“Business today is increasingly digital, services-based and driven by intangible assets, including rights to exploit intellectual property, from patents to logos.”
This quote from The Economist (‘New rules, same old paradigm” – October 2015) indicates the challenge facing the world of contract management. The Economist article points to the fact that the laws and regulations relating to trade were mostly designed for the manufacturing age. Not only are they inappropriate, but they add to the complexity of dealing with a fast-changing environment.
Might that observation also be made with regard to contracts and contract management? In a soon-to-be-published article, IACCM will point to the ineffectiveness – indeed actual damage – of today’s contract design and primary terms and conditions. The apparent inability of this discipline to adjust to the digital age is making it increasingly anachronistic (register with IACCM if you would like a copy of this article).
But is there light at the end of this particular tunnel? Dalip Raheja believes that there is. He recently attended the IACCM Americas annual forum and I found his observations both interesting and encouraging. This is what he had to say:
“As we have observed in the past, this is one forum where professionals from both buy-side and sell-side get together and talk about their respective processes. What has been fascinating to watch is how the language has changed in this community from contracting to commitment to relationships. While there were still a few slides that talked about contracting and compliance being the main outcome, it was pretty obvious that the train has left the station on that one and most people are already on board having a great time on the relationship express!!”
(To see Dalip’s full article, click here)
Whether consciously or otherwise, the world of contract management is morphing into a world of outputs, outcomes and relational agreements. For leading corporations (and a growing number of government agencies) there is a real commitment and hunger for change. Practitioners are enthused by the idea of being associated with success, rather than spending their time fixing problems and handling contention. As Dalip observes, the IACCM Forums and meetings appear to be the one place they can go to gain insight to how they might institute those changes. In this context, he omitted one group that is critical to success – that is, the technology and service providers who were present at this year’s Americas conference in record numbers (and with a waiting list to attend).
Contract management in its traditional form will indeed become far less visible in the digital age. Like so many other activities, it is steadily moving to an automated process. But this creates a wealth of new opportunities, as we start to generate a mass of value-adding data and insights, releasing the potential for new commercial offerings and market intelligence. Among these will be the integration of ‘the contract’ and ‘the relationship’, no longer adversaries but rather complementary forces for driving business value.
The implications of this are significant. Systems, processes, organizations and job roles will need substantial adjustment. The IACCM event touched on many of these changes, harnessing the enthusiasm of those who have boarded the train that Dalip references and are already waving goodbye to the debates of the past.
The collapse of the U.S. / EU safe harbor provisions covering transfers of personal data is a reminder of how fragile key trading principles can be. It is especially pertinent at a time when major cross-regional trade agreements are being negotiated and signed.
There will always be those who oppose trade, for either political or personal reasons. They will be looking for weaknesses, betrayals of trust, as opportunities to pounce and undermine relationships. Safe harbor is a good example. While it was on one hand convenient to pretend that it represented true cover for the rights of EU citizens, that was most likely a myth. Various political and industry groups always opposed the measures, believing that they entrenched the power of US technology giants. When Edward Snowden revealed the scale of US intelligence gathering and abuse of the safe harbor principles, it was only a matter of time before a challenge would be mounted. Now it has been successful and some new principles will need to be agreed. Meantime, European tech companies have a window of opportunity to offer locally based services.
Once again, the lesson here is that there are no secrets in a networked world. Governments – at least those which are democratic – that abuse trust or trample on principles will be found out and suffer accordingly. The same applies to business. Failure to operate with integrity is increasingly punished. On the counter side, regimes that pervert the truth condemn their people to poverty and are forced in most cases to operate outside the world trade systems.
Every parent must at some time look at their child and wonder “What will you do when you grow up?” Today, it is perhaps harder than ever to predict or offer guidance. Jobs that once seemed safe and secure are increasingly under pressure or disappearing; at the same time, new roles are emerging – a recent report suggested that 15% of the jobs in London today did not exist 15 years ago.
Yesterday I presented at the PASA conference in Melbourne, Australia. My topic was ‘Is the world of Procurement disappearing?’ And my answer was in many respects yes – because the role and its potential value are changing fast. I suggested that all the ‘C’ words that have been associated with the function (control, compliance, categories, commoditization, cost) are becoming supplanted by higher value issues that have much greater appeal to top management – for example, ‘the 4 R’s’ of reputation, relationships, risk and return.
Underlying the challenge for all workers today is the relentless rise of networked and digital technology. ‘On-demand knowledge’ means that simply knowing things or performing process steps has limited value. I made clear that this challenge is universal – one has only to follow the debate in other professions to appreciate that they are all insecure and that roles which perform tasks or offer general advice are disappearing – no one will be willing to fund them. Doctors, lawyers, accountants – many of the services they provide can be performed faster and more accurately on-line.
