This week saw the launch in Germany of a new Masters program in International Contract & Commercial Management. IACCM led the first two days, providing operational context and strategic direction.
As a concluding exercise, students were asked to develop presentations on the role that contract and commercial management functions will fulfil five years from now. One student summed it up brilliantly when he simply stated: ‘We will have shifted from building walls to building bridges’.
His point, of course, is that the contracting process today is too often focused on protecting narrow, siloed interests, rather than encouraging collaboration, transparency and agile movement. Protectionism is the opposite of free and open trade and always damages economic wealth. That is certainly the case with many contracts today. They are structured and worded in a way that undermines intent and threatens performance.
These students came from diverse industries and educational backgrounds, yet they were united in the challenge of managing uncertainty, dealing with change, defining outcomes and goals. They rapidly appreciated the need for contracts to assist in addressing these key issues, which means it must operate as a communication tool across stakeholders and provide mechanisms to deal with altered circumstances. Through that approach, a contract links parties and supports free movement of data and information, thereby ‘bridging gaps’ rather than creating walls to climb.
As we all know, a contract only has real purpose when things go wrong. That’s why organizations engage in a battle over whose form will prevail and it is why people become so frustrated when reaching agreement causes delay.
Attitudes haven’t changed all that much since research was undertaken by legal scholar Stewart Macaulay in 1963 and subsequently updated in 2013 by Professor Gillian Hadfield. In fact, those studies even question the relevance of a contract when things go wrong: “Written contracts (are) often highly standardized documents that (are) largely confined to the drawer once drafted by the legal department and then rarely consulted to resolve disputes”.
Macaulay and Hadfield were examining the attitiudes of business executives. But behind these superficial findings, they discovered that this attitude only applied to transactions that were relatively predictable and in themselves considered ‘low risk’ – in other words, the sale and acquisition of what today we might term ‘commodities’. As soon as performance becomes less predictable – for example, because of potential changes over time, uncertainty over requirements or capabilities, potential confusion over ownership or an expectation of innovation – ‘contracting’ becomes much more significant. Those executives not only started to care more about legal implications, they especially appreciated a need to “coordinate beliefs about what constitutes a breach of a highly ambiguous set of obligations” and to identify shared approaches and strategies that induce compliance and performance.
These concepts are of major importance because they can help us realize far more value from our trading relationships and they indicate the nature of the changes we need to make, especially in the approach to procurement.
On one level, it might be argued that procurement strategies which seek to break transactions into separate ‘commodity’ elements are really smart. They simplify acquisition and reduce the relevance of the contract, making it consistent with the use of ‘standardized documents’ that require little understanding of contract terms or behavioral economics. This turns the act of procurement into a process which often operates to avoid negotiation, not to support it.
In an era when most acquisitions were for standardized goods, there was a logic to this approach. Where it falls down is in the acquisition of more complicated items, such as IT systems or software, where requirements and performance are harder to define. It becomes especially problematic when purchasing long-term services, which by their nature are intangible and require far greater definition and management.
Today, while commodity purchasing remains a high volume of activity, the majority of business spend has moved from goods to services. We are buying performance, outcomes and sustainable relationships. In many organizations, Procurement skills and processes simply have not kept pace. They remain focused on driving down the price of commodities when they should instead be focused on working with suppliers and supply networks “to identify shared approaches and strategies that induce compliance and performance”. The discipline provided by contracts and the contracting process is fundamental to achieving this shift.
But the need for change goes beyond the Procurement function. It requires a new business attitude and a recognition that better performance depends upon integration across entire relationship networks. In other words, businesses need to start with an appreciation of the commitments they make to the market and they must flow those commitments (and updates to them) through the organization and into their supply agreements. Right now, there are multiple disconnects. Many functions operate as silos with limited appreciation of customers or markets. There is rarely adequate connection between those who form contracts with customers and those who are contracting with suppliers. Relatively few organizations see a need for sell-side and buy-side resources to co-locate, to use the same systems or to undergo similar training and to have complementary goals and objectives.
IACCM research consistently shows that these divisions in organizational structure cause substantial value and performance loss. There are compelling arguments to create an integrated function that supports ‘trading relationship capability’. But failing that, it would at the very least be smart to create an internal environment where those who develop and negotiate contracts – buy-side and sell-side – can speak to each other in the same language and have a common understanding of their role and methods.
Organizations are struggling to drive adoption of their contract management systems and, for many, integration with other systems is proving problematic. As a result, the level of satisfaction with current systems is low, with a rating of just 4.2 out of 10.
This is among the early findings from an IACCM survey on the use and performance of contract management technology.
