I received a request from an IACCM member who is undertaking analysis of the potential savings if his large, international corporation replaces in-house lawyers with contract managers. Research in the US has apparently led to a number of $100 per hour – presumably fully accounted cost. His question is whether the potential for cost reductions is similar in Europe.
I thought that I would share my answer to see how others might react. I am sure there will be those who applaud the idea of cutting legal headcount, while many will doubtless suggest that such a move would represent grossly irresponsible risk-taking.
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Your question is really interesting and quite challenging to answer.
“In Europe – as increasingly in the US – there are many contract or commercial managers who are qualified attorneys, but not ‘of counsel’. In some instances, they may perform jobs of broad equivalence to the in-house counsel. In others, the thing that attracts them to the job is that their role is significantly broader – and hence a cost comparison may be rather misleading.
In other instances, the alternative to a lawyer may be a para-legal or even an unqualified individual who has been trained to perform many of the ‘lower-level’ legal tasks. This model can of course reduce per hour costs considerably.
A third model is where much of the legal and contract-related work is moved to an off-shore center, either captive or outsourced. This option will generally be the cheapest of all.
I think the point here is that there is wide variability between organizations in the role they perceive to be needed. By way of example, I attach recent benchmark data showing where contracts / commercial groups typically spend their time; you will see that this is a much wider remit than the typical law department. Indeed, to the extent there is a trend in Europe, it is towards the realization that legal skills and knowledge are only a component of contracting and that there needs to be a focus away from pure lawyers towards ‘commercial managers’ with a much wider understanding of deal economics, risks and value management.
Our research shows that companies with a dedicated contract / commercial function achieve significant headcount efficiencies – but only part of this is through reduced legal resources; they also drive significant efficiencies in the functions that otherwise have to prepare and manage key aspects of the contract (e.g. Statements of Work, Service Levels etc).
I suspect that the theoretical per hour savings of simply replacing in-house counsel with an equivalent ‘contract manager’ would typically be around $35 – $50 in Europe – and significantly more if the work is moved to a low-cost center. However, as indicated above, my concern is that this approach fails to ask what is the real business need and how to optimize the value achieved from contract management.
If there is interest in this wider question, IACCM has various tools to support analysis of the contracting process and extensive additional benchmarking data to indicate the business impacts of alternative models.”
Although the business environment is undergoing rapid change, the focus of term and condition negotiations seems to remain relatively constant. Is that because contracts offer a point of stability in an unstable world, or is it because those who lead negotiations are failing to adapt?
IACCM’s annual study of ‘most negotiated terms’ never fails to offer fascinating insights. Over the years, it has shown the effect of new regulation, of economic recession, of geopolitical insecurity, of shifts in technologies and business offerings. Yet it has also confirmed an underlying tendency for negotiators to focus on issues of risk consequence – and in so doing, to undermine the value that contracts can deliver.
Does this tendency suggest that most of today’s contract negotiators are pessimists, or that they see their role as protecting the business against the over-optimism or lack of precision within sales or business unit management? Certainly such an attitude has validity, but it also fails to tackle the real problems (or opportunities) that come from creative and collaborative contracting.
With today’s steady increase in executive interest and focus on contracting, are we seeing a shift in the timing and purpose of negotiations? Is this affecting the terms we negotiate? IACCM will value your opinion and experience – and also share with you the results of their global survey. You can participate by visiting https://www.surveymonkey.com/r/topterms2015
Organizations continue to disaggregate. The traditional ‘integrated enterprise’ has eroded and current thinking is that organizations are more agile, more efficient and more creative if they use external suppliers and contractors, rather than invest in large-scale ‘owned’ resources.
We know this change is happening because the data shows increasing volumes of purchasing spend. Indeed, data from Proxima (a consultancy) has suggested that almost 70% of the average company’s revenue is now expended on external suppliers.
But are the assumed benefits occurring? It is hard to find data that answers this question. Traditional procurement measures focus on negotiated savings, rather than broader business benefits of cost over time, impacts on efficiency, speed or value. There is growing realization that disaggregation does not mean abandoning responsibility: in other words, you can eliminate resources, but you still have to engage and manage your new source of supply.
This pattern of change is leading to rather more fundamental impacts on business thinking. Management is awakening to the need for increased collaboration with its ‘outsourced’ resources. Relationships that are based solely on measures of input cost and compliance may appeal to the Finance department, but do not create a high-performing organization. This means also that greater care must be taken in the selection of suppliers and in the subsequent management of interactions. Hence we are seeing new measures introduced – often more qualitative in nature – and a major focus on broader skills of relationship management and contract management.
