Supply Chain Digest recently reported on barriers to collaboration between vendors and retailers. In a finding consistent with IACCM’s annual surveys, they discovered that ‘it’s not me who fails to collaborate, it’s them’.
Many may be surprised that most major retailers would ever think of themselves as ‘collaborative’ with their suppliers. In many cases, there is a massive gulf in relative power and the media headlines frequently suggest that this imbalance is something that the industry exploits. If commercial terms are anything to go by, there appears little room for collaboration. The research points to lack of trust as a fundamental issue – but of course this is generally a symptom, driven by other factors.
There are clues to those other factors in some of the scores. For example, the highest ranked difficulty identified by retailers is how to apportion gainshare, whereas for vendors the top challenge is the lack of collaborative skills exhibited by their customer. Vendors also see real problems in the availability of tools, data and executive support – this last item being perhaps linked to the fact that they see little evidence of a good return on investment from collaboration.
Ultimately, it is most likely the absence of any apparent financial benefit that is killing collaborative relationships. The fact that the retailers see the allocation of benefits as the biggest issue speaks volumes for industry behavior and attitudes. It confirms that for many, it is better to generate no benefit at all than to face the prospect of sharing that benefit with a vendor.
In an industry where margins are low, collaboration is a major source of cost reduction and innovation. But right now, a transactional mentality is in many cases destroying the possibility of value-add negotiations. Case studies have shown the opportunities that exist, especially when collaboration is handled across a category portfolio, not just with individual suppliers. However, this requires far more expansive thinking and a focus on value rather than price – something that the research shows is a distant dream for many in the retail sector.
84% of commercial and contracts practitioners believe they have the skills and competencies needed to perform a strategic role within their business, yet just 32% perceive themselves currently having substantial strategic influence or input.
Taking another statistic, 56% say that executive management considers the commercial and contracts function to be critical and strategic for business success, yet just half that number are receiving executive support for the investments needed to perform a strategic role.
IACCM recently worked with The MPower Group to produce two webinars in which we discussed the growing potential for strategic contracting and relationship management, versus the purely operational role that is common within many organizations. This operational reality is confirmed by much of the survey data that was collected in conjunction with the webinars. For example, almost two thirds recognize that the function is not seen as conferring competitive advantage (and therefore, one must assume, is not really seen as delivering significant revenue or margin improvement). 60% are struggling to persuade the rest of the organization that the function has value and – perhaps not surprisingly – 72% acknowledge that the function is not being raided for talent and future leaders.
So how can we explain the dichotomy between the belief in existing strategic skills and executive approval, versus the reality of actual status? Unfortunately, it suggests a lack of readiness to face the truth and a wish to be something that – in many cases – we are not. While a growing number of executives are embracing the importance of commercial and contracting skills and competencies, they do not automatically associate those attributes with the incumbent contracts and commercial staff. And that, quite simply, is why they are not investing or engaging the function in strategic decision-making.
There are certainly exceptions and some commercial groups are flourishing. They have focused on how to offer broader insights and advice, ensuring they have access to unique data on performance and improvement opportunities. They are not limited to work at a transactional level; nor are they excessively focused on issues such as compliance, escalations or post-mortems on failed contracts. These groups truly are looking at commercial and contract management as a source of competitive advantage – their message is about creativity rather than control. They work on developing capabilities to manage risk, rather than seeking to avoid it. They have compelling reasons to meet with top management, rather than having to wait to be called.
Many of those who read this blog will be among the small percentage who have grasped the challenge of continuous improvement and who have the personal and leadership qualities to offer strategic value. On the positive side, we also have growing numbers emerging from IACCM learning and certification programs, which are visibly impacting skills, knowledge and the confidence to engage with executive management. I firmly believe that this is of real importance to the contracts and commercial community; transactional work will steadily decline. We must step into the strategic gap that today’s market conditions have exposed.
Yesterday I was listening to a highly respected trainer in negotiations. He set out the sequence of activities needed to deliver success. His start point was to develop a negotiation strategy and he suggested that this should be based on an analysis of relative power.
