There are some undeniable trends in the way that trading relationships are being formed and managed. Among the most significant are the push for improved outcomes and greater value for money. These overarching concerns are driving demand for more collaboration between trading partners.
IACCM has conducted extensive research into the benefits and implications of collaborative business relationships. There is no doubt that collaboration tends to improve results, but such behavior is not innate to the way that organizations operate. The boundaries of self-interest are volatile, driven by shifts in business priorities and market conditions. However, many businesses are developing collaborative capability – for example, by investing in relevant skills, adjusting selection criteria, refocusing governance systems and operating with greater transparency around performance and risk.
Yet while these initiatives take root, we also see new battlegrounds emerging. Perhaps the most significant of these is in the field of patents, where state-sponsored growth means an inevitable era of conflict. Last year saw the 5th successive year of increase in filings, with an estimated 10.2 million patents now in effect globally.
In previous blogs I have highlighted the point that the patent system has strayed far from its roots of protecting investment by inventors. Instead, it has become an economic weapon and a tool to maintain wealth imbalances. As a result, emerging nations have recognized the need to join the club and they are increasingly the source of patents, with the strongest growth internationally in countries such as China, India, Brazil, Indonesia and Vietnam. To appreciate the scale of this shift, it is worth noting that China registered more patents last year than the United States and Japan combined.
The implications to contract negotiators are significant because the growing use of patents will impact pressure for indemnities. Buyers will have growing concerns about potential claims for infringement, especially in overseas markets. Defense mechanisms will be important. These may range from greater diligence in checking for existing patents, as well as having rapid access to patent experts and support services.
I spoke recently with Rakesh Mittal, CEO of Piverse Inc., a company offering such services to companies and organizations around the globe. “Emerging nations will continue to have GDP growth exceeding 3-4% for at least another decade and hence will demonstrate highest growth in consumption of consumer goods and services supported by global patents”, observed Mr Mittal. “With this growth in patent activity, most companies are struggling to find partners who can provide a framework for asset protection and for managing their global filing process at an affordable level. For many, the cost of patent back office functions is escalating year on year by at least 10-12%”.
However, the key point that is confirmed by Mr Mittal is that “As patents become a revenue source rather than just costs, patents take center-stage in this fight for global markets.” He also observed that many small and medium-sized companies have paid little attention to this topic in the past and therefore may have no internal expertise on which to draw – placing not only themselves, but also their customers, at significant risk.
What this means is that companies need not only to register their patents and trademarks, but also to research and build defensive capability. Increasingly the question is not if, but when and where, they will be challenged for breaching a patent, copyright or trademark, or will be forced to take action to protect their own assets. For all the talk – and merits – of collaboration, our world remains innately competitive. While the areas of battle may alter, conflict remains inevitable. Smart businesses make sure they are prepared.
IACCM has been undertaking a series of industry studies on the values and experiences of contract negotiators from both a customer and supplier perspective. Our studies are increasing understanding of the approaches used by the best-performing organizations and how they are creating a framework that increases the chances of not only reaching agreement, but also realizing long-term value from their trading relationships. It points to the fact that success is highly dependent on the organizational framework, rather than the personal skills of a specific negotiator.
Negotiation is supposed to help us reconcile perspectives and interests. A simple definition is “a formal discussion between people who are trying to reach an agreement”.
Based on this definition, a high proportion of business-to-business negotiations must be considered successful. They do indeed reach an agreement – though whether that agreement was really worth having and whether it actually delivers the benefits the parties hoped for is, of course, a different matter.
There is a massive amount of research and writing on the topic of negotiation, much of it highlighting the extent to which value is missed or lost as a result of typical approaches and behavior. IACCM research has been focused on the practical barriers and looks beyond the skills of individuals, to examine the broader challenges of organizational design.
Our findings suggest that most business-to-business negotiations suffer from some (apparently fatal) defects. Among these are:
- a lack of coherence
- unclear goals
- rigid rules and standards
- lack of confidence in capabilities and process
- inconsistencies of culture or value which negotiators make little effort to understand
How do these manifest themselves? The findings here are interesting. For example, negotiators on both sides claim that they value a sense of partnership – yet in most cases, neither feels the counter-party offers this. Indeed, on digging further, you find that negotiators are generally not confident about the behavior or performance of their own organization, so they are understandably hesitant in what they will commit, even though they expect full commitment from the other side.
Also, each side looks for ‘responsiveness’ and hopes for a ‘single point of contact, empowered to make decisions’. Yet again, they consistently feel this is something the counter-party lacks or – ironically – if they find a counter-party with these characteristics, they don’t believe what they are being told!
