In the past, relatively high failure rates were an accepted part of any production activity. The quality movement successfully challenged this acceptance and, at least in manufacturing, drove performance to new heights.
This was achieved by understanding the overall process of production, looking holistically to ensure integrity not only within each phase, but across phases. If activities are disjointed, quality suffers.
Contracting should be seen as a process. It is the activity that aligns commitment needs with capabilities, policies and practices, then oversees compliance and manages any necessary adjustment. Organizations perform this activity on a regular basis – and most tolerate a relatively low level of quality. Indeed, just like historic manufacturing processes, some level of failure or under-performance is accepted as inevitable. Most organizations don’t even know what that level is – though IACCM research has shown that 10-15% is probably ‘normal’ and certain industries or contract types experience levels of 30%+.
Contracts fail because the activities involved in their production are disjointed. Efforts at automation illustrate this only too clearly, with systems struggling to gain user adoption and failing to generate the sort of data that would enable a meaningful return on investment.
Typically, no one has responsibility for identifying, monitoring or maintaining quality of contracting. Numerous stakeholders claim rights over different elements, though none takes responsibility for the outcome that is achieved (for example, input comes from multiple groups within Legal and Finance, supplemented by Engineering, Project Management, Operations, Sales, Procurement …). And that’s before the counter-party gets its hands on the contract and seeks to impose its views into the mix. Whether or not these positions are compatible, or consistent with the results or relationship being sought, is often a matter of luck. As one law firm observed in a recent law suit ‘Contracts are often a case of too many cooks …..’.
The contracting process can and should be a quality process in its own right. When performed well, it acts as a method to ‘ensure integrity not only within each phase, but across phases’. When not viewed this way, it becomes an irritant, a source of confusion or delay, an activity that at best contains the level and consequence of under-performance, but does not control it.
New technologies and analysis are steadily revealing the scale of opportunity to drive improved performance through high quality contracting. Many are struggling to realise those benefits because of traditional attitudes towards ownership and continued assumptions that contracts are simply an output from other processes.
It is because of those attitudes and assumptions that contracts fail.
Almost 80% of contract and commercial managers have a high level of job satisfaction, but 62% feel that they lack a clear career path.
This uncertainty over future opportunity is reflected in the top challenges facing the contract and commercial management (CCM) community. They are:
- Providing measurable business value
- Operating with consistent skills and standards
- Gaining status and recognition
- Demonstrating leadership
- Attracting and retaining quality staff
It doesn’t take long to see the connection between these challenges. Many contracts and commercial groups lack the leadership needed to fix these problems and to develop a strategy that tackles the core issue of ‘providing measurable business value’. Inspirational leaders are those who grasp the potential to influence business direction, based on the wealth of data that can be generated from the contracting process. Those leaders also appreciate that need to provide consistent skills and standards – they recognize the diverse backgrounds of the typical CCM function and turn this into a strenght by super-imposing a training and development path that leads to common methods and techniques.
Through steps such as these, the challenges of status and attracting quality staff are rapidly addressed.
Why is leadership so often a problem? It is one of those ‘chicken and egg’ situations. Many times, those promoted to leadership positions are good practitioners, but come from a background of transactional excellence, rather than strategic thought. Some dismiss the need for consistent training, taking the view that contract and commercial management is an art, rather than a science, and is something learnt through experience, rather than teaching.
IACCM surveys regularly reveal a high level of dissatisfaction with functional leadership – so while practitioners love the work, they also fear that it is a dead-end. Fixing this issue is a priority for IACCM and various steps are being taken. For example, we are working with a growing number of business schools to develop MBA and executive education programs. Our training and certification programs include a growing emphasis on leadership and influencing skills and methods. Our research and conference programs are increasingly focused on highlighting the sources of value – current and future – for the CCM community. We are also working to finalize development of ‘the IACCM Way’ – a blueprint for excellence.
The challenges we face can be fixed – and the opportunities before us make the journey worthwhile.
