In an interesting article (To neither lose the customer’s respect nor become an ordinary salesman), Marcelo Rezende sets out the importance of building an empathetic relationship with a customer. He points to understanding the customer’s perspective and needs, pushing your own objectives into the background.
In many ways, Marcelo’s arguments reflect the traditional principles of good relationship management and certainly they mirror the behavior of many successful sales people. However, in an age where customers increasingly demand high quality results and outcomes, is this traditional approach sustainable?
The problem is that a business relationship is ultimately with an organization, not with the sales person. Yes, they may be an intermediary, but is their empathy actually a form of manipulation that will come back to haunt both supplier and customer? In other words, the sales interface may be highly adaptive in delivering a value proposition that the customer wants to hear, but is it reflective of what the supplier organization will actually do?
Unless there is real care, empathy can ultimately undermine trust. It may leave the sales representative seeing their role as being the customer advocate and their own organization becomes ‘the enemy’.
In many respects, this scenario is unavoidable. Sales are paid to sell; successful sales people need to relate to the customer and the customer’s needs; they will position the product or service in terms that represent value to the customer; this may create false expectations – indeed, those expectations are often dashed when the customer sees the contract (which is why many sales people prefer to be dismissive of the importance of terms and conditions and often leave their introduction to the last minute).
This is where we encounter the classic debate about ‘the contract’ and ‘the relationship’, with the sales organization generally anxious to promote the value of the former rather than the latter. Unfortunately, this does little to demonstrate overall business integrity and it also leaves contracts / commercial groups in a back-stop protective role. Even if the contract terms could have been adjusted to better reflect the customer’s values, they often are not, because the conversations that might have led to amendment were never held.
IACCM research has shown the benefits that can be achieved through closer partnering and earlier engagement between Sales and Commercial groups. Not only does this typically shorten cycle times, it is also much more likely to yield a happy customer and more profitable business. Empathy is something that must be embedded throughout the organization – not just within the sales department.
Impenetrable, incomprehensible, confusing and downright boring. These are a few of the words commonly associated with contracts. Whether it is the way they are designed, or the way they are worded, the overwhelming majority of contracts merit those descriptions. Indeed, in the case of many consumer agreements (especially those on-line), one can only believe the approach is a deliberate turn-off. Large companies would prefer customers not to realize just how unreasonable and unbalanced their terms of business really are.
Despite massive progress in other areas of communication – for example, company reports, marketing materials, web sites, official notices etc. – contracts have largely resisted significant change. In some instances they have moved to ‘plain English’ and there have been efforts to make them shorter (which does not necessarily make them clearer or easier to understand). But overall, IACCM surveys tell us that more than 90% of business people find contracts ‘hard or impossible’ to understand. Which may, of course, be good news to their authors, since it means more work providing interpretations of what they wrote – or in some cases, interpretations of what they think someone else was thinking when they wrote it.
Ultimately, none of this makes any sense. Contracts should provide an accurate record of an agreed transaction or relationship. In our increasingly volatile and virtual world, it should also provide a framework for underlying ‘business operations’ – who does what for whom in what circumstances and, in many cases, how this gets done. Good contracts are those that seek to deliver success; dealing with failure should be the exception. Today’s contracts often make failure more likely.
But however illogical the current approach, can it really change? Is there enough interest in making those changes? Increasingly the signs are yes. Led by a growing body of lawyers who are frustrated with current role and image, supported by an increasing number of law schools which want to produce graduates suited to the 21st century, aided by technologists who are working on artificial intelligence and blockchain, urged on by business executives and project managers who need contracts to become viable business tools – the momentum is building fast.
At IACCM, we re seeing this in a range of initiatives. For example, a growing number of in-house legal groups are coming together to explore the possibility of developing agreed ‘industry standards’ which would set a more consistent framework between suppliers and customers, facilitating increased clarity of those standard terms and reducing the amount of repetitive negotiation and customization. This is further developed by the legal groups approaching us for ‘contract design assessments’ – a specific effort to design contracts so they can be easily understood by counter-parties and users. Experience shows how this dramatically reduces cycle times, leads to increased compliance – and confers competitive advantage. It tells the world that they are forward-thinking organizations which actually care about open, honest communication and balance in their trading relationships. Then there are the various ‘Hackathons’, where top corporations and law schools engage in fundamental questioning of the thinking that underlies today’s contracting processes and its outputs ….
Beyond these practical steps, we have the much grander vision in places like MIT and Stanford, where fundamental thinking is going on about contracts in a digital age. An example is the Center for Collaborative Law ‘Common Accord’ event in Boston in May. There is a belief – currently beyond my understanding – that we can quite rapidly move to codified content and that contracts become standardized artefacts which increase security and also enhance them as ‘tradable assets’.