Flexibility is another key value – but is once more something that each side feels is missing. They criticize each other for the use of standard agreement templates which either reflect the wrong type of relationship or introduce an adversarial focus on legal and financial risk allocation. Often this is tied to issues of culture and the different attitudes to risk – yet there is little evidence that the parties seek to explore those differences and address their respective concerns.
Ultimately, many negotiations suffer from a lack of clear ownership and leadership. The interests of competing stakeholders make coordination extremely difficult and the growth of ‘specialism’ is making that increasingly difficult. As a result, negotiations are often quite fragmented and decision-making may be inconsistent. Desired characteristics like ‘partnering’ and ‘collaboration’ are lost in the more fundamental challenges of skepticism, cynicism and absence of trust.
When I was presenting recently to a group of senior supplier relationship managers, one of them posed the question: “Hands up if you think all suppliers are evil?” Every hand was raised.
In an environment of growing complexity and increased interdependency, the need for organizations to work together in relative harmony has never been greater. Right now, the framework and approaches to negotiation are clearly not helping. Yes, we reach agreement – but at what ultimate cost and with what loss of opportunity?
So who are we kidding when we say there is a process?
A recent survey undertaken by Ray Carter of DPSS reinforces the findings of IACCM. In general, organizations do not have an integrated, comprehensive contract management process.
While a majority in Ray’s survey (almost 60%) start out confidently proclaiming that a process exists, it is by the end evident that it does not, or that in key areas it is ineffective. For example, 90% admit to concerns about the quality of cost control and almost 80% acknowledge that there should be more visibility into the management of claims and disputes. Change controls represent an area of weakness for more than 70%.
When so much work goes into winning and awarding contracts and when it is clear they are such fundamental business assets, why is it that approaches to their management are so avant-garde? The major reason – as identified by legal academic Stewart Macaulay more than 40 years ago – is that executives have historically seen little value in contracts. Therefore no one was given ownership for the process by which they are created or managed. Responsibility is typically fragmented, with many stakeholders claiming ownership of elements, but none feeling accountable for quality or results.
This absence of ownership inevitably leads to an absence of data. Any measurements associated with contract management are typically meaningless. For example, the most common indicators are cycle time and (if there is a commercial or contracts function) a headcount to revenue ratio or number of contracts handled per head. None of these measures tells us anything about quality, suitability, or the financial results generated. In other words, organizations generally have no sense of whether their contracts are either efficient or effective. And that is precisely what the DPSS survey confirms.
One might argue that in the old world of product supply, when caveat emptor principles applied, the executive attitude to contract management was largely justified. Apart from major project industries, such as construction or aerospace, contracts served a limited and often short-term purpose. But that world is fast disappearing and contract management increasingly operates as the ‘organizational glue’ in aligning business operations across complex supply networks. In this world, the value erosion from weaknesses in the contracting process become substantial – but of course, the lack of such a process means that these losses remain invisible and ignored.
So why do survey respondents claim there is a process when in reality it doesn’t exist? I think it is a complicated answer, but ultimately there are many who do not want to acknowledge there is a problem because then they would feel obliged to fix it – and that seems too difficult. While we continue deluding ourselves, nothing will improve. And in the meantime, this remains a golden opportunity for someone to champion.
In many respects, these seem to be challenging times. I observe many commercial, contracts and procurement groups struggling to build momentum and indeed suffering cuts, because they are not adjusting to business needs. The question is whether the function can adapt and take on a wider role, or whether that wider role will be performed elsewhere. The need is for individuals to focus on the areas of the future, not those of the past, and to show a grasp of the emerging agenda driven by new technologies and digitization.
Just as the threat lies in technology, so do the opportunities. We must understand and use the systems that will define and support leading-edge supply chains. These enable a growing reliance on external sources of supply, with corporate size increasingly measured on revenue, not numbers of employees. Coordinating and integrating across these multiple, interdependent relationships will be key to survival. Another growth area will be SRM, due to the need for a more blended approach to supply management and innovation.
This means, for the right people, growth industries will be those where either there is significant disaggregation (and therefore dependence on commercial integration) and those where there is extensive regulatory / reputational oversight (and therefore dependence on integrity). As a result, I think there will be major opportunities in industries like pharma, financial services, insurance and perhaps telecoms, where better structured and well managed relationships will be critical. To a degree, that will also flow into IT and IT services, especially for companies that rely heavily on aggregation of suppliers and delivery of outcomes.
Capital goods and infrastructure industries should also need more commercial resource, but probably with a focus on building more effective supplier /project selection, negotiation and delivery management. As margins continue to operate under pressure, the theoretical savings generated by traditional procurement and ‘risk management’ provided by traditional contract management need to be turned into the ability to oversee contracts that deliver value, efficiency and improved margin.
