Its easy to write about the many areas where contract management could be improved. It is the failures that make the headlines. But sometimes it is important to reflect and recognize the success stories.
IACCM’s current series of in-depth studies on ‘the ten pitfalls of contract management’ offers exactly that opportunity. It is now 2 years since the initial work to identify the major causes of value leakage was undertaken. Many are familiar with the resulting infographic and the average 9.2% contract value erosion that occurs due to weaknesses in the contracting process.
Our current studies are examining each of the ten pitfalls in detail and they show encouraging signs of improvement. For example, the number one issue is lack of clarity over scope and goals. When we first explored that topic in 2013, there were significant disagreements between customer and supplier in 38% of contracts. This year, that number has dropped to 30%. Organizations are developing more sophisticated approaches, including improved contracting models, greater use of templates and checklists and investment in training operations teams. While there is still far to go, the scale of improvement is encouraging.
Subsequent studies have investigated timing of engagement of commercial resources and approaches to involving stakeholders. While both remain problematic, there is evidence that more sophisticated use of technology is leading to improvement. In some cases, this is due to streamlined procedures, in others it is through greater dissemination of knowledge leading to empowerment across the organization.
Each study is highlighting ‘best practices’ that reduce the value being eroded from historic weaknesses in contracting. Pitfall number 4 – protracted negotiations – is currently open for input (participate here) and reports on the other three are available to IACCM members on the website, http://www.IACCM.com.
Back in medieval times, the routes to a healthy mind and body were simple. Regular bleeding ‘to balance the humors’ could be accompanied by periodic flagellation, to encourage self-reflection and atone for bad thoughts or behavior.
When it comes to contracts, those medieval instincts have maintained a curious hold. The prevalent approach remains that they should first and foremost be instruments of pain and retribution. First we will extract all the blood we can (through aggressive price negotiation) and then we will apply instruments of torture (through maximised risk allocation).
Medicine has made massive progress over the years – and the digital age promises truly revolutionary change. It’s time for those who practice the dark arts of contracting to step back and see what we can learn.
First, medical practitioners have long understood that it would be far smarter to avoid problems than to treat them. Research is dedicated to understanding causes and to promote better ways of living. Technology – and especially artificial intelligence – is now being applied in a way that transforms insights because of the scale of analysis that can be undertaken. It is enabling understanding not only of cause, but also of likelihood – so individuals can better assess their propensity for medical problems. When it comes to diagnosis, digital devices are already actively monitoring our condition and in countries without well-established (and therefore more change-resistant) medical practitioners, are rapidly transforming the delivery of health care. Finally (at least for this example), doctors have recognised that ‘one size fits all’ treatment regimes often do more harm than good. Blood letting is no longer a universal solution. Indeed, technology now supports highly customised treatment and remediation plans suited to the conditions and preferences of the patient. As a result of all these changes, success rates will soar.
Similar results could be achieved with contracts and trading relationships. For example, we could be undertaking mass analysis of causes of ‘ill-health’ in contracted relationships. We could be applying diagnostic monitoring to predict when things are likely to go wrong. We could be developing treatment plans in the form of appropriate relationship models and terms and conditions, using technology to overcome ignorance and to eliminate the unhealthy fixation on standards and compliance.
Back in medieval times, most doctors (at that time largely self-anointed since there was no professional standard) were doubtless aware that their remedies did not work. But their continued employment depended on maintaining the myth that they knew what they were doing. It is time for contracts experts to step back and ask searching questions about our commitment to professional standards and the remedies and solutions that we apply. Far too often, they do more harm than good. And the sad thing is, many of us know that to be true.
Increasingly global, increasingly diverse teams, increasingly virtual communications …. the challenge of managing contracts has never been greater. Whether you are assembling, negotiating or implementing agreements, the results you achieve depend on teamwork – and in cross-cultural environments, that can be hard to achieve.
IACCM research has revealed just how demanding it is today to work across cultures. Not only are we dealing with more countries, we are also seeing greater activity between different industries. Cultural variations are not just national – they exist between functions, professions, companies and industries. Successful contracts depend on coordinating and reconciling differences in all these dimensions.
Examples of the challenges we face include the reactions that different cultures may have to the use of power, the handling of conflict, or attitudes to leadership. IACCM’s recent study of international contracting illustrates all these points, as well as the variations in ethics, business standards and transparency.