Yes, I really do get excited by contract analytics! After more than 35 years working in a field where almost everything was based on opinion and personal judgment, I find the potential of working with facts truly amazing. Just take this chart as an example (click to view).
The chart reflects system-based analysis of non-disclosure agreements from multiple companies. The columns to the right show commonality (where higher values reflect that a clause appears regularly) and consistency (where higher values indicate that the clause has similar principles). The clauses with a red circle are the most negotiated (common and variable), the clauses with a green circle are standard (common and consistent), and the clauses with a yellow circle are optional (less common in the set).
This type of analysis offers organizations the chance to benchmark, For example, building from this summary, it is of possible to extract ‘norms’ – in other words, what does a typical clause look like. Equally, an organization can see whether their experience of ‘most negotiated’ coincides with the experience of others.
NDAs are a fairly simple example of this form of analysis. With more complex agreements, the data becomes even more interesting and can assist organizations in understanding competitiveness, ease of doing business and – potentially – any link there may be between the contract terms and the success of the outcome.
For years, lawyers and contract managers have had to muse over their advice and decisions, having little substantive or objective data to draw from. The wealth of information that will now become available offers the chance to exert far greater influence and to deliver far more value to the business.
IACCM is working with a growing number of members to support this type of data extraction and provision and, in some cases, with groups of companies which provide contract samples, which are then anonymized before in-depth analysis.
Enterprise Resource Planning – or ERP – was designed during the era of the big, integrated enterprise. It streamlined internal business operations and drove efficiency through high levels of standardization. To a large extent, against that specific objective, it was successful. Now, it has become a constraint.
I recall being at the heart of one of the big ERP implementations. The people involved with sales contracting and negotiation were torn in their emotions. On one level, it was clearly necessary to eliminate the needless variations in policy, practice and process that had arisen in the typical multi-national, multi-divisional structure of most large corporations. But at the same time, the rigidity created by ERP systems was a source for concern. It seemed we were going from an inability to make commitments due to infinite variability, to an inability based on imposition of standards.
That fear was in many ways justified. Lack of flexibility arose in part due to the software and in part due to the eradication of human resources that resulted from automation. It meant that non-standard commitments became increasingly harder to manage and were therefore a source of risk.
The standardization of business processes also enabled large-scale outsourcing – so, ironically, a by-product of Enterprise Resource Planning has been the disaggregation of the enterprise. Today, business performance relies predominantly on the strength and efficiency of external relationships, with both customers and suppliers.
It is therefore surprising that many organizations continue to push ERP-related systems (such as ‘procure to pay’) ever deeper into their fabric. This fixation on internal control, rather than external enablement, is surely a mistake. The systems that businesses need today are very different. They must support collaborative working, sharing of information and data, not just on a one-to-one basis, but across value networks. Organizations must stop thinking about individual contracts and relationships and instead design around low cost, reliable delivery of customer commitments.
Putting it simply, we have entered an era where our focus should move away from the software that fuelled the integrated enterprise (ERP) and shift instead to solutions that support the virtual enterprise – what IACCM is terming ‘Relationship Resource Planning’, or RRP.
“Trust is in crisis around the world. The general population’s trust in all four key institutions — business, government, NGOs, and media — has declined: To rebuild trust and restore faith in the system, institutions must step outside of their traditional roles and work toward a new, more integrated operating model that puts people — and the addressing of their fears — at the center of everything they do.”
This quote, which comes from the 2017 Edelman Global Study, should be of major concern to each of us, whether as citizens or employees. Trust lies at the heart of economic progress and human welfare. And we all have a role in restoring it.
Given the theme of this blog site, my focus will be on the contribution of contract and commercial management. These are fields that could be making a positive difference.
First, let’s think about commercial policies and practices. These reflect the over-arching organizational or industry culture and the extent to which honesty and respect are inherent values. They include things like the way we define, measure and reward success. For example, when we use power to impose unfair terms or to drive unrealistic prices. Or when we fail to reward customer loyalty by offering them the best deal. Or when we deliberately withhold data that leads our counter-party to make poor decisions. Or when we fail to take responsibility for a performance issue that was clearly our fault.