Although many systems offer a wide variety of functions, the actual functionality achieved is generally limited – for most, it is the repository functions of accessing and having visibility into agreements that is the primary benefit. Almost half are using the system as a store for standard terms and term options, including templates, and around 40% support review and approval. Less than one third are able to demonstrate an ROI from their investment.
Clearly these are not compelling statistics. Our research suggests that the problems are not necessarily with the software. While some systems are not performing well, the problems often arise because:
- Organizations have not adequately considered their requirements
- Organizations have not considered opportunities to streamline their process
- Organizations have not focused on user needs and adoption
As a result, the primary users are within legal or contract management functions and there is no indication that most existing implementations will gain wider enterprise adoption. Many have already replaced systems, some several times, and almost half plan to do so again.
Most survey respondents are conscious of new technology developments – for example Artificial Intelligence, cognitive systems – that will substantially impact contract management, but more than two thirds have limited understanding of what that impact will be. Overall, less than 10% have implemented digital systems to streamline their contracts; more than 50% have no current plans for digitization.
In summary, most organizations appear to be struggling in their efforts to automate the contracting process. This is most likely because in many of them, contracting is still not viewed as an integrated process, but rather as somewhat disconnected steps, often with unclear ownership and responsibility. That is clearly not the fault of the software providers; it indicates the broader problem that businesses are still failing to get to grips with the opportunities that come from improved contracting and better performance from their trading relationships.
To participate in the IACCM survey and receive a copy of the final report, please visit https://www.research.net/r/Whattech
In a recent poll, 82% of contract and commercial managers said that their biggest challenge is ‘providing measurable business value’. While a similar percentage say that they enjoy their work, many are frustrated that it isn’t better understood or appreciated.
So what’s the problem?
It’s the fact that most of us can’t clearly describe why our work is important. We may talk about managing risks, but what risks and whose risks? When did they last occur? What are we doing to stop them? Some of us may suggest we ensure overall business integrity and compliance – which to others sounds an awful lot like bureaucracy and inflexibility. Of course there is always the claim that we improve or safeguard margins, either through revenue protection or via savings, which is probably true but often hard to illustrate.
So the real challenge is that contracts and commercial groups frequently lack a clear sense of mission. They often undertake highly diverse activities, ‘fixing things’ as they arise. While individually these activities may be important, it is almost impossible to describe cumulatively what value they have brought. And as we discover when we undertake IACCM’s capability assessments, contracts and commercial groups are generally not well aligned to corporate goals and strategic priorities.
There are in fact several issues that undermine the way contract and commercial managers are perceived. One is the lack of consistency in skills and standards. Practitioners come from a variety of backgrounds and tend to bring those backgrounds with them. In other words, their prior job or professional training influences the way they see their role. On one level, this diversity can bring strength to a commercial function; but it also brings the danger of inconsistency, confusing to users of the service.
Another factor is the absence of well-established tools or methods. Investment in contract and commercial capabilities tends to be limited and this results in variable approaches in the delivery of services, often again dependent on the individual practitioner. 55% feel that ‘gaining status and recognition’ is a problem and, without this, it is unlikely that investment will increase.
The third factor is the overall lack of meaningful data. Right now, the best way of gaining recognition is when there are major losses or exposures from poor contracts or commercial decisions. To the extent data exists, it is often at a transactional level or of little real meaning in terms of demonstrating contribution. For example, efficiency measures such as number of contracts handled or benchmarks of headcount tell us nothing about quality or value, nor do ‘estimates’ of negotiated savings or revenue gains at the point of contract signature.
Without a clear and easily described sense of purpose, it is almost impossible to develop a coherent approach to what we do or how we do it. And to excite people about our value, we must focus on driving improvements, to tackling the challenges of today, not those of the past. For example, are we visibly developing better contracting models that assist in managing market uncertainty? Are we actively promoting digitization of our contracting process to streamline and simplify getting to agreement? Are we proactive in tackling common sources of tension or value erosion in the negotiation and performance of our contracts? Are we seen as innovators and a source of new ideas, or as guardians of outdated rules and procedures that others see as barriers to doing their job?
Unless we are clear why we are doing something, it is impossible to check that what we do is actually of value to anyone.
So might a mission statement for contract and commercial management be something like: “We provide you with the contracts and commercial advice that ensure competitive success”.
What ideas do you have? What is the best mission statement for contract and commercial management that you have seen?
If you are involved in contract or commercial management, is it by design, or by accident? And what about your colleagues?
