The quality movement has been around for decades and regulated trading standards go back centuries, yet still we struggle to generate the right results. Our process for establishing and managing contracts frequently does not help.
Recently, IACCM ran a webinar featuring Warren Smith, a UK Government employee. Warren talked about work he is leading on reducing ‘fraud and error’ in public sector contracts. While precise numbers are difficult to establish, he believes that the amount at stake averages some 4-6% of contract value. This number is consistent with the findings of companies such as SirionLabs, who provide automated checking and validation services for major private sector clients.
You would think that most organizations might consider savings at this level to be a worthwhile target. With this in mind, IACCM approached members of its public sector Community of Interest, suggesting they might want to connect with Warren and share ideas and approaches. To date, there have been few positive responses – in most cases, it seems to be a matter of ‘Not my job.’ And it isn’t that they then identify someone else – because the answer seems to be that it is no-one’s job and no-one wants to pick it up.
Before those in the private sector dismiss this as a purely public sector problem of attitude, we should all reflect on the many ways in which contract value is eroded. Look no further than IACCM’s ‘ten pitfalls’ to identify a series of areas where more robust contract management could be driving better results. Claims and disputes is a good example: how many of us know the frequency of claims and disputes, how many of us know the underlying causes, how many of us are actively promoting improvements that would reduce the cost? Or what about some of the terms and conditions we insist on imposing during negotiations: do they truly benefit the organization? The thing is that it is easy to retreat into our areas of expertise or what we see as our defined job role, leaving ‘someone else’ to worry about the bigger problems of overall results.
Maybe we should all be learning from the work being done by people like Warren Smith – and the scale of commitment that the UK Government (and some other public sector entities) is showing towards achieving value through commercial excellence.
Yesterday I received an invitation from HR.com to attend a webinar entitled ‘Disagree agreeably to boost productivity’. The theme of the session is that disagreement is sometimes inevitable, but it does not have to create disharmony or argument. When we operate with openness and respect, disagreement can be a learning experience that boosts value. On the other hand, handled the wrong way, disagreement creates chasms, it undermines cooperation and respect.
Certainly these points are important for all of us to remember, in both business and personal life. However, it strikes me there is a different twist to this principle, which is ‘Agreeing disagreeably undermines value’. And for those of us involved in contract negotiation, this is an equally important principle.
How often have you emerged from a negotiation feeling somewhat annoyed or disgruntled, perhaps not even feeling committed to the result? Far too often, we reach agreement through a process of contention and grudging compromise. Just because we have agreed does not make the process itself agreeable – and that surely is a point also worthy of reflection as we consider our objectives and decide on our negotiating style.
Sustainability and ‘corporate social responsibility’ are the new, fourth dimension of supplier selection criteria (the other three being price, quality and time).
That’s according to Sylvain Guyoton, Vice President of Research at EcoVadis, who spoke today on an IACCM webinar. Sylvain described the evolution of sustainability and the extent to which it is now becoming integrated into procurement practices and, increasingly, a fundamental issue for suppliers. One element of this is the ability to demonstrate CSR standards; another is acceptance of additional contract terms and obligations.
EcoVadis has seen strong growth as corporations deal with the challenges created by high risk global supply chains, geopolitical instability and increased regulatory pressures and reporting requirements. Cost pressures force business to operate in this complex environment; CSR is the tool through which they manage the resulting supply and reputational risks.
In reality, sustainability has proven to be about much more than compliance. As the discipline has grown, it has resulted in major areas of cost reduction (for example, in more creative approaches to packaging or to logistics) and value creation (for example, through competitive differentiation). But this, to me, is where it becomes interesting that sustainability is still perceived as an area driven by Procurement / Supply Management, whereas in my mind it is much more about Marketing. To succeed, businesses need increasingly to be able to show their CSR credentials and to demonstrate their capabilities proactively. Therefore, I see a growing interest by those responsible for sales contracting, as they look to anticipate market needs and embed CSR principles as a source of competitive difference.