The implications of this change are significant. For one thing, it transforms traditional thinking that ‘contracting’ and ‘relationship management’ are separate activities. Increasingly, they are integrated and interdependent. Secondly, it also challenges the old view that contracts and relationships are a sub-element of procurement or sourcing. Today, contract and relationship management are the life-cycle activities which generate value; procurement and sourcing are sub-elements of them.
In the background, we see a growing amount of data illustrating the need for – and consequences of – change. But as a recent study from Vantage Partners shows, there is still a long way to go. Their survey of supplier relationship management (SRM) shows that almost two-thirds of participants don’t know how to measure the value achieved from their SRM investments. Over half indicate that their organization needs to execute a ‘major change of attitude’ if it is to generate greater value from its supply relationships.
For those who are interested in SRM, there is another major study currently underway. State of Flux is undertaking its annual survey, probably the most comprehensive in the industry. It can be reviewed and completed at https://www.surveymonkey.com/s/state-of-flux-2015-srm-survey
‘Collaboration’ is a big theme for management in many organizations. There are many factors at play in driving this direction. One is growing interdependency between organizations. Another is the trend away from product purchases to an increasing volume of services and solutions (or ‘indirect spend’ in procurement terms. Then there is concern over reputational risk, which makes the quality of relationships far more important. And finally we have innovation and the recognition that this is more likely to occur in a collaborative relationship.
I spent some time this week reviewing the state of collaborative working and it is clear that most organizations face a significant gulf between aspiration and reality. They seem to fall into two camps:
- There are some who focus on developing internal mechanisms and measurement systems to encourage greater cooperation with their suppliers or customers, but fail to translate these into revised approaches to contracting. The policies and practices that underlie terms and conditions (and the way they are negotiated) show little sign of alteration. While this does not necessarily destroy the possibility of collaboration, it certainly makes it harder.
- There are others who believe that they can change organizational behavior simply by introducing new forms of contract. Not only does this not work, it actually increases frustration and risk.
Another important disconnect is that many programs designed to deliver more collaborative relationships fail to consider the extent to which most suppliers now operate within an interdependent network. If that network is not operating collaboratively, all the aspirations will be undermined.
What can we do to address these disconnects? Common wisdom is that the contract is an output and comes at the end of process and organizational design. I suggest that the opposite is the case – the contract should come first. A thorough assessment of goals and markets leads to an understanding of the characteristics that surround collaboration – for example, commitments to communicate, share data, develop joint systems, agree mutually acceptable payment terms, acceptance provisions, responsibilities, security etc. The contract can be used as a method of assessing the extent of disconnect between collaboration characteristics and collaboration capabilities. This understanding is then used to drive internal reengineering to ensure alignment between ‘the market’, ‘the contract terms’ and ‘the ability to collaborate’.
Success is defined as an accomplishment, or the meeting of an aim or objective. In a recent article, Jonathan Cooper-Bagnall of Proxima Group challenges Procurement to re-think its measures of success. He might have posed the same challenge to all those involved with forming or managing trading relationships.
To quote from Jonathan’s observations: “A study by Oxford Economics highlighted the significant disconnect between the measures for success (of executives versus Procurement practitioners). The survey of 500 C-suite executives and 500 procurement employees across the world showed that 72% of C-suite executives ranked cost savings and cost avoidance as their primary measure for procurement success. Inventory turnover was second with 50% and supplier performance came in just below that at 49%. Procurement practitioners however, have different priorities according to the results of the study. Around 56% of practitioners ranked touchless transactions as their premier performance indicator. Cost savings and order cycle time tied for second, with 52%.”
Based on this, Jonathan rightly highlights a growing disconnect between executive expectations and the value that Procurement delivers. He suggests that management is increasingly concerned about the damage to brand and reputation that results from high-profile supplier failures to perform. While I agree with his conclusion, it does not seem to me that it is supported by the Oxford Economics findings – and it is miles away from the direction that most Procurement groups appear to be taking. Again, however, I must observe that the problem of defining and measuring success is common to most commercial groups – buy and sell.
My perspective is that executives are indeed concerned about business performance in terms of revenue, profit, brand and reputation. Each of these items is a measurable outcome. In itself, none of the measures mentioned by Oxford Economics is an outcome – they are inputs which may or may not lead to a positive outcome.
And that is the core problem with the measurements used by Procurement, Legal and contracts / commercial staff. They have no real insight as to whether their actions in selecting suppliers, drafting or negotiating terms or managing contracts actually drive better business outcomes. They contribute to a process, they do not oversee or manage it. So Jonathan is right to call for change – but I suggest that cost savings and cost avoidance are ‘success indicators’ that have been tried, tested – and failed.
This week’s IACCM Europe forum brings together more than 200 senior managers from across industry and the public sector. They are exploring and discussing the theme ‘2015 – the year of Commercial Excellence’.