I understand that power has a major influence in a negotiation, but should it really provide the framework? Surely this approach perpetuates negotiations as being akin to ‘the art of war’ – essentially an adversarial model where each party is wrestling for individual advantage?
It seems to me that negotiation strategy should instead be founded on an understanding of need, both perceived and potential, and the relationship required for success. I appreciate that it might be argued that a good power analysis should lead to the same place, because you would explore how to counter power through value, or alternatively how relative needs influence power. But in my experience, the focus on power often leads to the more negative master-slave approach and frequently results in the wrong conversations.
So I prefer to focus instead on the potential of the deal or relationship and the ingredients needed to make it work. For example, to what extent does it require collaboration and harmonisation of resources? What is the best division of responsibilities and what interfaces do we need? Analysis on this basis sets a very different tone for planning and subsequent negotiation. It also assists in highlighting comparative risks for the parties and therefore early thinking about the various terms and techniques through which they may be mitigated.
Indian outsourcing firms have had a major impact on the industry, especially on pricing, but also in some areas of innovation. Yet when it comes to negotiating with their potential clients, they are struggling to keep pace with providers from North America and Europe.
IACCM recently undertook a survey ‘Negotiating with IT Service & Outsourcing Providers’, which gathered comparative data on the largest providers. Three of these are from India, four from Europe and the remainder from North America. Each region has distinct characteristics, though with some blurring between common law and civil law jurisdictions.
Most IT service and outsourcing providers appreciate the critical role that negotiation plays not only in winning business, but in ensuring that it is good business. However, our latest study reveals a growing divide in this appreciation and also in the way that negotiation is being handled. The twelve suppliers included in the study fall into three distinct groups:
- The collaborators: a group that appreciates the importance of working closely with their customers to agree shared goals and objectives and to establish terms and conditions which support likely success. These firms focus increasingly on internal enablement and empowerment and are more likely to be based in Europe (though one US provider has entered this group and a second is on the margin).
- The adversaries: a group that continues to see negotiation as a battle over risk allocation and operates with relatively rigid policies and principles. Some of these firms struggle because they have few ‘standard’ offerings and therefore each contract is intrinsically more risky; others are influenced by the more litigious – and legally-driven – culture of North American business.
- The opportunists: a group that focuses on ‘win first, worry later’. Contract terms are rarely allowed to be a barrier and resources applied to contract negotiation are limited. These firms are either very easy to do business with (they say yes to almost anything), or very difficult, because detailed answers are hard to extract. While Indian providers tend to be in this group, it is also typical of finance-led organizations which have entered the market to take advantage of public sector outsourcing.
In many ways, these variations reflect the behavior of potential customers. The sophisticated buyer increasingly understands that value is not the same as the lowest price and that cultural alignment is important. Others try to drive performance through adversarial negotiations and unbalanced risk allocation, often using a third party as their interface to the supplier. And there are, of course, the commodity buyers – those for whom getting services cheaper is the core objective.
Indian providers appear to do well in winning and performing on relatively standardized business. Their low labor costs are increasingly supplemented by efficient use of technology to deliver better pricing and reliable performance. But in situations demanding a greater appreciation of customer needs and a more adaptive capability to deliver innovation, the survey suggests that they do not inspire confidence.
There is a tendency by many of us to view technology with a degree of skepticism. We have heard it all before – this wave of transformational change that never seems to arrive.
The truth is that technical advances tend to creep, rather than explode. As a result, they steadily insinuate themselves into our lives, in a way that we often fail to notice. It isn’t so long ago that there were no mobile phones; when contracts were produced on typewriters; when virtually all negotiation was face to face and there was no e-mail – most communications used a physical postal system.
Yet another large bank – this time HSBC – has announced the roll-out of biometric banking – the use of voice and fingerprints for customer recognition. I am sure many of us will welcome the elimination of today’s increasingly complex password systems. It has taken about 20 years for the banks t0 become sufficiently confident in biometrics that they are making this switch. I recall projects at IBM in the early 1990’s which failed because of the error rates – about 20% of people were not recognized.