So the important question is ‘what’s left?’ And it seems to me there are two fields on which we can focus. Both are related to the management of the changes going on around us – one being to deal with the complex and innovative possibilities created by our changing world and the other to establish and maintain the framework that enables the performance of others.
Organizations survive if they establish competitive advantage. While product differentiation is important, it is relatively hard to sustain. Therefore it must be accompanied by commercial differentiation – the ability to deliver things that others cannot do, or to deliver them more reliably and at lower total cost. At one end of the scale, this may mean highly complex and innovative projects which demand exceptional judgment, teamwork, ingenuity. At the other end, it would be represented by agile and efficient standardization to support mass production of goods or services – demanding replicable yet adaptive processes where human operatives are empowered to be highly self-sufficient.
So where does Procurement play in all of this? My suggestion is that businesses will soon stop thinking about ‘buying’ and ‘selling’ as opposites and will instead start to see them as integrated activities that depend on an ability to coordinate a portfolio of trading relationships that deliver organizational goals. In other words, there will be a specialist group that oversees the capabilities associated with implementing commercial strategies. They will focus on the portfolio of required relationships and the mechanisms through which these are transacted and performance is overseen.
For today’s Procurement practitioners, as with other professionals, their underlying knowledge will be assumed. Value will come from their skills in leadership, influencing, creativity, judgment and coordination. They will engage either in supporting high risk projects developing innovative and demanding solutions (for example, major capital projects or transformational service delivery); or they will be developing and maintaining the tools and systems that perform the roles of today’s procurement practitioners.
Their measures will no longer be based on the divisive formula of today (compliance and cost), but instead on their contribution to revenue and reputation.
Forming and managing trading relationships lies at the very heart of human development and economic wealth – so a role in this field will continue to offer tremendous opportunities. But it must be as an enabler of performance, not as a constraint. So what advice should you offer your children? I think quite simply, they must always focus on roles that deliver value and benefit to others and which draw on their ability to make good judgments, to be creative and to be energized by innovation and change. Hopefully, we can ourselves exhibit those characteristics and prepare them to take advantage of the volatile, uncertain environment they will inevitably face.
You are running a project or preparing a complex negotiation. The team you have assembled is cross-cultural, reflecting the various areas of skill and knowledge you need to ensure success. Suddenly you become aware of tensions within the team due to differing religious beliefs and attitudes. What should you do?
This is a topic discussed by attorney Tim Garrett in a series of articles “Is your workplace the new battleground for culture wars?” Tim offers some suggested guidance for those finding themselves in such a situation and points to the potential liability that organizations face if they fail to act in such situations.
IACCM research (available through the IACCM website) has shown the growing frequency of situations where contracts and commercial staff operate in multi-cultural teams, both within their national organization and on international activities. A growing number of countries are legislating to protect the diversity of opinions and behaviors related to race, sexual orientation and religion. As the article shows, this places real pressures on any supervisor or manager dealing with a diverse team. Our research indicates that few IACCM members have received any formal training in this area and that many employees feel there is a lack of sensitivity and inclusiveness in cross-cultural teams.
While Tim Garrett’s articles are written from a US perspective, the principles are increasingly important and valid internationally – and are also important if we want to ensure high performing teams. It’s yet another of the areas about which today’s commercial experts must be aware and vigilant – and indeed a topic included in IACCM’s new Advanced Training Curriculum.
Several months ago, I was talking with a friend who is CEO of a mid-size software company – let’s call it Company X. She had been working with the marketing group at a large corporation and they were excited by the functionality that her product offered. The IT organization were also supportive because of its ease of integration and use. Both could see significant financial benefits when compared to competitive offerings.
The problem was that Procurement had already started a bid process and Company X was late to the game. Their sales team – despite the internal support from Marketing and IT – had failed to gain Procurement support for either including them in the bid, or putting the process on hold. In frustration, my friend decided that she would personally call the responsible Procurement manager. After several minutes of conversation, she felt compelled to ask: “Which matters more to you – getting value and the best solution for your company, or complying with the process?” Without hesitation, the reply was: “Complying with the process”.
It is attitudes like this – and the blind adherence to rules – that helps account for the findings published recently by the Chartered Institute of Purchasing that ‘Three quarters of IT chiefs believe Procurement hinders rather than helps”. Perhaps indicating the depth of the problem, the article fails to question why such attitudes prevail and what Procurement should do differently. Instead, it focuses on the risk that this non-compliant behavior is creating – in other words, the problem is entirely with the executives and their attitude.
To me, the interesting point is that the remaining 22% of those IT chiefs presumably think that Procurement brings them value. So what are those 22% doing differently? I bet it is not that the IT chiefs are mindlessly subservient; it is more likely that they have procurement staff who are better integrated with their function and support the demanding business goals that are today imposed on IT executives. They are active in aligning business value and needs with market capabilities; they achieve compliance because people want to engage them.