As we work in increasingly diverse teams, we also need to understand (and address) variations in the things that motivate different cultures, their attitudes to goals or norms of practice. Language is an area we understand – and hopefully we make allowances when team members do not share a common tongue. The more we work with strangers, the greater the challenge of effective communication. The job of the contract manager is often to ensure common understanding and shared commitment. If we fail to appreciate the impacts of culture and the need this creates for sensitivity in approach and quality in communication, we put our contracts at risk.
An IACCM webinar on July 7th will present recent research that examines these issues and suggests how best they can be handled.
‘Contract management’ and ‘commercial management’ are terms and job titles that are often used interchangeably. Yet in many environments, they mean different things. As the global body for contract and commercial management, IACCM provides definition for both.
The challenge of divergent functional names and job titles is certainly not unique to this field. For example, what is the difference between a project manager and a program manager, or a project manager and project engineer? How does Procurement differ from Supply Management or Purchasing?
IACCM’s brief definitions are as follows:
- “Commercial management’ is the activity which defines the overarching policies and practices that provide a framework for trading relationships
- “Contract management” is the discipline through which those policies and practices are implemented and within which individual transactions are agreed and performed
Both activities need to be undertaken in a company. Often they are performed by the same function. They are also interdependent because the information generated by one feeds the other. For example, commercial policies and practices are influenced by the market experiences encountered during contract management. At a functional level, commercial management is strategic and contract management is operational.
Why does definition matter? Quite simply because without it, there is confusion. As mentioned at the beginning, different groups may undertake the same work, yet have different names; or equally, those with the same name may perform different work. So definition ensures common understanding.
It should be noted that the IACCM definition in both cases reflects a full life-cycle role. There are those who see ‘commercial management’ as covering only pre-award activities and ‘contract management’ covering post-award. Again, we accept that there may be division of job roles, but suggest it is wrong to lose the integrated view of process. Indeed, research into ‘best practice’ contracting makes it clear that such divisions are a source of weakness and value loss. High performing organizations have a consolidated end-to-end process.
There are “three big technologies shifting and colliding and the impact of these shifts will be felt across industry, beyond borders and into the lives of all of us.
The Internet of Things is a term for the connectivity of devices. Big data is the mining of behavior so we can build profiles on what people do and at some level predict what they want to do next. The third big technology coming our way is Artificial intelligence.” (Matt Church, Thought Leaders ‘Talking point’)
As IACCM’s imminent report on The Future of Contract & Commercial Management will reveal, these disciplines are in no sense immune from these powerful technological forces. They fundamentally alter the context within which we are working. Our world is pushing hard for simplification (and 83% of users consider the contracting process is complex); it is demanding user-centered design (and 88% find contracts hard to understand); and it expects an ability to demonstrate value (most contracts and legal groups lack data or evidence).
Connectivity, data mining and analysis are transformational not only in how we form and communicate contracts, but also in the value they can generate within the business and beyond. This is not just about doing our work faster or with less people. It is about seeing the purpose and structure of contracts in a completely new way.
If you want to know more, sign up for your copy of the Future of Contract & Commercial Management!
This week, my major focus has been on technology and its likely impact on the world of contracts and contract management. It included a day at the MIT Labs, meeting with academics, legal and technology experts and then proceeded with a West Coast tour that embraced Los Angeles, Silicon Valley and San Francisco, having discussions with technology start-ups and several of the more established providers. In each location, we also convened meetings with local IACCM members.
So what did all those conversations lead me to conclude?
Far from eliminating contracts and contract management, it is technology that is making them more important. It is also making them far more visible and transparent. So those responsible for contracts face both a challenge and an opportunity – to modernize, make fit for purpose and then deliver increased value.
Trading relationships are key to business – indeed, key to global development. Digitization and networked technology are transforming those relationships – their number, their strategic importance, their diversity and the risks they entail. Clarity, simplicity, ease of execution are critical and will be enabled by technology. For example, we must stop thinking about contracts as purely legal documents produced using traditional legal methods and wording. They are in fact communication vehicles that assist in defining and managing relationships, their risks and business outcomes.
“I speak all the time with executives from successful IT and technology companies. They no longer have time or patience to do business with companies like Oracle and IBM. It takes 3 months for them to negotiate a contract. By then, those executives expect a project to have been completed – not about to start.”
That was the comment made by one meeting participant – and he should know, because he and his team recruit many of the C-level executives for those firms.
Another of the companies attending our meetings explained that all its contract management staff are undertaking compulsory training in digitization – and this training includes revolutionizing its approach to contract design, negotiation and management, to deliver exceptional customer experience. “It is transforming delivery,” explained one manager.