An increasingly lively topic of discussion is just how badly equipped most organizations are when it comes to managing their contracts. Most have hundreds, even thousands, of ‘accidental contract managers’ – people who stumbled into the role from a variety of backgrounds, who then received training (if any) while ‘on the job’ and who work full time or part time creating, negotiating and managing contracts.
On one level, you can hail them as often unsung heroes – the people who manage risks and opportunities, who deliver revenue and savings. Each day. Every day. Often with little acknowledegment.
On another level, just imagine how much more they could achieve if they had structure, tools and systems, regular support and clear goals. We know the answer, of course, because IACCM research has so clearly pointed to the remarkable financial impact sof poor contract management. Lost revenue, missed savings, failure to control or to deliver improvement.
How is it that executives can be quite so oblivious to these weaknesses? Why do they allow such critical assets (their contracts) to be managed in such a haphazard fashion? The answer, of course, is that they generally don’t realize the scale of financial impact it is having, because no one has told them. And no one tells them because either they don’t know, or they think they can’t raise the subject without absolute evidence.
Slowly but surely, organizations are awakening to the issues and the opportunity. Companies like Vodafone, Ericsson and BT from the telecoms sector; ConocoPhillips and Shell from oil and gas; Meggitt from aerospace, Danske Bank from financial services, Atos and CapGemini from outsourcing and IT services and the UK Government from the public sector ….. these are just some of the organizations presenting at the IACCM Europe conference this year, sharing their approach to improvement and the success they are seeing.
The days of the accidental contract manager are numbered. Market pressures are demanding an era of increased professionalism and competence. Be among those who understand the difference and equip yourself to lead. Find out more by joining the established and aspiring leaders at the IACCM Europe conference in Dublin, May 8th-10th.
Discover contract excellence, by design.
I was recently running a workshop to assist in designing the governance terms for a major contract. The overall program lifecycle will be around 30 years, so change is inevitable. Among those changes will be shifts in the contracting parties themselves, as well as the roles that need to be fulfilled.
In this particular case, we were struggling to even reach consensus on goals and objectives. The client wanted to think about designing for whole-of-life value. The contractor (who had no security of tenure beyond the initial construction period) was thinking only in terms of the first 5 years. It quickly became evident that this difference of horizons was creating incompatible positions and interests. For example, the client wanted delivery of a solution that would maximize affordability and adaptability in the asset-management and sustainment phase, but they didn’t want to commit at this time to a sustainment contract. That left the contractor thinking only in terms of how they could gain an acceptable return on designing and building the asset.
While the example is extreme, it is indicative of the challenge we face in designing and negotiating contracts and relationships. And each time that information has to cross a boundary, the potential for misalignment or misunderstanding arises. This may be during internal transfers, between different stakeholders, or it may be extenral, to contractors, or onward to sub-contractors.
‘Contracting excellence’ is arguably about the management of boundaries, about ensuring understanding and appreciation of differing viewpoints or conflicting interests and ensuring they are addressed and reconciled. I’m not sure how much work has been done specifically to address this issue. It certainly isn’t evident in the way most organizations manage their contracts. Hand-offs are often quite casual, often to untrained or ill-equipped resources. There is rarely any check on the competence of the counter-party in the way they manage such transitions, or flow terms through to their sub-contractors or suppliers.
Overall, this is a truly fascinating aspect of business performance and it is becoming more critical as organizations increasingly depend on complex supply netorks and as acquisitions continue to shift from products to longer-term solutions or intangible services. The quality of understanding, analysis and communication is becoming more and more critical. Technology will play a big role in smoothing over the bumps of transition, but more highly skilled people will remain the real answer to resolving boundary challenges and disputes.
Information is critical to business influence. In business, unlike in the world of politics, facts, not opinions, are increasingly demanded to support decision-making. Yet for most of us in legal, procurement or contract management, reliable data remains elusive – and that in turn limits our ability to operate strategically and exert influence.
Those are among some of the early conclusions from IACCM’s on-going study on information enablement (to participate in this study, click here). It is clear that organizations are mostly struggling with inadequate and fragmented systems support – in part because they are caught in a cycle where the lack of data means that it is hard to make the business case for investment in the systems that would generate that data. But the biggest barrier may be our own attitudes; survey participants feel that commercial functions need ‘a general mindset shift towards efficiency and effectiveness’ – in other words, many may not yet have grasped the importance of driving change and the need for data to support it.
Today, the survey tells us, there is growing availability of information about compliance rates (especially within Procurement), but the sort of data that could transform the commercial functional role is still hard to find and extract – for example, obligation analysis and tracking or insight to term and condition norms in the market.