So what, you may ask, has this to do with the world of contracts and negotiations? Well, biometrics is just one area of increasingly intelligent systems and collectively they will change our world over the next few years just as much as the advent of networked technology and email disrupted our ways of working in the 1990s. Certainly archaic concepts like signatures will rapidly disappear. One of my colleagues is meeting today with a voice recognition expert who has developed a matching system for negotiators – technology that helps you align with your counter-party, ensuring you have a negotiator who is most likely to build empathy and reach a more favorable outcome.
Nanotechnology also falls into this ‘intelligent’ category. I have written before about the FDA’s provisional approval of nanotechnology-coated drugs which transmit messages to their manufacturer. Similar technology is being embedded into packaging, so that we could, for example, charge on opening or use. Such developments will lead to a surge in contracts where the supplier takes responsibility for on-demand availability – once one product is used, it is automatically re-stocked.
There are even more radical proposals to use collaborative development systems in generating ‘contract standards’, similar to the way that open source software was developed. ‘Smart contracts’ using the blockchain sytems that underpin Bitcoin is another area of development.
As I have written previously, many providers of contract management software moved down a blind alley, led by consultants and analysts who had little appreciation of the role of contracts in 21st century business. The issue is not automating what we have done in the past; it is about managing contracts as core business assets through increasingly versatile and intelligent systems. For anyone working in this field, it is essential that we start to understand the impact on job roles and future skills; we need to lead the transformation, not wait for it to overwhelm us.
Once we start to erect tribal boundaries, where does it stop? Advanced economies depend on being open, on working to establish accord rather than discord. By working together we create an environment of potential harmony. By excluding others, we create an environment of likely conflict.
Many of us know this – and sadly experience the consequences of ‘tribal protectionism’ – in our work as contract and commercial experts. Whether the boundaries are internal, between functions or profit centers, or external, between customers and suppliers, they create inefficiencies, they detract from value, and they make our daily work less pleasant. Since our activities focus on trading relationships, current debates about world trade are certainly relevant to us.
Trade lies at the heart of human development. It has enabled progress, yet it has also been the source of imperial expansion and wars. Economic and technical progress cause massive fluctuations in the relevance and importance of different geographic regions and the need for specific skills. At any point in time, this is good news for some, bad news for others.
Given this environment, it is not surprising that the issue of trade lies at the heart of political debate. There will always be a desire by some to expand and by others to protect. Each has valid arguments. But ultimately, I think it is important to reflect on the fact that human development has been driven by our unique capability to trade with each other. It lies at the heart of our economic and social well-being.
Therefore we must be cautious about political leaders who offer protection, but in reality have no sense of the consequences of such protection. It is essential to remember that for every action, there is an equal and opposite reaction. The thing we must always ask is “if your policies are implemented, what will the reaction be – and is that something we will welcome?”
And indeed, it is the same question we should always be asking within the context of our own organization or company – are we protecting or are we enabling and which policies will actually have beneficial results?
There are some undeniable trends in the way that trading relationships are being formed and managed. Among the most significant are the push for improved outcomes and greater value for money. These overarching concerns are driving demand for more collaboration between trading partners.
IACCM has conducted extensive research into the benefits and implications of collaborative business relationships. There is no doubt that collaboration tends to improve results, but such behavior is not innate to the way that organizations operate. The boundaries of self-interest are volatile, driven by shifts in business priorities and market conditions. However, many businesses are developing collaborative capability – for example, by investing in relevant skills, adjusting selection criteria, refocusing governance systems and operating with greater transparency around performance and risk.
Yet while these initiatives take root, we also see new battlegrounds emerging. Perhaps the most significant of these is in the field of patents, where state-sponsored growth means an inevitable era of conflict. Last year saw the 5th successive year of increase in filings, with an estimated 10.2 million patents now in effect globally.
In previous blogs I have highlighted the point that the patent system has strayed far from its roots of protecting investment by inventors. Instead, it has become an economic weapon and a tool to maintain wealth imbalances. As a result, emerging nations have recognized the need to join the club and they are increasingly the source of patents, with the strongest growth internationally in countries such as China, India, Brazil, Indonesia and Vietnam. To appreciate the scale of this shift, it is worth noting that China registered more patents last year than the United States and Japan combined.