And then let’s think about contracts themselves and the overall contracting process. To what extent do we draft and negotiate agreements that are by design fair and balanced? What efforts do we make to ensure that the terms we put forward are understood by the counter-party? Do we view our agreements as a framework for mutual success, or as a weapon to be used when there is disagreement?
To quote again from Edelman: “With the fall of trust, the majority of respondents now lack full belief that the overall system is working for them. In this climate, people’s societal and economic concerns, including globalization, the pace of innovation and eroding social values, turn into fears, spurring the rise of populist actions now playing out in several Western-style democracies”. This decline can only be averted if we make changes in the way we operate. If each of us waits for someone else to make the first move, we are consigning ourselves to continued decline.
That is why IACCM is so vehement in its calls for change. The commercial community should be at the forefront in considering the negative impacts that will arise from declining trust and take a position of leadership in proposing solutions. Many of us know what needs to be done. It is time to take responsibility.
Making sense of digital requires first an appreciation of its different forms – digitization, digitalization and digital transformation. Bertrand Maltaverne[1] recently wrote an excellent article on this topic and made the following definitions:
- Digitization is the conversion from analog to digital (e.g. digitization of data).
- Digitalization is the process of using digital technology and the impact it has (e.g. digitalization of a process).
- Digital transformation is a digital-first response that encompasses all aspects of business …. It leads to the creation of entirely new markets, customers and businesses.
The challenge facing those who are responsible for contract management is that without digitizing their contracts and without digitalizing their process they will increasingly become barriers to the digital transformation of their business.
A core problem – identified in many IACCM studies and capability assessments – is that contract management is not typically viewed in the context of a life-cycle. Contracting policies and terms and conditions are frequently established by different departments; specific agreements or negotiations are undertaken by various groups or specialists who may or may not operate with consistency. Once signed, those who were responsible for creating the contract are generally not involved in its on-going management. With such diversity of participants and (often) limited clarity over roles and responsibilities, it is not surprising that coherent approaches to digitizing and digitalization are proving difficult to achieve. Unfortunately, as IACCM’s recent report on automation observed, contract management software is similarly fragmented and its adoption constrained.
Consumer businesses face a much easier time since they can largely dictate the way they form and manage contracts with both customers and many of their suppliers. It is much harder in the b2b environment, where relationship types are more varied, levels of relative power differ and underlying processes are inconsistent. However, market forces will drive the need for digitization since without it, organizations will be unable to compete. Those forces will result in a new ‘contract management revolution’, even more fundamental than the changes that globalization caused some 15 – 20 years ago. This time, it will drive three major changes:
- the development of a life-cycle view of the contracting process, from inception of requirement to completion or close-out of the agreement
- an appreciation that digital enablement of contracting is not only about internal process and data flows, but that it is fundamentally about enabling interactions outside the organization
- the identification of resources dedicated to oversight and maintenance of digital trading relationship terms and capabilities, covering all relationship types
The IACCM Automation Report is available to IACCM members at http://www.iaccm.com
Business leaders call for more collaboration; workers confirm that they prefer collaborative environments; researchers point to the benefits of collaboration. Yet consistently it proves hard to achieve and sustain – almost always (of course) due to failings by ‘the other side’!
The big challenge is that collaboration generally requires significant behavioral change at an organizational level. Indeed, this is recognised in the newly announced ISO standard, ‘Collaborative Business Relationships’.
The problem is that any large, established organization struggles to implement behavioral change and in this instance the problem is of course much bigger, because the ability to collaborate is not just a matter of internal capabilities. You must also find organizations to collaborate with, others who share your values and methods.
So if there is indeed an overall will to collaborate, how can we bring practicality and meaning to collaborative relationships?
While we can certainly refer to the ISO standard as an aspirational model for organisational design, we also need to understand why the past is littered with anecdotal examples of success, but very few where those successes have been sustained or replicated.
