement seem to appreciate this, with 38% deeming it ‘essential’. However, as the survey results show, there is a continuing gap between the importance of timely payment and typical market practices. The final report, which be issued in early September, will explore this aspect in more detail.
To contribute to the survey and receive a copy of the report, please visit https://www.research.net/r/Z7Y6YTQ
As routine and repetitive tasks are steadily taken over by machines, personal skills and characteristics will become critical for job security and progression. High on the list are leadership and influencing skills. These are critical to opportunities for advancement and also for gaining ‘trusted adviser’ status.
A recent survey by executive leadership firm Heidrick & Struggles casts interesting light on different types of leader and their related attributes. For the commercial community, of particular interest is the analysis they undertook of lawyers, who scored well in some categories, but showed potentially fatal weaknesses in others.
So where are the strengths? Lawyers scored especially well in being learning-oriented and visionary, reliable and execution-focused. But on the counter-side, the survey reesults reveal ‘a tendency to be overcautious’ and that lawyers are significantly less comfortable with ambiguity, scoring more than 15 percent lower on average than CEOs and other C-level executives. These are serious drawbacks in a business environment where speed, adaptability and a readiness to deal with uncertainty and ambiguity are critical characteristics.
This research came to mind today during a conversation with an executive from a major supplier to the oil and gas industry. It mirrored the issues highlighted above – a frustration by executives that the legal and contracts team is not keeping pace with the market and is making ‘the wrong assessment of risk’. Even worse, they are perceived too often as indulging in ‘adversarial behavior’ within an industry where collaboration is increasingly seen as key.
These are recurrent issues and to resolve them, commercial staff need to become far more holistic in their understanding and assessment of risk, as well as in their adoption of a wider range of mitigation and avoidance methods. This includes a more balanced focus on risk likelihood and an appreciation that traditional approaches to risk allocation frequently generate counter-risks that can be more severe than the issues they seek to address. As markets shift to more focus on outcomes and performance, we need different contracting models and more robust governance methods. Today, good risk management is not about avoiding risks – it is about identifying ways in which they can be accepted and managed. This is a critical shift for legal and contract management personnel and a key area for IACCM training.
Commitment Matters 