The implications to contract negotiators are significant because the growing use of patents will impact pressure for indemnities. Buyers will have growing concerns about potential claims for infringement, especially in overseas markets. Defense mechanisms will be important. These may range from greater diligence in checking for existing patents, as well as having rapid access to patent experts and support services.
I spoke recently with Rakesh Mittal, CEO of Piverse Inc., a company offering such services to companies and organizations around the globe. “Emerging nations will continue to have GDP growth exceeding 3-4% for at least another decade and hence will demonstrate highest growth in consumption of consumer goods and services supported by global patents”, observed Mr Mittal. “With this growth in patent activity, most companies are struggling to find partners who can provide a framework for asset protection and for managing their global filing process at an affordable level. For many, the cost of patent back office functions is escalating year on year by at least 10-12%”.
However, the key point that is confirmed by Mr Mittal is that “As patents become a revenue source rather than just costs, patents take center-stage in this fight for global markets.” He also observed that many small and medium-sized companies have paid little attention to this topic in the past and therefore may have no internal expertise on which to draw – placing not only themselves, but also their customers, at significant risk.
What this means is that companies need not only to register their patents and trademarks, but also to research and build defensive capability. Increasingly the question is not if, but when and where, they will be challenged for breaching a patent, copyright or trademark, or will be forced to take action to protect their own assets. For all the talk – and merits – of collaboration, our world remains innately competitive. While the areas of battle may alter, conflict remains inevitable. Smart businesses make sure they are prepared.
IACCM has been undertaking a series of industry studies on the values and experiences of contract negotiators from both a customer and supplier perspective. Our studies are increasing understanding of the approaches used by the best-performing organizations and how they are creating a framework that increases the chances of not only reaching agreement, but also realizing long-term value from their trading relationships. It points to the fact that success is highly dependent on the organizational framework, rather than the personal skills of a specific negotiator.
Negotiation is supposed to help us reconcile perspectives and interests. A simple definition is “a formal discussion between people who are trying to reach an agreement”.
Based on this definition, a high proportion of business-to-business negotiations must be considered successful. They do indeed reach an agreement – though whether that agreement was really worth having and whether it actually delivers the benefits the parties hoped for is, of course, a different matter.
There is a massive amount of research and writing on the topic of negotiation, much of it highlighting the extent to which value is missed or lost as a result of typical approaches and behavior. IACCM research has been focused on the practical barriers and looks beyond the skills of individuals, to examine the broader challenges of organizational design.
Our findings suggest that most business-to-business negotiations suffer from some (apparently fatal) defects. Among these are:
- a lack of coherence
- unclear goals
- rigid rules and standards
- lack of confidence in capabilities and process
- inconsistencies of culture or value which negotiators make little effort to understand
How do these manifest themselves? The findings here are interesting. For example, negotiators on both sides claim that they value a sense of partnership – yet in most cases, neither feels the counter-party offers this. Indeed, on digging further, you find that negotiators are generally not confident about the behavior or performance of their own organization, so they are understandably hesitant in what they will commit, even though they expect full commitment from the other side.
Also, each side looks for ‘responsiveness’ and hopes for a ‘single point of contact, empowered to make decisions’. Yet again, they consistently feel this is something the counter-party lacks or – ironically – if they find a counter-party with these characteristics, they don’t believe what they are being told!
Flexibility is another key value – but is once more something that each side feels is missing. They criticize each other for the use of standard agreement templates which either reflect the wrong type of relationship or introduce an adversarial focus on legal and financial risk allocation. Often this is tied to issues of culture and the different attitudes to risk – yet there is little evidence that the parties seek to explore those differences and address their respective concerns.
Ultimately, many negotiations suffer from a lack of clear ownership and leadership. The interests of competing stakeholders make coordination extremely difficult and the growth of ‘specialism’ is making that increasingly difficult. As a result, negotiations are often quite fragmented and decision-making may be inconsistent. Desired characteristics like ‘partnering’ and ‘collaboration’ are lost in the more fundamental challenges of skepticism, cynicism and absence of trust.