Why is that? Embedded attitudes towards suppliers and customers are hard to change; they are often founded in a history of disappointments and tensions. Management and measurement systems frequently drive contention. Contracts are typically unbalanced and rarely act as a unifying force (‘we collaborate in spite of the contract’). Overall, factors such as these undermine trust and repetitive experiences confirm that collaboration is the exception.
The ISO standard is helpful in providing an approach for measuring eventual success. But in isolation, I dont believe that it offers a practical method for moving forward. As with all change initiatives, organizations need evidence of success; people want to understand more precisely how they should change working practices and they want to see the benefits.
That is where IACCM’s relational contracting model comes into play. It is realistic, practical, relatively easy to implement – and successful. The relational workshops help people see how they as individuals can make a difference and result in the sort of small steps that are fundamental to realising a big vision. The collaboration resulting from this approach generates a working environment that others then wish to replicate. From being an isolated example or pilot, the relational approach can rapidly gather steam and become THE way of working.
By its very nature, trade is a collaborative activity. It also lies at the heart of human progress and economic advancement. To quote from a recent article in Fast Company: “Collaboration is no longer just a strategy: it is the key to long-term business success and competitiveness. Businesses that realize this sooner rather than later will be the ones who win the game and succeed in the new global economy”. Relational contracting provides commercial and procurement teams with the chance to show leadership in this field, rather than being seen as a potential barrier.
A major reason for contracts – and why they are often so complicated to agree – is fear of the other side. In part, this is fear of what they won’t do. For example, will they deliver what they promise and will it be on time? Will they pay the bill? But these issues of core obligation and potential consequence are well established and in general are fairly easy to agree. Ironically, they are also the areas where most organizations (and many professional associations) continue to focus their training efforts.
The thing that is often more complicated is a fear of what the counter-party WILL do – particularly in the context of opportunistic behavior. This is especially the case in situations where there is an individual and to some extent customized scope – for example, in construction, engineering and in outsourcing or complex services.
Opportunism comes in two major forms. One is potentially the contract itself. If the proposed terms have been developed by one party (rather than using, say, an industry standard), there is a natural expectation by the counter-party that they will somehow be disadvantaged. Given the complexity and length of many agreements, these issues of ‘guile’ can be very hard to spot – until they are used against you.
The other big issue is around the scope and goals – the fear they are incomplete, ambiguous, flawed. Indeed, in the construction industry, research has shown that bidders welcome flawed design because this represents an opportunity for future price increases. Anecdotal evidence suggests that the same is true in many services engagements.
Dealing with the potential for opportunism is complicated. It depends on a mix of decision rights, potential remedies and consequences, incentives and relationship integrity. Unfortunately, procurement policies and sales practices frequently stand in the way of effectively discussing and balancing these factors. For example, a good procurement process might encourage and reward suppliers who point out design flaws, rather than allowing them to be used as a way to recover margin on a low-price bid. Intelligent acquisition methods would also explore information flows to ensure greater control and balance in effective decision rights. Good contracting practices would embed robust governance methods into the agreement and ensure they were effectively operationalized.
As we deal with ever-increasing levels of uncertainty and change, IACCM‘s work (and training materials) focus on the need to structure agreements and relationships in different ways. Far too many projects are still undermined by inappropriate approaches to supplier evaluation, negotiation and contract management – along with the wrong form of contract. If they really wish to reduce costs and improve margin, it is in these areas that organizations should focus their training and development.
Technology lies at the heart of every modern business. Yet increasingly organisations don’t own their technology – they buy in services from a range of providers. The job of the CIO has shifted to that of a business enabler and innovator, knowing less about the technology, but much more about its business impact and needing to understand the requirements of the market.
With this steady shift comes a substantial change in success factors and dependencies. One priority is selecting suppliers that do not create major reputational risks (British Airways is a good recent example of that problem), regulatory exposures or uncontrolled costs, including switching costs. Another is ensuring reliability, ease of use, adaptability and supporting innovation.