Going beyond this, we are also observing a growing realization that good CSR practices demand different thinking about contracts. Sustainability depends on embedded behaviors and practices within a business, not just words on a contract. This need is adding to the momentum for contracts as effective tools for communication – in other words, they need to be designed and written in ways that ordinary people can understand. It is this which is driving momentum for user-based contracts and the evidence suggests that compliance rates soar as a result.
Therefore I believe the issues that are driving sustainability are indicative of a much wider change in society and business, towards greater openness and transparency – and this means not only new terms and conditions, but also quite fundamental rethinking of the way we develop and communicate our contracts.
The need to manage change is becoming more probable and more frequent. Markets, customers, regulators – it is a challenge for business today to remain competitive and to remain compliant. And that situation is often made worse by the extent to which we depend on our external trading partners to facilitate (or even originate) that change.
Why is it that reliance on external providers would make change more complicated? Surely a key argument for outsourcing is that it offers greater flexibility, that it removes the pain associated with internal change programs – so is outsourcing not working?
A recent blog by The MPower Group focuses on the factors that are needed for effective change management. They highlight the essential elements of leadership, employee engagement and honest, open communication. Immediately we start to see the problem. Far from facilitating change, many of the contracts we put in place today operate as barriers to it. There is frequently an attitude that change is risky and represents a potential win-lose game, associated with concepts such as ‘scope creep’.
Since most changes rightly need to be negotiated, it is appropriate that contracts place controls on the way this will happen. But in today’s business environment, it is essential that the mechanisms are fast and adaptive, ensuring the right data and conversations, the right stakeholder engagement and appropriate levels of sponsorship. Many times I find contracts do not define these mechanisms and are either vague or bureaucratic, reflecting poorly defined internal procedures.
Underlying this is the problem of attitude and the view of too many contract negotiators and managers that change is something that will bite them, that facilitating change will mean either a hit on margin or an exposure on price or budget. What we must understand is that without change, we will not be able to compete. This is just one example of the areas where contracting practices and attitudes can operate against the interests of the business – and the people who work there.
When it comes to contract and commercial management, what does good look like? With some 83% of business people in a recent poll dissatisfied with their organization’s contracting process, you might think that this would be an important question and that businesses worldwide would be seeking answers.
By and large, they are not.
In past blogs, I have made efforts to describe ‘excellence’ in both areas. Yet to be helpful, organizations often need ways to measure current capability and performance. That is where tools such as capability maturity models and assessments can be useful. At their best, they offer not only an insight to current state, but also a benchmark against other organizations and a route-map for improvement.
Certainly that is the way the IACCM capability assessment works. It measures process, rather than organization, since ultimately it is process effectiveness that matters – and the quality of organizational performance will become evident as part of the results. It offers a variety of benchmarks, ranging from global, geographic or industry averages, through to comparisons by quartile. It also challenges organizations to ensure that contract and commercial practices are aligned with the strategic goals and objectives of the business (which often they are not).
The most common weaknesses are in leadership and technology. In many ways, the two are intertwined. Without technology, processes remain manual, time-intensive, resistant to change – and most important, they remain largely transactional and lack good management information or data. Because of this, the process (and people related to it) generally have limited status or influence, except at a transactional or deal-based level. As a result, it is a role that rarely attracts natural leaders and where top management fails to see the purpose that good leadership would serve. Lack of investment (in both people and technology) is an inevitable result.
IACCM data has shown very clearly the costs that are associated with poor contracting and the absence of good commercial data. Capability assessments reveal the nature of current weaknesses and the steps required for improvement. With these insights available, it should not be difficult to achieve solid progress. In a world where management claims to seek continuous improvement, you might expect rapid and immediate attention being paid to this area of business operations. Yet in general, it is not. There is an embedded reluctance to grasp the opportunities that come from change.
In part, the reasons for this go back to the already mentioned issue of leadership. But organizational politics and fear of disruptive change also play a major role. Many different groups claim an interest in contracting and commercial management. While none may be willing to take ownership or accept accountability, they are stubbornly determined to prevent anyone else from doing so. As a result, there is generally inertia, broken only when there is a major error or disaster. This is followed by a flurry of activity, perhaps some new form of control mechanism or addition of contract terms that protect against an event that is unlikely to recur.