How quickly this grand vision occurs, I have no idea. But I do know the momentum for change is now here and that the practical examples of it are increasingly visible. Of course there will be those who resist, just as many in the clergy resisted the spread of printed books in the 15th century. Anything that demystifies activity and makes it accessible and understandable is a threat to those who own ‘the mystery’. The forces of history are firmly on the side of those who want simplification and self-help.
Almost 60% of contract practitioners expect contracts to become more ‘relational’ and less ‘transactional’ in the next few years. That’s according to the results of a worldwide survey on ‘The Future of Contracting’ that IACCM has been conducting since last November.
Why do they feel that this is the way forward? The answers vary, as do the motivations, but key factors include:
- for buyers, there are various pressures suggesting that transactional behavior is no longer a good idea. Since the late 1990’s, Procurement has focused on driving down prices at the expense of relationships. Supplier loyalty was a thing of the past. However, that approach carries risks and longer-term costs. The loss of supplier loyalty is one example. The difficulty of overseeing quality and performance is another – and this is especially the case in an area such as regulatory compliance. Frequent supplier switching also carries direct costs in administration and management, which can undermine the savings from a lower price or charge.
- for suppliers, there is generally little attraction in transactional business. Certainly in the b2b environment, it is disruptive, makes planning hard and is linked to commodity pricing. So the transactional pressures from buyers have forced many suppliers to re-think their business model, to seek ways to differentiate and bring added value. An example of this is a readiness to accept more risk, to take greater responsibility for outputs or outcomes.
Together, these factors have been reflected in the steady shift from pure product sales to an increasing volume of packaged solutions or services (indicated in the growth of indirect procurement and the percentage of world trade in services). However, this growth has exposed real weaknesses in ‘relationship management’, until now a rather woolly, sales-led activity.
Hence the scale of interest now in ‘relational contracting’. There are many myths about relational contracts, top among them being that it introduces a ‘softness’ to the contract that creates legal doubt or threatens enforceability.
The reality is very different. Relational contracts are fully recognized by the courts and subject to a growing body of case law and precedent. It isn’t vast – but that is because relational agreements are less likely to fail and lead to litigation. And in a business context, they actually reduce doubt by creating greater discipline and clarity in the relationship, its governance and performance. They introduce positive measures rather than relying on negative incentives – in other words, more control, less need to use the stick!
Without fundamental change to its goals and purpose, can the typical procurement function really contribute to business integrity?
One of the largest procurement associations has defined member responsibilities in the following way:
1) Enhance and protect the standing of the profession by being ethical and having integrity in all business relationships
2) Promote the eradication of unethical business practices such as infringing human rights, fraud, corruption
On the surface, these are noble aims – yet are they actually effective or relevant? To what extent are current procurement practices (and associated training) undermining the very values that lie at the heart of these responsibilities?
I write this because the common experience of most suppliers remains that Procurement practitioners are focused almost entirely on price negotiation and obtaining ‘savings’ – far too often with no regard to the impact this will have on quality and, I regret to say, integrity. I don’t question the ethics of those professionals – but I do question the judgment of organizations that measure success in such narrow terms. I also question procurement leadership that accepts such measures and does not challenge top management (especially the CFO) to monitor value achieved, not theoretical savings.
What needs to be different? First, it is the integrity of the supply base that should be of greatest concern to the procurement function. Having responsibility for personal integrity is surely a given; it is assessing and validating a supplier’s integrity and honesty that really matters in generating business results and protecting reputation. Far too often, this does not happen – and hence the concerns about human rights, fraud and corruption.
Second, and more fundamentally, seeking to maximize discount and minimize price is quite simply not compatible with the defined responsibilities. It drives unethical behavior; it favors the dishonest supplier; it encourages short-cuts and bullying in the supply chain. We see evidence of this time and again, especially in low-margin or price driven industries – for example retail, construction and the public sector. Stories such as the Taiwanese earthquake and buildings constructed with oil cans illustrate the human cost that comes with such practices.
Procurement and supply chain management are critical activities for the success of business and should indeed be major contributors to the delivery of ethics and value. But for this to have meaning, I suggest that practitioners must challenge the way they are trained and measured and re-think the role they play in developing and managing trading relationships.
If we ever want to achieve excellence in contract management, we must start thinking of it as a distinct business process and equipping it accordingly.
In many organizations, contract management is seen as a sub-element of other processes or disciplines – procurement, project management, legal, CRM, SRM etc. This fragmentation means that it is generally inefficient and ineffective – leading to the revenue and value erosion identified in multiple IACCM research studies.
Of course, some organizations have awakened to this issue and invested heavily in building their contracting competence. They have realized that the goal of sales and acquisition processes is to generate successful contracts. In other words, contracts are the core business asset and sales and procurement activities are the means to achieving them.
