2024 is already an energizing year! It has been wonderful to be back fully in face-to-face meetings and to feel the enthusiasm of the community that continues to build around WorldCC. Such diversity – geographic, functional, industry – yet inspired by a common belief in the importance and contribution of a fresh approach to contracting and commercial thinking.
Commercial innovation is the foundation for human progress!
This fact is often overlooked – and those who are key to creative thinking and its implementation are too often relegated to the back room, their work seen as an afterthought. And many have allowed this to happen, accepting a role that focuses on risk avoidance or compliance, rather than the creativity that our dynamic world demands.
So what is energizing me?
In just a few weeks, I have had the chance to interact with contracts,, commercial, procurement and legal practitioners in the US, UK, France, India and Saudi Arabia. Very different places, with their own unique and priceless characters. Yet everywhere I find the same buoyancy, a sense of optimism and a readiness to escape the constraints of the past.
And I am excited!
What better time than WorldCC’s 25th anniversary for real change to take root, for this powerful community to move to a position of leading and inspiring fresh approaches? In 2024, we are introducing major shifts in our training and certification. Empowered by AI, we are able to elevate the services and support we offer. The research that is needed to generate the insights and authority for new approaches is gathering pace. And our community is gathering, coming together in a rich series of local meetings and international summits.
So we have the foundations: now is the time to climb out of those back rooms, to come into the light and implement those new approaches to the way we establish and manage our trading relationships. It is actually not complicated to formulate fresh commercial models, simplified and balanced forms of contract, improved models of governance.
What it requires is a belief in ourselves, a unity of purpose. Come together, stay together – and change will happen.
This adage rings especially true when we look at the state of relationship management between buyers and suppliers. WorldCC’s latest study (to be published next month) reveals a wide gap between understanding its importance and taking the steps needed to align each party’s interests.
In today’s fast-paced and volatile business environment, open and collaborative relationships take on added significance. For any customer organization, a coherent approach to managing supplier relationships is a strategic imperative for managing risk and achieving business value. Executed well, the WorldCC study confirms the mutual benefits that flow to both buyers and suppliers, from improved efficiency and cost savings, to innovation and competitive advantage.
Achieving these benefits at a consistent level is the exception, not the rule. Many organizations find themselves at a crossroads, struggling to move beyond transactional interactions to instead build meaningful, strategic partnerships with their suppliers. This disconnect stems from a variety of challenges, including internal resistance, lack of clear roles and responsibilities, and under-utilization of technologies that could facilitate deeper collaboration. Together, these factors undermine levels of trust, transparency and collaboration.
The report provides insights and actionable strategies to bridge the gap between theory and practice. One element of this is exploring the role that an effective SRM program plays as part of a broader relationship management capability.
As we navigate the complexities of modern supply chains, there is a critical need for strategic focus on relationship management, understanding and executing on ‘the things that matter’. This report contains valuable insight to why today’s contracts and relationships so often under-perform – and highlights what is needed to improve.
If you need advance information on the report, please get in touch with afernandez@worldcc.com
The pace may be slow, the reservations significant – but there is certainly plenty of interest in the impact AI will have on contracts and contract management.
It is somewhat ironic that many lawyers are skeptical or even fearful of AI yet, as an industry, the Legal sector is forging ahead of most. Law firms fully appreciate the impact on their traditional offerings and ways of working.
While other industries are in most cases more hesitant, it doesn’t prevent curiosity. Indeed, forward thinking contracts and legal teams are keen to investigate and understand how AI might alter their role, in particular eliminating many repetitive tasks and contributing to increased value. Early use cases indicate that these hopes are being realized and I am looking forward to an up-coming webinar where Amgen explains their experience in deploying AI (visit here for details or to register).
For many, existing systems remain a limiting factor in the benefits they can achieve. Low adoption rates together with fragmented functionality make it difficult to access or generate the data on which AI flourishes. While fixing the problems is not easy, the pace of improvement has picked up and I am confident that the next 2 years will see a massive upsurge in the use of AI in the contracting process, with some exciting results spurring us on.
With ever-greater frequency, organizations highlight the importance of collaboration, both internally and with their trading partners. Few would argue that collaboration depends upon strong relationships, so the early findings from current WorldCC research are a cause for concern.