Improvement will come. In most cases, this will be in spite of incumbent contract and commercial practitioners. It will be driven by technology – not the contract management software of the past, but tools and systems that inject powerful data analysis and enable new ways of contracting and new insights from contracts. ‘Good’ is already starting to look very different from the past.
At times of uncertainty, the role of contracts in both protecting and delivering value becomes even more evident.
That is one clear result of Brexit, the unexpected decision by the UK to leave the European Union (EU). Law firms in particular have been quick to issue thoughts and guidance on the possible consequences for future trade and existing relationships. IACCM members have been anxiously seeking guidance on ‘which terms are impacted?’
Digging beneath the surface, the answer is itself mostly uncertain because there are many possibilities regarding what may happen. Volatile markets could move favorably or unfavorably; new trade treaties or revised regulatory environments may or may not emerge. And in reality, Brexit is just one example of a world where growing interdependence makes disruption and uncertainty both frequent and normal. In other words, good contracting now demands focus on how unexpected change and unpredictable events will be handled.
Many of the clauses that are impacted by volatile conditions are not new. Obvious examples are Force Majeure, payment and price adjustment terms, clauses relating to new or revised regulation, taxes or tariffs, rights of termination or renegotiation. But sophisticated negotiators are recognizing the growing importance of better structured governance provisions, bringing greater definition to the ‘rules’ under which the relationship will operate. David Frydlinger touches on this in his recent blog and IACCM highlighted similar points in a webinar that it ran just days after the Brexit vote.
Trading relationships – just like daily life – can never be free from risk. While some events are predictable, many are not. The longer the term of the contract, the more uncertain it becomes. Our best approach to dealing with that uncertainty is not to try to anticipate each possible eventuality, but rather to agree mutually acceptable procedures through which they will be discussed and equitably resolved.
Tania Seary of Procurious is the latest in a long line to suggest Procurement should be ‘at the top table’. Her article, Headed for the C-Suite, wisely suggests that a pre-requisite is to demonstrate relevance to business objectives and to do this through ‘ a new focus on key performance indicators’.
There can be little doubt about the importance of procurement and supply management activities in today’s business. As external spend increases, so does dependence on the quality and performance of suppliers. Ms. Seary rightly points to the value this can generate in terms of productivity, overall costs and potential innovation. Therefore, her suggestion to focus on areas such as these and measure Procurement’s impact is essentially a sound approach.
However, it seems to me that the problem for Procurement is that it is still only executing on other people’s ideas and strategies. Ultimately, no one needs Procurement if there are no customers. So to establish true strategic relevance it must visibly contribute to (and perhaps lead) product or commercial innovation. That would mean identifying new suppliers, new technologies, unique services that truly generate competitive advantage or open new markets.
Experience suggests that ‘the top table’ is where ideas are created, not where execution occurs. Of course the C-suite is interested in operational performance – and it pays great attention when it goes wrong – but those who undertake these roles are trusty lieutenants, not generals.
Should negotiations ever come down to price? Not according to INSEAD professor Horacio Falcao. In a thought-provoking article, Professor Falcao suggests that ‘a focus on price puts both sides at risk of leaving out other interests that are more important’.
I have sympathy with this view, which in large part reflects the eternal debate over price versus cost of ownership. There are certainly many examples where ‘cheap’ means also ‘low quality’ or ‘untrustworthy’, resulting in unexpected costs for the buyer. However, the article seems to be based on two assumptions that may themselves be questionable. First, it depends on detailed market or competitive knowledge. Second, it makes an assertion about supplier behaviour which, in my experience, is not entirely accurate.