I feel that talented procurement professionals are being badly let down by those who call for ‘licensed practitioners’ to be imposed on the business. It undermines their skills and contribution to imply that the only way Procurement can gain status is through diktat. It overlooks the fact that business functions are servants to the business, not its master. They are responsible for offering the services and support that merit inclusion and involvement in decision-making.
Within every business, processes are essential to ensure underlying controls and efficiency. But they represent a platform – and a key aspect of professionalism is to exercise judgment in their application. We must understand not only the rules, but also their implications and impacts in specific situations. The mark of true professionalism is therefore to know when it is appropriate to deviate from the rules (or to challenge and change them) and how to manage the consequences.
Today’s focus on business value means that we must all be ready to question what we are doing and how we do it. If three quarters of your clients feel you are hindering their work, I suggest it is time to rethink what you are doing – not to turn around and blame them for avoiding you.
A survey recently published by The Ethical Corporation suggests that the ‘most exciting opportunity’ to achieve sustainability is through collaboration with suppliers. However, while this was the most popular approach among those surveyed, it was selected by just 24%.
Those polled report that their main incentives are linked to eliminating supply chain risks and avoiding reputational damage. Topping their list of issues were traceability (56%) and environmental concerns (53%), although these varied by region with North America seeking to ‘eliminate dependency on unsustainable raw materials’. Answers also varied depending on markets served.
The question of how we achieve sustainable practices – and where responsibility lies – is complex. Clearly there is an opportunity for suppliers to gain competitive advantage through their ability to make distinctive commitments. These will come from product innovation – for example, alternative materials, technical innovation – such as improved control or measurement systems, and increased control over supply chains. Yet many of these improvements require investment and may increase costs – and there is little sign that most customers are willing to pay for increased sustainability.
Overall, the range of issues highlighted in the Ethical Corporation report represent demanding and exciting commercial challenges. They reflect the growing array of opportunities for commercial experts to contribute to the business through innovative approaches to the formation and management of key trading relationships.
To view a copy of the report from The Ethical Corporation, click here
How often have you heard that ‘it’s the relationship that matters?’ Either by inference or quite explicitly, ‘the contract’ is pushed into the background as having either little significance or, in some cases, being a downright impediment to that all-important relationship.
Steadily, the evidence is mounting that this widely-held view is a myth. ‘Relationships’, according to leading sales authority Dave Kahle, are often used as an excuse for poor selling. In a recent article, Dave observes that the claim of “”great relationships” is too often a veil that sales people hide behind to keep from exposing the weakness in their sales skills”. He goes on to point out that businesses must remember that their goal is to sell things and generate revenue. Whereas with friends or family, your primary objective may be a strong relationship, that is absolutely not the case with customers – unless it is visibly leading to strong growth and increasing penetration.
So the fact that ‘the relationship’ is not really so important does not of itself alter the proposition that contracts also have limited – perhaps negative – significance. So what evidence is there to challenge this element of the myth?
First, we certainly know that contracts can have an extremely negative effect. There are many connections between contract terms and important issues such as trust, integrity and ease of doing business. We know, for example, that contract terms and their negotiation frequently undermine the promises made during the sales or marketing process. We know that unfair or unbalanced risk allocations often result in negative behavior. It is in organizations that work this way that the tendency to emphasize ‘the relationship’ is strongest – and that is hardly surprising. I once worked for a company where Sales were trained to tell customers “It’s not what the contract says that matters, it’s what we actually do”. Inevitably such statements undermined trust – and suppliers who were ready to make stronger commitments started to win more contracts. So certainly contracts are a potential differentiator.
But there is more than this. One IACCM member recently reviewed several thousand customers and they discovered that customers with a formal contract were almost twice as satisfied as those without. Their subsequent research confirmed a point that IACCM has been promoting for some years – that good contracts define and set expectations and therefore represent the framework for a relationship. In this case, customers were indeed happier because they knew what to expect; there was discipline to the way the organizations worked together. Indeed, it was almost the opposite of the loose management through a ‘great relationship’.
Best practice does indeed lead to a conclusion that ‘relational contracting’ is the right way forward – an embedding of relationship principles into the contract and a refocusing of negotiations to establish structure to the way that organizations will work together. Top performing organizations are edging towards this approach – re-thinking the timing and connections between Sales and contracts / commercial staff, developing centers of excellence for ‘relational negotiation’, re-designing contract structure and content to emphasize collaborative performance and governance.
So it is time that all of us challenge the myth of ‘contracts don’t really matter’.
Is there really such a thing as a ‘procurement strategy’ (beyond the initial make / buy decision), or is it rather a contracting and relationship strategy?