When I was presenting recently to a group of senior supplier relationship managers, one of them posed the question: “Hands up if you think all suppliers are evil?” Every hand was raised.
In an environment of growing complexity and increased interdependency, the need for organizations to work together in relative harmony has never been greater. Right now, the framework and approaches to negotiation are clearly not helping. Yes, we reach agreement – but at what ultimate cost and with what loss of opportunity?
So who are we kidding when we say there is a process?
A recent survey undertaken by Ray Carter of DPSS reinforces the findings of IACCM. In general, organizations do not have an integrated, comprehensive contract management process.
While a majority in Ray’s survey (almost 60%) start out confidently proclaiming that a process exists, it is by the end evident that it does not, or that in key areas it is ineffective. For example, 90% admit to concerns about the quality of cost control and almost 80% acknowledge that there should be more visibility into the management of claims and disputes. Change controls represent an area of weakness for more than 70%.
When so much work goes into winning and awarding contracts and when it is clear they are such fundamental business assets, why is it that approaches to their management are so avant-garde? The major reason – as identified by legal academic Stewart Macaulay more than 40 years ago – is that executives have historically seen little value in contracts. Therefore no one was given ownership for the process by which they are created or managed. Responsibility is typically fragmented, with many stakeholders claiming ownership of elements, but none feeling accountable for quality or results.
This absence of ownership inevitably leads to an absence of data. Any measurements associated with contract management are typically meaningless. For example, the most common indicators are cycle time and (if there is a commercial or contracts function) a headcount to revenue ratio or number of contracts handled per head. None of these measures tells us anything about quality, suitability, or the financial results generated. In other words, organizations generally have no sense of whether their contracts are either efficient or effective. And that is precisely what the DPSS survey confirms.
One might argue that in the old world of product supply, when caveat emptor principles applied, the executive attitude to contract management was largely justified. Apart from major project industries, such as construction or aerospace, contracts served a limited and often short-term purpose. But that world is fast disappearing and contract management increasingly operates as the ‘organizational glue’ in aligning business operations across complex supply networks. In this world, the value erosion from weaknesses in the contracting process become substantial – but of course, the lack of such a process means that these losses remain invisible and ignored.
So why do survey respondents claim there is a process when in reality it doesn’t exist? I think it is a complicated answer, but ultimately there are many who do not want to acknowledge there is a problem because then they would feel obliged to fix it – and that seems too difficult. While we continue deluding ourselves, nothing will improve. And in the meantime, this remains a golden opportunity for someone to champion.
In many respects, these seem to be challenging times. I observe many commercial, contracts and procurement groups struggling to build momentum and indeed suffering cuts, because they are not adjusting to business needs. The question is whether the function can adapt and take on a wider role, or whether that wider role will be performed elsewhere. The need is for individuals to focus on the areas of the future, not those of the past, and to show a grasp of the emerging agenda driven by new technologies and digitization.
Just as the threat lies in technology, so do the opportunities. We must understand and use the systems that will define and support leading-edge supply chains. These enable a growing reliance on external sources of supply, with corporate size increasingly measured on revenue, not numbers of employees. Coordinating and integrating across these multiple, interdependent relationships will be key to survival. Another growth area will be SRM, due to the need for a more blended approach to supply management and innovation.
This means, for the right people, growth industries will be those where either there is significant disaggregation (and therefore dependence on commercial integration) and those where there is extensive regulatory / reputational oversight (and therefore dependence on integrity). As a result, I think there will be major opportunities in industries like pharma, financial services, insurance and perhaps telecoms, where better structured and well managed relationships will be critical. To a degree, that will also flow into IT and IT services, especially for companies that rely heavily on aggregation of suppliers and delivery of outcomes.
Capital goods and infrastructure industries should also need more commercial resource, but probably with a focus on building more effective supplier /project selection, negotiation and delivery management. As margins continue to operate under pressure, the theoretical savings generated by traditional procurement and ‘risk management’ provided by traditional contract management need to be turned into the ability to oversee contracts that deliver value, efficiency and improved margin.
Commitment Matters 