There is no consistency in where such information is gathered and stored; most organizations do not have a point of consolidated ownership and whatever data is available will typically be scattered across multiple and disconnected systems. Without a clear champion for change, it is hard to see how improvements will occur. Yet for those few who have taken steps to consolidate information, the benefits are obvious. They are seeing increased agility, greater speed and quality of commercial support to the business, and overall reductions in costs. They are also able to act more strategically and exert greater influence over business decisions.
Overall, the survey results show that the commercial community appreciates the critical importance of information enablement to themselves and to the business. They also recognize that needs are changing, with a requirement for more information, better analytics and an ability to look deeper within individual contracts and across portfolios of agreements. But they continue to struggle with how to progress because they remain fragmented along organizational lines as well as through the diversity of underlying technology infrastructure. Most have multiple systems, very few of which are internet or mobile-device enabled. Therefore information entry, collection and dissemination remain at best problematic and at worst impossible.
With today’s need for more agile and adaptive trading relationships and growing urgency for business to be more commercially innovative, information enablement promises to be an increasingly critical issue. If you would like to compare where you stand in the competitive race and to receive a copy of this important report, participate in the survey at https://www.research.net/r/IACCMIE
Of course, there is another road that leads to fame and fortune – that is to manufacture ‘alternative facts’, traditionally the preserve of poor and dishonest sales people. But ultimately, is such a path sustainable and will it not prove destructive?
One of IACCM’s ‘big themes’ for 2017 is the idea of competing on risk. That means, rather than working to avoid risk, instead embracing it as an opportunity.
We are not suggesting that risks are simply taken on board without thought and evaluation, but we are suggesting that commercial competence requires attempts to better understand and evaluate risks. And whenever it proves attractive (i.e. a source of competitive advantage), we should find ways to accept that risk through creative terms or capabilities.
Far too many commercial groups – whether lawyers or contract managers – tend to evaluate opportunities by listing all the things that are wrong – and often passing the list to the opportunity owner with the attitude ‘job done’. Such an approach is not risk management; it is not even risk avoidance, since the result of their action is itself endangering the future of their business and all too often the list is ignored.
Competing on risk can begin in quite a simple way; for example, by better understanding market norms and behaviors. In a recent survey of the technology sector, IACCM discovered wide variations in the risk appetite between companies. This appeared to be largely attitudinal or cultural, nothing to do with relative propensity to handle the risks concerned. We are talking here about the response to clauses such as liabilities or rights to audit – significant issues, but while a high proportion of the companies surveyed reject certain terms out of hand, others do not. A quick review of the profitability and performance of those companies revealed no real differences – so this appears to be simply a matter of policy and risk appetite. However, guess which of the businesses is seeing faster growth.
When they were asked whether this risk appetite was based on specific market or competitive knowledge, the answer was no. These companies were unconsciously competing on risk. How many more opportunities might they have had with some market research and evaluation of customer needs and priorities?
A different example of competing on risk came from an article in Strategy+Business and concerns car manufacturer Hyundai. In the depth of the financial crisis in 2009, car sales plummeted and several of the industry’s giants filed for Chapter 11. They moved into a highly defensive mode, expecting (rightly) a collapse in sales. But Hyundai saw opportunity. It realized that consumers were fearful of losing their jobs and were therefore deferring expenditure. It tackled that concern by offering a buy-back guarantee in the event that a purchaser lost their job; it gained sales accordingly.
A simple example of how one term can make a real difference. More fundamentally, a great example of how we can choose to see risk as a threat or as an opportunity. Neither may be right all the time, but those who persist in seeing risk as a negative will certainly not turn it into revenue and competitive edge.
As recently as the mid-1990s, 81% of business spend was on goods. By 2015, that number had dropped to 44%. The growth of services procurement has therefore been spectacular – and the capability of business to handle this change lags far behind.
The differences between acquiring tangible goods and intangible services is significant. For example, it is relatively more easy to define the requirements for a tangible product and to determine at the point of delivery or acceptance whether it is fit for purpose. In many cases, the source of supply is less important than the price and the need for a sustained relationship with the supplier is often of limited significance. However, for more critical products, or in situations where they are being packaged for inter-operability, buyers have learnt that it is smarter to hold suppliers to account for performance – and in this way, they have driven many former product contracts into being service-based contracts for performance or outcomes. Add to this the growth of outsourcing and professional services and it is easy to see why the transition to a services-oriented economy has occurred.