In today’s technology-driven world, one of the biggest obstacles to driving value from contracts and contracting processes has been the absence of relevant technology. Rather than challenge existing perceptions, many software providers have designed products that reinforce existing approaches. Their products are targeted for sales, or for procurement, or as an adjunct to ERP or CRM. As a result, they are seen as irrelevant to the needs of many parts of the business and hence adoption rates are low. Recent IACCM research showed that 62% of organizations have contract management software, yet less than 20% have achieved widespread adoption.
It is this background that causes me to feel optimistic about the announcement of amalgamation between Contiki and Exari. Together, they believe that they bring robust lifecycle management software that combines with powerful document creation and management. More importantly, they emphasize that their focus is on contract management as a competency in its own right – not as some sub-element of another process or function.
Of course, we have yet to see whether this vision translates to a powerful new player in the market, but it is an important step forward and offers the potential to support ‘excellence’ in contract management.
“We are living through a time of rupture, initiated by fast, dramatic changes in technology, institutions and values, and accelerated by IT innovations, globalization and deregulation in many areas. As a result, projects are now more than ever subject to complexity, change and unpredictability.”
Add to this quote the fact that deregulation is now accompanied by waves of new regulation, that globalization has resulted in geopolitical chaos, and that complexity, change and unpredictability apply as much to business relationships as they do to projects. Overall, we are left having to accept – and deal with – an environment of real uncertainty.
In the world of project management, this realization is steadily leading to new thinking about the processes, tools and skills needed to deliver successful results. One consequence of this new thinking is an increasing overlap between the role of the project manager and the role of the contract manager, together with recognition that the contract models and typical approaches to the management of uncertainty are not ‘fit for purpose’.
Contract managers and project managers tend to seek control and they see their approaches as providing a platform for certainty. While they may be good at initial planning within an established framework of business goals and stakeholder values, the instruments and methods they then use are not suited to the fast-changing environment in which they operate. In other words, current project management methodology and contract management disciplines tend to constrain change rather than anticipate and enable it. As a result, performance is often either derailed or delivers an outcome that no longer meets requirements.
For those in Project Management, there is a growing belief that new and better forms of contract, along with more flexible contract and relationship governance procedures, may hold the key to managing unpredictability. Indeed, they can point to an array of available contract models (NEC3, FIDIC, Relational) that already exist, but have largely been ignored by the commercial community. In consequence, there are early signs that professional associations for project management are steadily moving to the view that project managers may themselves need to become contract managers, or at the very least become proficient in this field.
Historically, many contract management groups were subservient to project management. But this was at a time when the role was in fact about contract administration and formed part of the control culture mentioned above. I welcome the fact that project managers are awakening to the importance of contract and commercial skills and the tools and instruments that this discipline can offer. I am also pleased that they want to include increased content in their training. And I hope the contracts and commercial community will respond by building closer relationships with project managers and in answering their needs for delivering successful projects in an unpredictable world.
Last year, the UK’s Chartered Institute for Personnel and Development issued a report highlighting Generation Y skill gaps. Commercial skills came out as a priority area – in particular, the ability to understand the point of view of clients and stakeholders.
Selecting a business partner, negotiating a relationship, managing a contract – doing any of these successfully depends on understanding other points of view. Indeed, commercial skill is about much more than this. Understanding is one thing; real commercial skill is about achieving reconciliation between those view points. It requires the ability to analyze, to influence and to create a workable solution – or to establish that there is in fact no workable solution, at least with this set of stakeholders.
The reason commercial skills are becoming increasingly important is because of the momentum of change. In the past, fields such as procurement, contract management and (to some extent) legal and finance have been about defining and imposing standards and norms. ‘Compliance’ became such a buzz-word – and yet compliance spells disaster if it constrains innovation and change.
The standards and compliance mentality of the last 20 years bears significant responsibility in the crushing of commercial skills and business judgment. It created ‘professions’ that are highly compliant, but intellectually useless. Professional bodies saw themselves as ‘guardians of the standard’ and therefore offered training and development programs that were outdated before they were even released.
Commercial skills are all about balancing the need for sound business controls with the imperative for continuous update and the management of change. This is an exciting, but challenging, environment – especially for educators. It means they need to provide a basic structure for learning that includes training to regularly question and redesign the way we do things.
That is why, at IACCM, we are driven by continuous research, by outreach to multiple stakeholder groups, to new technologies and ideas that will shape the commercial landscape. We fervently believe that our role is to support our members in equipping for the future – not to prepare them for the past!
Unless you happen to be an expert, most people would probably vote that contracts are a ‘necessary evil’. If it were an option, there is a chance that they would be outvoted by those who selected ‘unnecessary evil’. Only an enlightened few are likely to choose ‘a competitive weapon’.
Personally, I would want to vote for ‘a competitive asset’ – but I recognize that in most cases, this is wishful thinking.