There is wide agreement about the pressures facing business and the need for rapid and substantial change. Indeed, during one of the executive workshops, Jonathan Cooper-Bagnall, from Proxima Group, made the observation that many business functions had spent 10 or more years undergoing reengineering. Similar fundamental shifts were now being demanded of commercial teams (contract management, legal and parts of procurement), yet in a much shorter time period of perhaps 2 or 3 years. This creates massive challenges, especially with regard to the development of skills.
Jonathan’s point reflects the sense of challenge at the conference. Many delegates recognize the nature of the commercially transformational pressures in their markets, but are struggling to shift from current roles, tasks and behaviors. As a result, they are overwhelmed by the workload that results form change, yet lacking the people or tools to adapt. Commercial processes, policies, practices and systems (to the extent systems exist) often pull in a direction opposite to that of the market. This means that existing commercial resources can be seen as the enemies of change, resisting the needs of the business.
This conference is therefore very much about how to deal with the change agenda, how to start making the rapid shifts that are necessary. It focuses on issues such as the almost universal shift to performance and outcome-based agreements, to new payment models, to a role of business enabling rather than business review, to a need to segment market and relationship types rather than deal with transactions and individual deviations. It places commercial teams in a role as leaders and instigators of change, rather than a force focused on compliance. Risk management becomes far more holistic and an innate element of practice, rather than today’s rather selective and inefficient approach to selective risk avoidance. Overall, Commercial Excellence sits right at the hear of the business. This year’s event is helping commercial teams to fill the current vacuum and take ownership of their destiny – in a time-frame that is dramatically faster than that experienced by any other business function.
I have written several blogs recently on the topic of performance or outcome-based contracts. This reflects growing pressure on suppliers to take responsibility for results and the momentum is especially strong in the public sector.
As with all contract models, the key question is whether their use drives greater levels of success. IACCM research (a recent report is available from the IACCM website) suggests that performance-based contracts have a substantial positive impact – reducing the percentage of ‘failed’ agreements by almost half. But this depends on a shift in the behaviors and management systems of the contracting parties. If they do not invest time in clarifying requirements or fail to establish the right governance mechanisms and incentives, most or all of the benefits will be lost.
Yesterday I presented to an audience of project managers from the Canadian Department of Defence. Canada is just one of the countries moving steadily towards increased use of performance-based agreements. I also sat in on a presentation by Deloitte, which revealed the results of their audit of US performance-based logistics contracts. The US DoD started switching to this model about 15 years ago, but (as with many organizations) kept no data to show whether there was overall benefit. About 5 years ago, Deloitte developed a methodology and ran a pilot review of 11 contracts. Subsequently, they added a further 11 to the list. Based on their analysis, 21 of the projects reviewed were generating improved availability and responsiveness at significantly lower cost. These findings have helped support the steady expansion in use of performance-based agreements.
Among the many interesting insights that Deloitte shared was the fact (and their surprise) on how little performance data is generated in respect of contracts. They had great difficulty in extracting demand data, cost data, consolidated availability or supply data from either the customer or supplier. In other words, no one know whether a different form of contracting was generating any real improvement in results, at either a transactional or portfolio level.
To me, this was once again the critical point. IACCM research regularly points to the substantial effect that improved contracting can have on business results. Our frustration is the absence of solid data. Our only method to establish impacts is through ‘crowd sourced’ input. When member organizations go away and test this data by undertaking their own in-depth audits, they actually find the results are quite accurate. But sadly, they remain the exception and many contracts groups prefer to dispute the results than to undertake the research. Hence, the move towards performance and outcome-based agreements will doubtless remain slow – and in many cases will be driven by other parts of the business.
At a recent meeting of General Counsel, the question was asked “In the future, will the General Counsel need to be a lawyer?”
While only a few answered in the negative, it was interesting that there was no impassioned defense of the need for lawyers to hold the role. And indeed, given broader trends in business, it seems wise for the legal community to consider this possibility and the reasons behind it.
It is increasingly the case that heads of function are not drawn from within that function. They are often selected for their business talents and the drive for their appointment may be to bring reform to a specialist group that is not delivering the right value. But they may also be put in place to act as a more effective conduit between the functional specialists and the broader business – ensuring that in-depth professional knowledge is evaluated and communicated in ways that are practical.
The in-house legal department was often established as an alternative to using outside lawyers. As such, it often acted in a quasi-independent role, with the belief that it should not get too close to the business in case this influenced its objectivity. For many reasons, that thinking is under increasing pressure and lawyers are not quite as special as they once were. Indeed, the same pressures are evident in law firms, where a growing number of non-lawyers increasingly add significant value and, in leading jurisdictions, the need for law firms to be owned by lawyers is fast eroding or under challenge.
