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.
25 years ago, I worked with a large Business Administration function on a project to redefine their value. Senior management had issued a challenge to all support functions, requiring them to justify their existence.
The leaders of Business Administration took a bold step. They believed that they could not only prove internal merit, but they could go a step further and start to generate revenue by selling their services externally.
My role was in part to facilitate their planning and in part to test the commercial viability of their ideas.
Sadly, it quickly became evident that this was a group in denial, hoping that they could somehow resist the advances of technology. Their proposed external offerings were not sustainable and, within 2 years, the function had all but vanished. Its remnants were busy defining and managing the automated systems that had eliminated several thousand jobs.
This story is not uncommon and throughout history has been a consequence of technological advances. The only remarkable fact is the consistent lack of readiness by those whose jobs are affected.
Might this group have protected themselves by moving into new, adjacent areas of activity? In this particular case, it was hard to see how such a move could have been achieved. Right now, it’s the question facing Procurement – as Richard Sterling points out in an excellent article “Procurement’s Make-over“.
There is no doubt that the core functions of the procurement process will automate. This leaves practitioners exposed, having been led down the wrong path by their traditional professional associations. As Richard’s article points out, most Procurement groups remain driven by the short-term practices introduced with strategic sourcing. The adoption of narrow measurements of savings and compliance, together with the alienation of suppliers, led to the marginalisation of key skills such as relationship management and commercial judgment. It is now a real struggle to escape the trap of today’s activities and build the skills and credibility needed to assume a new role.
IACCM’s approach to this problem has been to develop learning and development programs that encourage individuals to challenge old assumptions and to embrace innovation and change. It seems to be working. One seasoned and senior Procurement executive recently told me: ‘I found the IACCM training quite upsetting. It made me consider our role in a completely different way and question many of my assumptions. I realized how much more value we could be offering the business. I was upset because I hadn’t thought of it before.’
Maybe it’s time to upset your team!
Business imperatives are changing fast. The walk-out by corporate leaders from the Trump administration business councils is just one indication of the shift taking place in boardrooms. Exercising good commercial judgment is increasingly tough, yet critical for success.
Ethics. Collaboration. Innovation. Leadership. These are among the terms frequently used in corporate strategies to describe the attributes that a business must now demonstrate. They are closely interconnected values that demand fresh thinking and attitudes throughout an organization.
This implies substantial change for functions such as contract management, legal or procurement. To remain relevant, they need to become more visible in business decision-making; but that relevance depends on demonstrating creativity, adaptability and holistic behavior.
Long-term business success has always depended on innovation and problem solving. What has changed is the extent to which those characteristics must be achieved through working more collaboratively with others, at far greater speed, and under the ever-watchful eye of social media. The challenge for commercial staff is that their work is often viewed as risk-averse, adversarial and a cause for delay. Whether or not such a view is merited is not the point: just as with business itself, a positive image is fundamental to survival.
The media is full of stories about the elimination of traditional jobs and professions, yet values such as ethics, collaboration, innovation and leadership will not be delivered through machines. Commercial understanding – the ability to understand what makes a business successful, through either buying or selling products or services – lies at the heart of these attributes. But the demanding context in which commercial understanding must now be delivered requires a far more outward-looking and inquiring attitude. Too often, legal, contracts and procurement groups do things a particular way because that is the way they do them; they fail to challenge themselves and others to think differently. Yet thinking differently is now the core of commerciality.
Steady reform is not enough. To build a new image and to gain true relevance, commercial teams need reinvention. One way to get started is through a ‘hackathon’, an approach that has been used successfully by a number of groups. Ultimately, we must find a way to automate or eliminate traditional tasks and focus efforts on supporting dynamic, creative business models and relationships. To be considered commercial experts, we must demonstrate that we are commercially aware – and we don’t do that by denying the validity or relevance of the emerging world view.
Contracts – there are millions of them and they cost a lot to produce. They have been around for thousands of years. So you might think that their purpose is clear and universally understood.
But it isn’t.
That is the immediate conclusion to be drawn from early results in IACCM’s survey ‘The purpose of a contract‘. To those who work with contracts on a regular basis, this may cause little surprise because they are only too aware of the complex interactions and motivations of the multiple stakeholders. For example, it is clear that the primary interests of a lawyer asked to draft an agreement may differ from those of the cost accountant asked to evaluate profitability or the project manager who is defining a scope of work.
But this variation of perspective is in fact a matter of great concern because the real purpose of a contract is to drive a business outcome, not to satisfy the particular needs or interests of an individual contributor. The fact that ‘purpose’ is apparently in the eye of the beholder and there is no consistent sense of the ultimate, unifying goal goes a long way to explaining why so many agreements fail to generate the anticipated results or benefits. The problem is amplified by the fact that over 60% of those responding acknowledge that there is no clear point of accountability for ensuring that the contract fulfils its purpose.
The survey results will tell us not only how different functions view a contract, but also the variations between geographies, industries and size of business. For those who develop or negotiate contracts, this will offer an invaluable insight and understanding of how others may perceive the process.
To participate – and obtain a copy of the results – visit https://www.research.net/r/Thepurposeofcontract
Contract management technology has been around for almost 20 years – and has had remarkably limited impact. While some administrative tasks are now widely automated, the bulk of contract management still depends on human intervention and knowledge.