That is a question that IACCM has been posing – and indeed extending the question to sales strategy as well – so it is interesting that the same point is now being picked up by academics and researchers as they look at increasingly volatile and unpredictable market conditions.
Let me offer some background.
Today I conducted a webinar with Professor Rob Handfield, who teaches supply management at North Carolina State University and is the Executive Director of the Supply Chain Resource Cooperative. We were presenting to a large audience from the oil and gas sector – an industry where collapsing prices have caused rapid focus on issues of value efficiency and effectiveness.
Rob recently published a research paper on “The role of effective relationship management in successful oil and gas projects”. Some of the research was undertaken in conjunction with IACCM and the results were published in JCSCAN (the Journal of Strategic Contracting & Negotiation), available from the IACCM website. His findings point to the critical importance of contract management and its integration with key aspects of relationship definition and oversight.
Among the key points coming from the research are:
- the need for earlier engagement of commercial resources
- the importance of focus and definition of goals, objectives and their relative importance.
- the critical issue of stakeholder inclusion and engagement.
- the need for risk management to be integrated into performance management and to develop a practical and structured approach to handling risks.
- the importance of engaging the right people, with the right attitudes and at the right time.
The chances of project failure were shown to increase if the parties simply rely on ‘the relationship’. Today’s business environment demands far better definition of performance and governance techniques. Therefore ‘informal, relationship structures’ such as frequent meetings, the sue of phone and email, just don’t work. Face-to-face meetings similarly can often be an excuse for lack of definition and discipline – and are therefore often associated with unsuccessful projects.
Success factors are associated with robust and well-defined contracts which offer defined approaches to goals, their oversight and governance. They are also linked to contracts with a contract management plan, where well-trained contract management professionals are deployed and where they are engaged early in the project. Performance measures must be few in number and relevant in form. Technology also plays a growing role – and the study confirmed that many of the procurement systems now in place have little or no relevance to project success since they are too mechanistic and generate little or no relevant data or analysis.
Returning to the opening sentence, once again we see evidence that thought leaders are seeing procurement (and perhaps soon also Sales) as a sub-element of the contract and relationship management process.
IACCM’s announcement this week of new learning programs and certification standards is about much more than a product launch. It reflects the emergence of an exciting and dynamic career path for a new breed of practitioners and experts.
“Contract and commercial management has for too long been the poor relation,” said one senior executive in a recent panel discussion, mirroring an observation by the UK’s National Audit Office in 2014 when it reported that “the biggest problem with contract management is that management does not take it seriously enough”.
Sentiments are changing fast. ‘Commercial excellence’ is rapidly rising on the Board and executive agenda – that is, visible operational integrity, the ability to make good judgments and to remain agile in the face of fast-changing market conditions. Yet the urgency of this agenda means that investment in the necessary skills and systems has been lacking. Organizations are struggling to find people with adequate vision to lead commercial operations; they are struggling to identify the tools and applications that support management of new business relationships; and they are struggling to develop and implement the contractual terms and models that underpin high performing, collaborative relationships.
It is in recognition of this environment that IACCM has fundamentally overhauled its portfolio of training products and its standards of professional accreditation. A new advanced curriculum reflects the need for deeper and broader skills. Strongly research based, the material equips a practitioner community to deal with the challenges of change. Revised certification standards build from this curriculum and, at Certified Expert level, require demonstration of the leadership and influencing skills demanded by the Board and top executives.
For more information about these exciting new programs, visit https://www.iaccm.com/news/?id=8814
Sustainability initiatives can deliver benefits worth up to 70% of an organisation’s average earnings. That’s one of the conclusions McKinsey has reached from its research. But of course, many initiatives do not yield that level of benefit because they are not made operationally effective.
Contracts and commercial practices have a big role to play in delivering business results from sustainability. For example, many initiatives are focused on supply chain security. This requires a rethink of traditional approaches to contract terms and supplier management, essentially to develop partnering and shared commitment to results. Many companies are now investing in training and equipping their suppliers to ensure supply security, quality and integrity. This may include providing materials, support technology or research. Adversarial approaches designed to drive short term cost reductions are being replaced by longer term relational terms and agreements that ensure a robust and loyal supply base.
The counter-side of this approach is the new emphasis for suppliers to compete on better serving customer interests. The most stark example is in the area of sales measurement and motivation. The days when the supplier’s main goal was to maximise volumes are fast receding. Instead, customers want suppliers who offer innovative approaches to reduce demand, especially in areas such as water or energy use, or in the need for raw materials. This is propelling us fast into different forms of contract, such as shared benefits or payment by results.
Sustainability is not a fad. As the McKinsey study clearly shows, it delivers tangible business benefits and represents an unstoppable social, economic and political direction. Trading relationships sit at the heart of sustainability – so if you are not already involved in understanding and implementing associated contract and commercial practices, it’s time to get engaged.
Commitment Matters 