There are certainly already instances where the General Counsel may not be admitted within the jurisdiction where they are based. It seems only a matter of time before in-house legal groups start to appoint the best person for the job – and that job may not require them to be legally qualified.
The MBA market produces an ever-higher number of graduates. Leading business schools promote enticing programs, offering the leaders of the future key skills such as a global mindset, entrepreneurship, decision-making. The problem is that these skills are increasingly common – and employers do not generally value them.
Bloomberg recently issued a report based on input from leading recruiters. It sought to identify the skills that really can get you employed or advance your career – that is, those that are both valuable and rare. Towards the top of the list are analytical skills and the ability to work collaboratively – two areas consistently highlighted in this blog. But while these are valuable, they are also relatively easy to find (though interestingly they are not among the most common skills for contracts and commercial professionals).
Two areas that are often highlighted by the contracts and commercial community as being important are industry-related knowledge and adaptability (the ability to perform a wide variety of tasks). Unfortunately, both of these feature on the ‘less wanted’ list.
So what are the premium skills – those that are both rare and highly valued? There are four of them:
- Strategic thinking
- Creative problem solving
- Leadership skills
- Communication skills
All of these feature among the key skills measured by IACCM competency assessments. Our benchmarks show considerable variability within the contracts and commercial community. For example, those in commercial management tend to be stronger on the first two. Contract managers are slightly ahead when it comes to communication skills. Neither group scores well on leadership. But overall, there is considerable room for improvement. Even those applying for Expert level certification are frequently weak on strategic thinking and creative problem solving. They are much better at seeing problems than at solving them. This means that creative opportunities are mostly missed. While technical skills are often very high, these do not lend themselves to strategic thinking – indeed, growing specialism can create a blindness to the bigger picture.
With some 12,000 professionals now having undertaken the IACCM skills assessments, we have invaluable insight to the current state of the profession (both buy-side and sell-side). Our regular talent surveys also tell us which skills the community thinks are important. Frequent conversations with top management offer us insights to their thinking and expectations. And now we have the Bloomberg survey to add to the mix. Overall, Bloomberg’s findings broadly align with what we hear from executives when they talk about contracting competence or commercial excellence. Right now, there is a significant gap between these messages and the community’s view of what skills they have or deem important.
Public procurement is going through testing times. The approach to service delivery is changing radically and demanding a depth of commercial skills far beyond those of the past. There is a need for far greater market awareness and engagement, to keep pace with emerging supply trends and technologies. It is also essential for government to ensure innovation and value for money through improved contract management.
These demands have led to major reform programs, many centered on the need for ‘smart buyers’ or ‘government as an intelligent client’ or ‘making government a better customer’. In other words, there is broad understanding that the public sector must focus on greater collaboration, increased transparency and ‘ease of doing business’. But as with most reform programs, the right words and sentiments at the top are often frustrated lower down in the organization. That appears to be the case with a number of today’s well-intentioned initiatives.
However, there are encouraging signs coming from the defence department in Australia, where a commitment to performance-based contracting means that public sector leadership is not just saying it wants a change in behavior, it is actually doing something about it (and I should acknowledge here that counter-parts in Canada, the US and the UK are working closely together on related concepts).
The Australian direction is not new. The first performance-based contracts go back some 10 years and in the last 3 years have been accompanied by growing use of relational contracting models. However, these moves are now supported in a recent review paper, ‘First Principles’, which builds on existing foundations and seeks to accelerate progress.
The paper contains some important directions. First among these is a re-definition of ‘the enterprise’ to include all organizations contributing to an outcome. This acknowledges the fundamental significance of the customer / supplier relationship and the approach to its governance and oversight. This is supplemented by initiatives such as interactive bidding and renewed commitment to the engagement of small-medium enterprises. Another development is the provision of related training – but not just for defence personnel: the intent is to run joint supplier-buyer programs. Each of these developments seeks to drive alignment of purpose and capability between the buyer and supplier.
At a sell-out conference last week, staff from the Defence Materiel Organization led reflections on the approach to performance-based agreements and the contribution they are making to improved relationships and results. This represents a rejection of the short-term, adversarial methods that still bedevil so many procurements and demonstrates that the right practical measures can drive real change and kindle wide enthusiasm.
There are still improvements to be made – and the conference included some hard-hitting assessments by suppliers, highlighting areas of policy and terms and conditions that still stand in the way of optimized results. But many of these are being tackled and, importantly, there are the forums for issues to be discussed openly and addressed.
IACCM’s research on performance-based contracts shows that failure rates are lower than in traditional contract models, but they require a shift in attitudes and behaviors which many (on both buy-side and sell-side) tend to resist. A lack of trust, a failure of imagination and an absence of visible leadership often combine to frustrate change. In Australia, there are clear signs that the mould has been broken and that true improvements in performance are being realized.
Commitment Matters 