When it comes to complex contracts and negotiations, scrap metal may not be the first thing you think of. But a recent edition of the Canadian ‘Globe & Mail’ tells us otherwise: “Despite the technological developments in the industry, the trust needed to do business effectively requires a face-to-face approach”.
The article goes on to explain the challenges of validating the integrity of suppliers, the provenance of the scrap and the standards of overall quality control in an industry that is increasingly global. These factors apparently demand site visits, human interaction and physical handshakes.
The arguments against automation reminded me of similar views from recent IACCM surveys – that the best way to improve negotiated results would be to reinstate face to face meetings. In both cases, not only is the conclusion wrong, but it flies in the face of the unstoppable march of technology. Rather than fight this advance, those who want to prosper should instead be thinking about how they can develop and deploy the right automated solutions faster than their competitors.
Let’s go back to scrap metal for a moment. The sources of supply are not infinite and margins are (apparently) low. It surely won’t be long before someone develops a ‘scrapadviser’ app where facilities are rated for their performance. They may even start selling through Amazon or a similar global platform, using industry standard terms and automated negotiation. And when it comes to a specific record of quality and origin, technologies such as blockchain lie at the heart of such information, offering reliable and authenticated data. (For more on blockchain and its potential to transform trade practices, see an excellent summary provided by Bertrand Maltaverne).
While scrap metal may not be top of mind for most of us, I found this story interesting. If something as mundane as the trade in scrap is heading towards technological disruption, just imagine how its going to affect you and your business – since I’m sure your ambition is to avoid ending up unwanted and on the scrap heap!
In a press release published in Supply Management, we learn that ‘a majority of Procurement models are failing to add value’. According to a study by Ayming, a business performance consulting company, less than 20% of executives feel that “their organization has driven significant value from procurement in recent years”.
This news is unlikely to surprise many members of IACCM, since they have voted with their feet and recognized the need to make a fundamental transition in what they do and how they do it. In making that decision, they mirror the two-thirds of survey respondents who see a need for new organizational stuctures and models (though more than half of those respondents have no plan to do anything about it).
What I find shocking is how long it is taking most procurement groups to adjust to the realities of the business and market environment. The scale of dependency on supply networks is certainly not new, nor is the extent of the shift from direct to indirect spend. Complaints that Procurement is detached from the broader business and pursuing objectives that often destroy value have been rampant for years – the ‘better, faster, cheaper’ ethos of traditional purchasing was discredited last century, yet continues to be espoused in the training and measurement systems promoted by most procurement professional bodies. Surely they should be ashamed of the fact that 84% of research respondents see a need for training and upskilling of existing staff – and this after the millions that have been spent in gaining ‘professional’ qualifications from the traditional providers.
Technology is another area where many are failing. They continue to institute systems that were designed for a world of commodities and which are incapable of delivering value through relationships. In most cases, they also have little or no capability to oversee and report on supply networks or ecosystems. The report makes the observation that increased value delivery “means making sure communications between internal and external stakeholders are as seamless as possible and that there is enough flexibility built into the system to accommodate new technologies, such as blockchain.”
I am proud of the vision that IACCM has developed and is successfully helping many of its members to implement. The focus on delivering sustainable benefit through high quality, integrated trading relationships is exciting. In the process, we are successfully challenging and changing many old assumptions and established ways of working. Organizational barriers are breaking down; technologies that enable meaningful reporting and collaboration are being implemented; the role and purpose of the contracting process is becoming understood; and contracts themselves are on the verge of revolutionary change, from instruments of battle and delay to instruments of consensus and efficient operations.
The doorway to value is wide open and increasing numbers are walking through it, escaping the constraints of their past. In the words of General Stanley McChrystal in his excellent book, ‘Team of Teams’: “Accelerating speed and interdependence in today’s world have created levels of complexity that confound even the most superbly efficient industrial age establishment …… Understanding and adapting is not optional; it will be what differentiates success from failure in the years ahead”.
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.
Commitment Matters 