At MIT, all the talk was about creating contract standards – but not to eliminate contracting. Instead, it was to facilitate and hasten the process, especially around legal provisions, so that organizations can instead focus on the results they are trying to achieve and the relationship they must form and manage to generate shared benefits.
The issues and opportunities go much deeper. Contract management has to make use of the advanced analytical capabilities now available. These include the ability to manage across languages and jurisdictions (we have to eliminate the risks that these impose); they include the ability to see and manage interconnections between contracts (for example, an extended supply network); they include portfolio performance analytics – what issues regularly arise, what terms contribute to success and failure; they include advanced negotiation techniques, with technology removing emotion and imposing effective planning and prioritization. The list goes on – and such technologies are rapidly emerging and gaining deployment.
In a fast-moving, outsourced, outcome-focused world, contracts and their management take on massive significance for the health and sustainability of business and government. Far from technology spelling the death knell for contracting experts, it promises their elevation to key roles within the business. But this, of course, depends on a readiness to act as business enablers, not controllers. It is about embracing risk and finding creative answers to its management. And it demands steady consolidation of those resources into an integrated group that covers all trading relationship types (buy and sell), to ensure their integrity and inter-operability.
Without doubt, the best news from this week was the evident excitement and enthusiasm of practitioners and technology leaders to partner on this journey and together to become the drivers for rapid change.
Is contract compliance about strategy, process, policies or individual obligations? Is it about specific performance or conformance with regulation? Is it focused on internal operations or external relationships? The answer, of course, is that it is all of those things. But an intelligent compliance system is also about ensuring understanding of when compliance must change, at what point must we switch our thinking.
For an example, I’ll go back to my days in the world of computers and software. I’m talking about a time when pricing varied by country because sales were generally local and customers were organized by country or region, not globally. But networked technology rapidly drove a change in the customer view. They wanted to manage their purchases on a worldwide basis – and they started to demand harmonized pricing. I recall the Finance department fighting tooth and nail to resist those demands. They accused customers of ‘gaming’ and set up rigid control systems to prevent Sales deviating from standard country pricing.
The result was a sustained and fairly rapid loss of market share, especially in portable devices such as personal computers. Finance and Contract Management between them were remarkably successful at ensuring compliance – indeed, ultimately they had 100% compliance, because they ensured the collapse of that segment of the business.
So when we talk about compliance, we must define its role – and the responsibilities of ‘compliance managers’ – very carefully. When I was asked recently about the job role, I tried to develop a high level description:
“Contract compliance management can embrace many different aspects and phases of contract management. It is an important area of business performance which in theory will raise efficiency and reduce risks. However, while compliance monitoring is necessary, it is essential that there are processes which allow insight to the need or opportunities for change. Therefore best practice takes on two forms – one of which is ensuring that there are controls over non-compliance and the other is ensuring that the definitions of compliance are monitored and necessary adjustments are made for changing business or market conditions,
At a strategic level, it might be responsibility for things like:
– ensuring integrity of the contract management process and monitoring compliance
– aligning available contract terms with corporate policies and approved practices
– developing or overseeing availability of standard contract templates and monitoring compliance
At a transactional level, it might include:
– review and approval of proposed variations from standard process, policy or terms
– monitoring of contract and obligation performance to ensure compliance with specified terms
At both levels, it might include:
– input of relevant compliance data to control systems
– identification of compliance variations and / or exposures, including frequencies
– recommendations for changes in compliance rules, policies or terms to reflect changing trends, market conditions or opportunities
– management reporting and change initiatives”.
I’d welcome your thoughts and experiences on how this role is best defined and performed – recognizing, of course, the increasing role that software plays in compliance management.
Do we complement each other, or do we compete?
On May 22nd, the UK’s Sunday Times carried a major feature highlighting the growing importance of projects and their management. It rightly highlighted the fact that traditional purchasing of goods is giving way to the purchase of results, of outcomes. This trend is further enhanced by continued outsourcing of business operations and service delivery.
The value of projects is supposed to increase by more than 50% – or $18 trillion – over the next few years, creating nearly 16 million new jobs (though it strikes me that many of these will be replacement jobs, not new). The article implies many of these roles will be as ‘project managers’ – in other words, coordinators of the activities needed to deliver valuable contract and project outcomes.
So what are the implications of this to contract managers? Does it represent additional opportunity, or potential elimination?