Services, however, are often much more difficult to define and the criteria for ‘success’ can be complicated and take time to measure. Essentially, we are no longer buying ‘things’, but rather we are buying ‘relationships’. And that doesn’t fit well with the adversarial, price-based negotiations of the past. Control, compliance and commoditization do not align with the need for commitment to long-term value delivery and the importance of agile, adaptable supply relationships. Therefore the three new ‘Cs’ of procurement must be cost of ownership, cooperation and collaboration – factors that demand new criteria for selection and for managing performance.
But the challenge (and the opportunity) goes deeper than simply reforming procurement skills or methods – and it applies to both buyers and sellers. For 20+ years, organizations focused on driving out cost through internal efficiency. They outsourced extensively (to cut fixed costs) and streamlined what remained through massive investments in technology. Today, with most businesses spending 60+% of their revenue on external supply, the room for internal cost cutting is limited. But the opportunity to drive similar efficiencies in external relationships is enormous. That’s because most organizations continue to interface with the outside world as if they were buying products, rather than acquiring relationships. The inefficiencies and tensions in most buyer-seller relationships create enormous value loss and erosion – according to IACCM research, an amount that is on average equivalent to 9% of revenue.
Essentially, in streamlining internal processes, businesses have generated inevitable conflicts when they try to work together. Without extensive human resources, they struggle to adapt and work together in any harmonious way. That is why the contracting process is rising to the fore as the next big area for business transformation. Disciplined contracting can deliver high-performing relationships – but right now, few organizations have that discipline and many continue trying to drive value through dysfunctional processes and adversarial risk transfer.
A recent webinar by Vodafone and SirionLabs was a refreshing example of new thinking and new capabilities. The supply management team at Vodafone have recognized the importance of building contracting and performance management capabilities and have redefined organizational roles and skills. At the same time, they have introduced the dynamic software provided by SirionLabs, designed to facilitate collaborative buyer-supplier relationships through shared governance and performance management data and techniques. In addition to the webinar, you can discover more about this ground-breaking partnership at the IACCM Europe conference in Dublin, May 8th – 10th.
As with so many fundamental shifts in business conditions, it takes time to recognize what is going wrong and how it can be fixed. But any impartial observer could quickly point to the chaotic and fragmented state of buyer-supplier relationships and recognize that there is room for massive improvement. We must indeed stop thinking about buying things and instead start to buy the relationships that we need for success – and of course, equip ourselves to manage them.
Agility – the ability to move quickly and easily – is not an attribute many would apply to contracts or the contracting process. For many, the need for a contract is seen as an impediment, a barrier to getting things done. Executives are among those who regularly call for simplification and speed.
These pressures create a real conundrum for any responsible contracts or legal professional. How do you align the demands for streamlined decisions with the need for due diligence, for protecting the interests of the business or client? A variety of techniques have been tried, with the most common being the use of standard templates and attempts to use power (or frustration) as a means to stifle or curtail debate.
But templates have their limits. Certainly they are not traditionally respectful of the counter-party’s needs or interests. As such, they carry hidden costs – perhaps a premium on price, or missed opportunities, or negative performance incentives. The conversations they stifle can often be of real value.
So today, there seems to be a trade off between agility and value – if you want it fast, you lose quality and eradicate judgment. You also guarantee contention when dealing with another powerful company or trying to handle a more complex transaction or relationship. In other words, one size does not fit all.
Does it have to be this way?
IACCM research suggests that much of the difficulty in contracting arises from the failure to think of it as a life-cycle process. It is instead a series of disconnected activities that feature as steps within other processes – for example, bidding, or sourcing, or sales or project management or finance or fulfilment ….. The terms come from a multitude of stakeholders, the physical components are similarly created in various places and brought together, often at the last minute, in a frenzy of document assembly. Attempts at streamlining are typically frustrated because the stages are in fact interdependent – so for example, if you digitize the form but leave the rest of the process untouched, you have actually introduced greater complexity.
Modern systems support new approaches. For example, a database of terms and term options, rather than fixed templates, can link to opportunity management systems upstream and to obligation extraction systems downstream. Such systems can be adaptive to different industry customers or jurisdictions and to different types of acquisition. The work by IACCM and its corporate members on ‘contract principles’ can streamline negotiation and cause a focus on value, rather than risk transfer. Terms and conditions can be designed to facilitate post-award efficiency, through more adaptive approaches to change management or issue resolution.
Contracts can and should lie at the heart of business value. The failure to develop a structured process has reduced their purpose and relevance – and in parallel threatens the perceived purpose or relevance of those who are charged with their production. There really isn’t an innate contradiction between the terms ‘agile’ and ‘contracts’; it’s a matter of choice and imagination.
Commitment Matters 