The fact that so many systems implementations have failed has engendered a degree of cynicism, a sense that contract management is just too complicated for machines to master.
Well, if you are one of those who harbour that belief, it’s time to look over your shoulder because you may be in for a surprise. There is a whole new wave of technology that is rapidly coming over the horizon.
Scarcely a week goes by now when there is not some announcement of a new initiative. Blockchain and smart contracts grab frequent headlines. More quietly, we are seeing significant advances in deployment of artificial intelligence and advanced analytics. And perhaps one of the most immediate areas of impact is NLP or natural language processing.
Behind all these, the forces of digitisation and standardisation are working away, designing and building platforms, codifying content and debating where future contracts will be housed, how they will be designed and the form of global database governance and maintenance. Common Accord, Accord, Open Law, the Open Contracting Initiative …. these are just some from a long list of collaborative ventures that seek to drive new efficiencies in contract creation and management.
Right now, the agenda is being driven by a combination of lawyers and technologists – those who actually manage contracts are notable by their absence. Except, of course, IACCM. The association is engaged in many initiatives, seeking to convene, to coordinate and to ensure the voice (and needs) of the practitioner are heard. We also keep our membership informed through webinars, articles and – most important – our ContractTech track at the IACCM conferences (next up is IACCM Americas, in Toronto, October 11-13).
We can’t force you to look over your shoulder – but it would be the smart thing to do!
Commercial management is about understanding markets, then turning that understanding into an appreciation of the capabilities needed to meet market requirements and determining whether those capabilities can be developed, sustained and turned into profitable operations.
Given the complexity and pace of change in today’s markets, it is not surprising that the topic of commercial capability is gaining increased focus and priority. It is also leading to questions over how best to create the necessary organizational structure and skills – a ‘commercial powerhouse’.
At IACCM, we have studied this field, undertaken research, developed training for the last 20 years. We have also assembled the world’s only community of commercial management practitioners and an associated ‘body of knowledge’. Fundamentally, commercial competence is not a functional discipline; it is the ability to operate across functions, reconciling stakeholder interests and perspectives to develop a commercially feasible solution.
Many organizations are struggling to adjust to the demands of volatile markets. They are constrained by traditional functional thinking and power battles. They lack the right technologies. They have internal measurement systems that drive contention, rather than collaboration.
IACCM is unique in having created a multi-functional professional association, where members share experiences and use their diversity to create solutions. Our mission is to enable sustainable relationships – and we are succeeding. IACCM member companies are given the insights and the skills they need to handle the commercial challenges of an uncertain and volatile world. By bringing together lawyers, commercial and contract managers, procurement staff, we are transforming organizational thinking and enabling a collaborative approach to market management and trading relationships.
The old world was based on divisions of labor and functional contention systems. The new world requires ‘a commercial powerhouse’ – unified, cross-functional teams with market understanding, who undertake effective assessments of requirements and construct commercial capabilities. Those teams act as a gearbox, driving coherence across trading relationships and facilitating innovation and continuous improvement.
In the world of sales, the value of relationships is well understood. A key business goal is to generate repeat customers, to establish a sense of trust and loyalty. This is because, in general, the cost of servicing a repeat customer is lower than the cost of finding and closing new business. Sometimes, it is also true that loyal customers are willing to pay higher prices – or, in the case of less scrupulous suppliers, can be taken advantage of because they are less likely to price shop.
The economics of relationship management is relatively well understood from a sales and marketing perspective and this is reflected in sophisticated segmentation models that generate different levels of relationship support and depth. The range of technologies that are now available has enabled ever-increasing sophistication and variety in the nature and scope of those relationships, taking account of detailed customer preferences, demographics and values to produce targeted and differentiated offerings and terms and conditions.
That same sophistication has been much slower in coming to supplier relationships. Indeed, the more that suppliers have sought to implement strong relationship selling, the more that buyers have felt the need to resist. Global networked technologies opened a world of apparently endless, low cost competition, providing opportunities to achieve price-based savings and encouraging the abandonment of ‘relationships’, which were seen as innately exploitative. Strategic sourcing encouraged a mentality of arm’s-length transactions, controlled interactions and commoditization.
Scrapping relationships came at a cost. Dealing with a constant churn of suppliers has many hidden risks. Loyalty and reliability disappear. Ethical standards become unaffordable. Opportunism becomes the order of the day. One direct consequence of buyer behavior has been a steady growth of national and international regulation, which is now a major cost imposition on business. In other words, the savings achieved through aggressive procurement methods have in large part been eliminated by the additional costs that flow from those methods.
It is this environment which is driving a steady re-think of procurement practices and supply relationships, but often still without the strategic clarity of customer relationship management. Disciplines such as SRM remain confused and struggle in many cases to obtain investment and support. That confusion is evident in the typical program that focuses on a few ‘strategic suppliers’, without having any clarity on the broader approach to supplier relationships in general. As a result, processes and responsibilities often remain confused and benefits are elusive.
Even the most basic analysis quickly demonstrates that today’s practices for establishing and managing customer-supplier interactions make little economic sense. Approaches that are based on lack of trust and openness are by their nature inefficient and frequently self-defeating. While ‘cosy’ and opportunistic relationships are clearly not the answer, what we really need is a shared approach to relational strategies and evaluation – an approach which explores optimised mutual benefit rather than sub-optimal individual gain.
Commitment Matters 