Professor Falcao uses the procurement drive for ‘commoditization’ as the foundation for his ideas, on the basis that this is the philosophy that underlies intense price-based negotiation. He makes the point that there are always areas of value that go beyond the core product or service – for example reliability of supply or quality of service and support – and that these must be taken into account when agreeing a price. Clearly this is true. However, comparative competitive data may be difficult to find, so often a buyer tends to address such issues of performance through liquidated damages or service level credits. Arguably, a smart buyer will also embed rights of termination for consistent failures of performance. To the buyer, such terms represent a protection against the consequences of their price-based focus and do not represent a reason to agree a higher price.
So while these additional terms confirm that value is not based on price alone, it is often hard for a supplier with superior service to win a higher price.
The second hypothesis in the article relates to the way a supplier will behave if forced to accept a low price. Professor Falcao contends that this will result in degradation of service. Again, my experience on this is mixed. I have seen many instances where a focus on price actually has the opposite effect, with the supplier either:
a) working harder to show their value in the (often mistaken) belief that they will thereby earn supplier loyalty and potential for future higher prices or additional business; and / or
b) focusing on ways to improve efficiency and reduce their own cost base. Indeed, such price-based pressure is often the source of innovation.
It is indeed true that a smart buyer looks beyond price, but in many instances it is in fact the driver of value, not its enemy.
I want to share a question that appeared this week on the IACCM message board.
“Has anyone had any success in setting up and managing KPIs for Contracts Management. The intent would be to set internal KPIs for our contracts team. Since the ‘success’ of a contract (say a construction contract) is influenced by many factors outside of the Contracts Administrators control I don’t want to set up KPI’s on contract value/growth etc. Some obvious ones are timeline to execute contracts, timeline to review invoices, execute changes etc but they don’t really seem to add much ‘value’ – any thoughts?”
Censeo Consulting Group and the Public Spend Forum recently announced their findings on ‘the required skills of the public procurement workforce’. They discovered under-performance ‘in nearly 70% of identified competency areas’.
I am always a little skeptical about research reports from consultants. While they raise some great discussion points, there is this nagging feeling that the findings may be somewhat self-serving – essentially “Wow, we just discovered this massive problem – and it just so happens we have the services to overcome it”. And in this instance, the published data is actually close to the opposite of IACCM’s rather more extensive findings. Of course, that is not to say it is wrong, at least in the context of the 43 people interviewed, nor do I know what the objectives of the report’s authors may be. So let’s look at the broader questions that these findings raise.
Do skills and competencies matter? On this point, I think we would all be agreed that they do. And given the nature of today’s public services and their dependency on private sector suppliers, I presume there would be broad agreement that areas like negotiation, contracting and relationship management would be high on the list (though we might debate which of these is a skill versus a competency). It should be reassuring, then, that the Censeo research finds that the public sector workforce demonstrates competency in contracting and negotiation. However, anyone who has true competency in these fields may be rather shocked to learn that ‘proficiency decreased significantly for more complex skills, such as stakeholder engagement, risk analysis and problem-solving’.
I have never met a truly competent negotiator or contract manager who did not excel at stakeholder engagement, risk analysis and problem solving. These are fundamental attributes without which subsequent contract performance is almost doomed to fail. IACCM’s research into public sector skills actually shows advanced capability in problem solving and comparable competency to the private sector in risk analysis and stakeholder engagement. Where the public sector falls down is in negotiation (because they generally take the view that their contracts are non-negotiable) and contracting (because they tend to operate from templates which often reflect inappropriate forms of relationship and terms and conditions). And as we all know from the highly-publicized contract failures, contract management is an important area for public sector improvement (as a competency, rather than just a job role).
Today’s challenging business conditions certainly demand renewed focus on required skills and competencies, but pre-requisite is a coherent assessment of which skills and competencies are actually important to the future and then an objective appraisal of current gaps. Given the speed with which change is occurring, there are significant shortfalls in both public and private sector. Some of these will be addressed through training. Others may be filled by new organizational structures (redefining job roles, moving to more team-based structures) and some through automation. It is a demanding, yet exciting, time – and progress will be assisted if we focus on tangible and objective data and creative solutions to performance shortfalls.
Commitment Matters 