These are hard factors to balance – and they depend on sound commercial judgments and effective selection, negotiation, contracting and relationship management. But in addition to these issues affecting the overall technology platform, it is important to recognise that core business capabilities increasingly depend on the underlying technology platform. Digitization, for example, is understood to be a key market differentiator, enabling linkage and dynamic information flows across entire supply networks, facilitating relationships, executing smart contracts, overseeing compliance and performance.
So has contract and commercial management at last found a natural home – an executive whose success and future depends on the quality of these functions? It certainly seems possible. Indeed, we are seeing a growing number of CIOs who appreciate that poor contracting undermines not only their personal position, but is a broader constraint on business agility. Hence they are starting to promote or lead ‘hackathons’ to reengineer contracting practices and processes.
And even if that shift of role does not happen, it is surely time that commercial teams build strong connections to the CIO, helping him or her to understand the extent of their reliance on strong contract and commercial support. Perhaps with that understanding will come a new level of prioritization for investment in contract management technology.
One of the biggest problems with contract management is imprecision in its definition. What exactly is its purpose; where does it begin and end; who is responsible for its overall performance? It is an activity where the answer to these questions varies not only between companies, but between functions and individuals within a company. It is therefore inevitable that there can be confusion, overlaps – and in many cases, areas that simply aren’t tackled since they are either no-one’s (or everyone’s) job.
A leading example of this is communication. Time and again, when IACCM is asked to assist members with improving their contract management, we find poor communications lying at the heart of problems. This can – and usually does – take a variety of forms. It may be the inadequate data flows generated from technology. It could be a failure to engage with stakeholders or to keep them informed. It might be poor handover from the pre-award team to those responsible for performance. It is frequently the complicated wording and structure of the contract itself, leaving 88% of business people complaining in a recent survey that ‘contracts are difficult or impossible to understand’.
Each of these issues reflects the observation in the opening paragraph – roles and responsibilities are frequently unclear, therefore the problems are not addressed.
But the issue with communication goes much deeper because it is also about the ways we communicate. Ensuring contract performance is critical to any organization, yet in many there is little thought given to the methods by which this can best be achieved. Our cost-cutting world has typically assumed that the best model for business operations is in many cases remote. Indeed, with many project teams and supply networks now scattered across time zones, physical meeting and co-location are often impossible. Pressure on travel budgets has ruled out even occasional physical meetings. Technology for contract management is frequently limited because no one is clear about the investment case. As a result, people often rely on email – which is increasingly recognised as a major source of confusion, misunderstanding and inefficiency.
Contract management desperately needs a complete overhaul of its associated communications strategy. As IACCM dives deeper into its analysis of the causes of value erosion, it is clear that inappropriate forms of communication lie at the heart of many problems. There are numerous examples – here are just two:
- Suppliers were regularly failing to meet regulatory standards on health, safety and hygiene. This was leading to high levels of staff turnover at those suppliers and resulting in poor quality and productivity. Contract terms were amended, introducing more detailed clauses and more onerous penalties. There was no measurable improvement in performance – until someone realised that the contracts were the problem. No one could understand them. Through redesign, the contract became a means of effective communication, rather than a weapon to punish non-compliance.
- In a recent workshop assessing performance on a $16bn project, it became evident that working relationships between the many parties were strained. Goals were often unclear and there was a tendency to allocate blame for problems, rather than to fix them. It became obvious that communications across this interdependent ‘virtual’ enterprise were poor. There was heavy reliance on email because no one had alternative contact information – there wasn’t even a shared database of phone numbers. Physical meetings were rare; use of alternative communication techniques had not been explored. A team was established to define communication protocols and to ensure clarity over the behaviours expected from program participants, regardless of which organization they represented. Performance and morale are showing steady improvement.
Communication lies at the heart of human behavior. That means it also lies at the heart of contract performance. So why isn’t establishing and defining communication practices and protocol a fundamental element of a contract manager’s role?
Commitment Matters 