I think we need to look at this from several angles. First, it has been my belief for almost 30 years that any ambitious contract manager needs basic training in the principles of project management. The disciplines associated with project management are applicable to the assembly of a contract, especially the coordination across multiple stakeholders. Second, project managers need similar awareness of contracts (as project management tools) and broader commercial issues (since these are what frequently undermines their project). With some exceptions, there appears to be little interest or understanding on the part of project managers that these are valuable areas of knowledge or expertise. Third, commercial complexity and volatility shows every sign of continuing to increase over the years ahead, demanding resources capable of anticipating, coordinating and managing the results. Fourth, I very much doubt that we will see the emergence of a new breed of ‘multi-functional’ experts, capable of managing every aspect of a complex project, from inception of opportunity to close-out.
What I expect is that our increasingly automated age will still require cross-disciplinary coordinators. It is subject experts who will suffer the greatest attrition, steadily replaced by knowledge systems. So it may be that project managers (primarily technical coordination skills) and contract managers (primarily commercial skills) will increasingly partner and perhaps share accountability for successful project delivery.
Today’s world of open, electronic communication does not always lead us to the truth, but it frequently exposes those who behave dishonestly or without integrity. As a result, there is far greater focus on ethical standards and public expectations continue to grow.
Ethics are fundamental to contracting and negotiation. If there is no honesty in the commitments we make, trading activity not only becomes more risky, but eventually it would collapse. Yet competitive pressures – and the desire to make money – mean that businesses (and their individual employees) often act at the margin of their true capability or rules. Over- commitment by a sales representative is one example; creative tax avoidance by the CFO and the Board may be another.
It is interesting to observe how organizations and individuals react when they are caught out, when they have overstepped the mark. Frequently, I hear the childish refrain: “I didn’t mean to do it,” – as if this lack of direct intent somehow exonerates the offending party from blame.
Sometimes, of course, we act from ignorance and cannot readily anticipate the outcome. But in itself, ignorance or lack of intent do not seem to me acceptable excuses. Ethical standards demand a much higher bar – and essentially beg the question: “But did you mean NOT to do it?”
And I think this principle of testing and validation lies at the heart of good contract and commercial management. ‘Meaning not to do it’ involves thinking through the potential consequences of actions (or sometimes inactions) and ensuring decision makers are equipped with the knowledge or insights that support honest and ethical commitments – and avoid that rather pathetic excuse of “I didn’t mean to do it”.
Part 1 of this blog described current perceptions about the role of contract management and pointed to the difficulties these create when trying to demonstrate value. Part 2 will explain the benefits that can be achieved from an altered focus.
According to IACCM research, 98% of people agree that winning and awarding contracts is important to the health and performance of their business – so there can be little doubt that they see contracts as innately important. Where they struggle is in the form those contracts take (just 12% find them easy to understand) and the process through which they are formed and managed (just 17% are satisfied).
The problem, I believe, is due to a fundamental mismatch between business needs and contract management practice. Contracts are assets (hence the 98% who consider them valuable); but rather than supporting their creation and maximizing their value, the process has become dominated by issues of compliance and control. This is illustrated by complex and time-consuming review and approval procedures, undertaken for the purpose of risk avoidance or to allow the application of ‘expert judgment’, yet too often contributing little except delay and value erosion.
Contract management is not an extension of ERP (enterprise resource planning). Whereas ERP drives internal efficiencies, contract management is all about relationships that cross enterprise boundaries. As a discipline (and also as a software application), it must seek ways to simplify inter-enterprise activities and to maximize the benefits from a trading relationship. It is therefore first and foremost an enabling function, optimizing the value of contract assets and focused on supporting the quality and speed with which contracts can be closed. Measurements of success must therefore focus on the extent to which the form, structure and content of contracts is generating high-performing relationships – and avoiding terms, policies or procedures that generate unacceptable levels of risk or undermine value and success.
This approach shifts contract management from an internal to an external (market-based) focus. Its value comes from being able to illustrate steady advances in the efficiency and effectiveness of trading relationships through improved business interactions. For example, good contract management reduces the frequency of complaints or claims; it leads to accelerated decision-making, change management and issue resolution; it can demonstrate its contribution to on-time, within budget completion of contracts or projects. These improvements come from increased alignment with trading partners and an appreciation that the terms of contract that really matter are those associated with governance and performance management – the terms that increase the probability of collaborative relationships and success.
The true ROI of contract management does not lie in the risks it avoids; it comes from the value it can add through continuous update, adaptation and streamlining of the way that businesses interact. It is an instrument of creativity, based on consolidated and comparative performance data and supplemented by the ability to exercise judgment over individual (major) transactions or relationships. This is a big step away from administrative coordination, oversight of transactional obligations and monitoring of compliance – and it reflects the business intelligence needed to prosper in the digital age.
Commitment Matters 