Despite the clear benefits, the survey shows that there is a notable shortfall in the execution of relationship management. This is recognized by most in the buyer community and contributes to a lack of belief among suppliers, where 77% question the sincerity of customers in truly wanting to collaborate. This gap is largely attributed to:
1. Internal Challenges: Buyers report significant internal challenges, such as overlapping or poorly defined roles and responsibilities (69%), unrealistic expectations (58%), and frequent changes in requirements (50%). These issues point to a need for better internal alignment and clearer communication within organizations.
2. Transactional Focus: Relationship management is often confined to project or contract levels, leading to a focus on immediate transactional performance rather than long-term business value. This narrow scope limits the potential for broader strategic benefits that relationship management and collaboration can offer.
3. Limited Use of Relationship Management-Specific Technology: Despite the availability of sophisticated technology tailored to relationship management, most rely on Contract Lifecycle Management and Data Analytics tools. The under-utilization of technology represents a missed opportunity to support more effective relationship management practices.
The full report will be issued to survey participants at the end of January. If you’d like to be among the recipients, you can participate at
https://iaccm.fra1.qualtrics.com/jfe/form/SV_0SLXODYKzKDz1ci
Insight from WorldCC Research: Diversifying Contract Types Amid Market Uncertainty
Recent WorldCC research underscores an important trend: businesses are increasingly diversifying their contract types to navigate the uncertainties and risks of today’s market. While this strategic development makes sense, a critical gap has been identified. Many organizations overlook the impact these varying contracts have on internal capabilities and skill requirements. Because of this, there’s often a lack of clear guidelines on the appropriate application of different contract models.
The Art of Selecting the Optimal Contract
Selecting the most effective contract and commercial model is a major factor in achieving successful business outcomes. This process demands astute business judgment and necessitates constructive dialogue both with external parties and internal stakeholders. To support this, I am developing a module for the WorldCC training and certification program. Here, to give a sense of direction, is a concise overview of how different contract types necessitate varied organizational structures and skill sets:
- Purchase Orders
- Structure: Primarily Procurement-driven.
- Required Skills: Vendor selection, foundational contract management.
- Master Agreements
- Structure: A blend of Procurement and Legal, with an emphasis on relationship management.
- Required Skills: Strategic sourcing, comprehensive contract administration.
- Short Form Contracts
- Structure: Geared towards Project Management with rapid decision-making.
- Required Skills: Fundamental project management, basic contract literacy.
- Performance-Based Contracts
- Structure: Centers on Performance Monitoring teams.
- Required Skills: Detailed performance analysis, effective vendor management.
- Outcome-Based Contracts
- Structure: Oriented towards achieving strategic outcomes, often involving integrated teams.
- Required Skills: Outcome definition and measurement, strategic execution.
- Relational Contracts
- Structure: Relationship-centric, involving cross-functional teams.
- Required Skills: Proficient relationship management, adaptable negotiation strategies.
- Agile Contracts
- Structure: Characterized by Agile teams, favoring iterative project methodologies.
- Required Skills: Agile project management, continuous adaptation and feedback.
- Alliance Contracts
- Structure: Partnership-oriented with collaborative decision-making.
- Required Skills: Collaboration, shared risk and benefit mindset.
- Joint Venture Agreements
- Structure: Distinct governance structure for joint ventures.
- Required Skills: Joint management expertise, strategic cooperative leadership.
- As-a-Service Contracts
- Structure: Focused on continuous service management.
- Required Skills: Management of service levels, ongoing vendor assessment.
Key Takeaway
It is essential to understand the unique demands of each contract type and the circumstances where each should be applied. This understanding enables alignment with your organization’s structure and skill set, reducing performance risks and ensuring that you are strategically positioned for success. This knowledge empowers you to deploy contracts that are not only legally sound but also optimally structured to serve their true purpose of supporting economic performance and business growth.
As we enter a new year, reflect for a moment how much (and how little) contracts have changed over the last two millennia.
1. The Medium: Think about how contracts were written in the past. Long ago, people used clay tablets, papyrus, or wood. Today, our tools and technology mean that we type them up on computers and store them digitally.
2. Signing a Contract: In old times, sealing a contract with wax and a unique stamp was common. Then, we moved to writing signatures by hand. Now, we often use digital signatures – just a click or a tap on a screen.