Contracts – and the contracting process – tend to be seen as instruments for bureaucratic control. There is a celebration when they are signed – partly because they represent an important milestone for the business, partly due to the relief that they are now out of the way.
And ‘out of the way’ is far too often the truth. They are shuffled into a filing cabinet – real or virtual – and emerge only when there are real problems, when the relationship is in trouble. They are a safeguard, a method of risk allocation, a stick to beat the other side.
That, at least, is the view of the ‘necessary evil’ party.
What an opportunity such an attitude is missing! The contracting process represents a chance to ensure common goals, to test whether parties can work together, to build quality and commitment into their relationship. In short, it is the means through which we can safeguard delivery of successful results. Better contracts and better contracting processes are indeed a source of competitive advantage.
And if you don’t believe me, or want to learn more about how to transform your contracts, your contracting process and your value to the business, join our two part webinar series, in which Dalip Raheja and I will take you on a thought-leadership journey. Part one – “The Why – Contracting Must Change and What will Happen if We Don’t?” is on February 24th and you can register at https://www2.iaccm.com/events/register/?id=2339
And we will start with a poll to discover how you feel about the contribution of contracts today – and finish with a poll to check that these webinars have provided insight to a new way forward!
A new year, but continued pressure to deliver savings.
That statement summarizes where many Procurement groups find themselves as we enter 2016. So to the casual observer, nothing has changed.
Yet they would be wrong, because the expectations of top management in both public and private sector are shifting fast. They want supply chains that deliver sustained improvements in cost, quality and innovation, supporting flexible, market-oriented operational capabilities. And those attributes will not be achieved through traditional, supplier-focused demands for price reductions.
2016 will see continued erosion of old-style Procurement and growth of the skills and methods needed to manage category segments and integrated supply networks. Input-based acquisition will be replaced by effective commissioning and management of outputs and outcomes. “Procurement” will steadily shift from being a functional activity into an organisational competence.
So what is left?
The future – far from looking bleak – is simply different. It demands greater understanding of markets, closer integration of customer / supplier operations and shared commitments to performance. Those characteristics will be delivered through the adoption of contract management and supplier relationship management techniques, underpinned by heightened levels of commercial awareness.
To meet the challenges of 2016 and beyond, procurement must move from its narrow focus on short term savings. Practitioners of the future will exhibit cross-functional knowledge and stakeholder understanding, to ensure that savings are achieved throughout the lifecycle of a supply relationship and that they supplement – rather than undermine – the achievement of business value.
Perhaps the big question in all of this is whether these new attributes can ever emerge while Procurement reports to the CFO. The short-termism of financial thinking, combined with its limited understanding of business relationships and ethics, far too often drives destructive behavior by Procurement. The growing importance of overall supply management demands a shift in thinking and measurements – implying that an escape from the umbrella of Finance is a critical need.
A breath of fresh air is blowing in Buenos Aires with a new government under the leadership of Mauricio Macri … and the winds of change may soon be blowing throughout Latin America.
According to reputable local political analysts and global press releases, under the former government, Argentina lost its political and economic weight in the region, during a decade of uncertainty in rules, intervention in the economy and confrontation with key elements in the international community. Unrealistic exchange rates and export controls, failure to produce reliable official statistics and undermining of both media and the courts were key features of this period – deterring foreign investment and constraining economic performance.
The ending of the commodity boom has forced economic reality onto other regimes, most notably Brazil and Venezuela. The signs of transformation, integrity, transparency, sacrifice and challenge to corruption that are now evident create positive hope for change across the continent. And with this change comes the need for enhanced commercial and contract management skills, the ability to compete and strike business deals on an international basis.
Collaboration instead of ideological struggles. Certainty in the rules. Transparency…These emerging values remind me of the IACCM themes for 2016: “Transformation: agility, collaboration and reputation. In fact, at IACCM we anticipated this scenario in Latin America, so we decided to strengthen our efforts and invest in the region by re-launching our learning programs and appointing this year Pablo Cilotta as our director for South and Central America.
Already Pablo is experiencing the speed with which change is occurring, in both private and public sector. For the private sector, the issue is one of competitiveness; for the public sector, it is a matter of reconciling growing demand with reducing budgets. This issue of affordability is not only affecting markets such as the UK, the USA and Australia (where the IACCM has been contributing to commercial reform), but also in these LatAm nations where their government policies must now focus on driving revenues and reducing costs.
In the past, the public sector tended to gaze inwards when looking for solutions, but what we are seeing is that governments are engaged in fast-moving global competition, which therefore requires new attitudes and skills. This needs to happen in Argentina and in the rest of Latin America too, following these trends in the more developed nations.
The opportunities in Latin America in 2016 will be exciting for many companies – not least IACCM, helping both the private and the public sectors to realise their enormous potential. It is a demanding, yet remarkably exciting, period in our development and of the emerging contract and commercial professionals across Latin America.
Commitment Matters 