3. The Role of Laws: Over time, laws around contracts became more formal and structured. This shift helped in dealing with more complex trade and social interactions.
Contracts Today: Complex but Unchanging Records
Today, we have many more contracts than before, and they’re often longer and more complicated. Despite these changes, each contract is like a snapshot, capturing an agreement at a specific moment. The unique nature of each contract and the varying situations they cover can make it tough to analyze them on a large scale and learn from past success or failure.
AI – enabling the contract of the future
As in the past, many changes will be a direct or indirect result of advances in technology. In the case of contracts, we should ask fundamental questions that go to the heart of the way agreements are formed and managed. Here are three areas where Artificial Intelligence may lead to radically different approaches and expectations of value.
- Emotion-Responsive Contracts: In the future, contracts might include emotion-responsive clauses, thanks to advances in AI and neuroscience. These contracts would adapt their terms based on the emotional state of the parties involved. For instance, if a party is under distress or extreme happiness, certain clauses could automatically adjust to ensure fair and ethical dealings. This would require sophisticated emotional recognition technology, possibly even direct neural interfacing. Experiments in this area have been running for several years – for example, AI can predict the likely reaction to a specific clause and the way it is worded.
- Quantum Entanglement Contracts: Leveraging the properties of quantum mechanics, contracts could be established where the terms are interconnected through quantum entanglement. The fulfillment or breach of a clause in one location could instantaneously affect the contract terms in another location, regardless of the distance. This would be a groundbreaking way to enforce immediate compliance and could revolutionize international agreements or complex multi-party contracts.
- Holographic Lifetime Contracts: Imagine a contract not as a document, but as a holographic entity that accompanies you for its duration. This AI-powered hologram would not only remind you of your contractual obligations but also adapt and provide advice based on changing circumstances. It could negotiate on-the-fly adjustments with the holographic entities of other contract parties, creating a dynamic, living agreement that evolves over time.
Far-fetched as some of these ideas may seem, it is essential we remember that as recently as 40 years ago contracts and legal professionals would have dismissed the idea that contracts could be developed and stored electronically or that digital signatures could exist. So as we start a new year, it is a great time to open our minds and start to re-imagine the purpose of our contracts and the benefits that could flow from a fresh approach.
Anyone who follows my writing or research will know that I’m a massive advocate for commercial teams – buy or sell – to focus on strategic value. ‘Commercial innovation’ is always essential, but today’s challenging market conditions provide a new urgency. That represents a massive opportunity to step out of the shadows.
Forward-thinking organizations already grasp the significance that Artificial Intelligence is likely to have on their future plans and capabilities. It will touch every corner of their operations, not only driving efficiency, but also powering creativity. So forgive me my skepticism, but a recent report from GEP (‘Adopting AI Responsibly: Guidelines for Procurement of AI Solutions by the Private Sector’) strikes me as unrealistic in its aspirations.
It makes the claim that: “Procurement is best positioned within an organization to help the C-suite define and create a holistic blueprint for the organization’s Al strategy.”
Really? I can certainly see that Procurement will play a part in executing on the strategy and hopefully it will also be at the forefront in determining how AI will transform the process of procurement. But to suggest that Procurement is somehow at the forefront in defining and creating the corporate strategy for AI strikes me as a massive overreach, damaging credibility.
A successful AI strategy will demand cross-functional collaboration and it will depend on digital platforms. As different groups across the business start to understand its potential, there will be a myriad of use cases. These will require robust evaluation – for example, cost / benefit analysis, resource implications, ethical and reputational assessment, market and competitive impact, affect on existing products and services.
As WorldCC research is discovering, most organizations are still focused on developing a policy, especially as it relates to Generative AI. Those at the forefront have established multi-functional teams and are encouraging employees to identify potential opportunities, while also ensuring appropriate controls on how these exciting tools are used. Security and IP protection are the big issues.
So Procurement teams, get involved. Be up there in working out how AI can transform your operations and value. But let’s recognise that this is our chance to integrate and collaborate – not an opportunity to alienate others by seeking to control.
Reflect for a moment on what causes you to trust people, or organizations. What are the characteristics, behaviors, values that you look out for?
In a recent article, PASA offers ‘Five essential tips to build trust with your suppliers’. In addition to the need to ‘ensure mutual interests’, it concludes with this summary: “By recognising the importance of business development, understanding supplier capabilities, prioritising empathy, and seeking evidence of authenticity, procurement professionals can establish strong and trustworthy partnerships with suppliers, leading to successful project outcomes.”
OK, you might say, that’s not an unreasonable list. And nor would it be if it were not so one-sided. Take empathy as an example. The article doesn’t suggest that Procurement should demonstrate any empathy with the supplier’s goals and interests, but rather that the supplier must show ‘an empathic understanding of your organization’s goals and challenges’.
In my experience, it is this self-interested, one-sided view of the world that undermines collaboration and generates potential for conflict. Just imagine a personal relationship where all the focus is on the other party’s interests, where all the testing is about their loyalty, where all the questions are ‘what have you done for me today’ …
A recipe for trust? If you want loyal suppliers – or customers – I recommend you don’t follow the advice contained in these ‘five essential tips’. Later this week, I’ll offer an alternative.
Much is being written about ’Future Procurement’, mostly envisaging a new, expanded role for the existing function.
While those forecasts may be correct, I prefer to view this topic through the lens of organizational competency, rather than assuming the need for a specific function or experts to create capability.
What are the problems with procurement today? Why is there this constant drumbeat about the need for change? Many would say those performing the role are too narrow in their thinking, too limited in their accountability, too constrained in their contribution and that overall capability lacks coherence (and to the extent this is true, it is typically not the practitioners at fault, but the constraints put upon them by outdated rules, processes, measurements and systems).
So in this context is it procurement that’s wrong, or is it a failure to look more holistically at the capability to deliver outcomes through or with external providers? This capability requires coordination across multiple stakeholders – it is a cross-functional integration role, not a traditional discipline; and it certainly is not something that today’s practitioners have been taught to do. So why would we assume that procurement steps into that role?
Therefore we must give thought here to the question – ‘are we seeking to fundamentally redefine what we mean by procurement, or are we trying to reform or redesign the current procurement phase to fit better within an overall delivery system?’
Among the challenges we face that have driven a need for reform are:
– the massive increase in externally acquired goods and services
– the steady shift from acquisition of goods to a predominance of services
– the continuing evolution of relationship types and models with little thought given to the organisational capabilities needed for their management
On top of these, the scale of market change and uncertainty today require fundamentally different capabilities to assess, to contract and to manage. Adaptability, agility, predictive capability, dynamic reform – these are not characteristics that those outside the function generally associate with procurement.
So what do we need? As one senior executive recently said to me, “we could essentially outsource everything except contract management – and that’s arguably the area of capability where we’ve made the least investment”.
I think few would disagree that procurement capability needs to change, to be more adaptive and responsive, more effective at analysing and replicating its own success. But does the role itself need to expand, or does it need to be better instructed and managed, provided with fit for purpose tools and policies? In a perfect world, I might argue that organizations want full self-service capabilities without function. ‘Future procurement’ may well be fulfilled by people equipped with intelligent machines.
With this in mind, modern procurement should be an enabling and oversight function, equipping the organisation with the tools and knowledge needed to successfully select and manage supply relationships.
To do this, there needs to be segmentation based on the type of relationship needed to achieve the required outcome. That’s because different forms of relationship require very different skills and capabilities for their management.
Traditional procurement was strongly focused on input. Indeed, as a former head of the GSA in the US observed ‘we often undertake a perfect procurement and achieve completely the wrong outcome’. Too often, procurement has been a rules based system designed to support product acquisition.
When it comes to delivering value, contract award is the beginning, not the end. While there has been some excellent work reskilling and attempting to convert thinking from ‘procurement’ to ‘commercial’, post-award skills and competencies have until recently been largely ignored and the transformation of existing thought and behaviours are at best patchy. Even where training has been applied, its effectiveness is constrained by the actions or inactions of others – for example, legal, finance, operations – or the embedded assumptions of executives or suppliers.
Leading practice is to design for a full acquisition lifecycle. And in this wider context, at a recent conference, delegates recognised that procurement is just one phase in the much wider discipline of contracting.
So I would suggest that the question regarding ’Future Procurement’ is one that we cannot and should not seek to answer without first having defined and understood the overall contracting lifecycle – from inception of requirement to delivery of outcome or termination of need. It is this capability that is missing and simply fiddling with procurement may enable marginal improvements, but will not fix the problems.
Commitment Matters 