In an interesting article (To neither lose the customer’s respect nor become an ordinary salesman), Marcelo Rezende sets out the importance of building an empathetic relationship with a customer. He points to understanding the customer’s perspective and needs, pushing your own objectives into the background.
In many ways, Marcelo’s arguments reflect the traditional principles of good relationship management and certainly they mirror the behavior of many successful sales people. However, in an age where customers increasingly demand high quality results and outcomes, is this traditional approach sustainable?
The problem is that a business relationship is ultimately with an organization, not with the sales person. Yes, they may be an intermediary, but is their empathy actually a form of manipulation that will come back to haunt both supplier and customer? In other words, the sales interface may be highly adaptive in delivering a value proposition that the customer wants to hear, but is it reflective of what the supplier organization will actually do?
Unless there is real care, empathy can ultimately undermine trust. It may leave the sales representative seeing their role as being the customer advocate and their own organization becomes ‘the enemy’.
In many respects, this scenario is unavoidable. Sales are paid to sell; successful sales people need to relate to the customer and the customer’s needs; they will position the product or service in terms that represent value to the customer; this may create false expectations – indeed, those expectations are often dashed when the customer sees the contract (which is why many sales people prefer to be dismissive of the importance of terms and conditions and often leave their introduction to the last minute).
This is where we encounter the classic debate about ‘the contract’ and ‘the relationship’, with the sales organization generally anxious to promote the value of the former rather than the latter. Unfortunately, this does little to demonstrate overall business integrity and it also leaves contracts / commercial groups in a back-stop protective role. Even if the contract terms could have been adjusted to better reflect the customer’s values, they often are not, because the conversations that might have led to amendment were never held.
IACCM research has shown the benefits that can be achieved through closer partnering and earlier engagement between Sales and Commercial groups. Not only does this typically shorten cycle times, it is also much more likely to yield a happy customer and more profitable business. Empathy is something that must be embedded throughout the organization – not just within the sales department.
Impenetrable, incomprehensible, confusing and downright boring. These are a few of the words commonly associated with contracts. Whether it is the way they are designed, or the way they are worded, the overwhelming majority of contracts merit those descriptions. Indeed, in the case of many consumer agreements (especially those on-line), one can only believe the approach is a deliberate turn-off. Large companies would prefer customers not to realize just how unreasonable and unbalanced their terms of business really are.
Despite massive progress in other areas of communication – for example, company reports, marketing materials, web sites, official notices etc. – contracts have largely resisted significant change. In some instances they have moved to ‘plain English’ and there have been efforts to make them shorter (which does not necessarily make them clearer or easier to understand). But overall, IACCM surveys tell us that more than 90% of business people find contracts ‘hard or impossible’ to understand. Which may, of course, be good news to their authors, since it means more work providing interpretations of what they wrote – or in some cases, interpretations of what they think someone else was thinking when they wrote it.
Ultimately, none of this makes any sense. Contracts should provide an accurate record of an agreed transaction or relationship. In our increasingly volatile and virtual world, it should also provide a framework for underlying ‘business operations’ – who does what for whom in what circumstances and, in many cases, how this gets done. Good contracts are those that seek to deliver success; dealing with failure should be the exception. Today’s contracts often make failure more likely.
But however illogical the current approach, can it really change? Is there enough interest in making those changes? Increasingly the signs are yes. Led by a growing body of lawyers who are frustrated with current role and image, supported by an increasing number of law schools which want to produce graduates suited to the 21st century, aided by technologists who are working on artificial intelligence and blockchain, urged on by business executives and project managers who need contracts to become viable business tools – the momentum is building fast.
At IACCM, we re seeing this in a range of initiatives. For example, a growing number of in-house legal groups are coming together to explore the possibility of developing agreed ‘industry standards’ which would set a more consistent framework between suppliers and customers, facilitating increased clarity of those standard terms and reducing the amount of repetitive negotiation and customization. This is further developed by the legal groups approaching us for ‘contract design assessments’ – a specific effort to design contracts so they can be easily understood by counter-parties and users. Experience shows how this dramatically reduces cycle times, leads to increased compliance – and confers competitive advantage. It tells the world that they are forward-thinking organizations which actually care about open, honest communication and balance in their trading relationships. Then there are the various ‘Hackathons’, where top corporations and law schools engage in fundamental questioning of the thinking that underlies today’s contracting processes and its outputs ….
Beyond these practical steps, we have the much grander vision in places like MIT and Stanford, where fundamental thinking is going on about contracts in a digital age. An example is the Center for Collaborative Law ‘Common Accord’ event in Boston in May. There is a belief – currently beyond my understanding – that we can quite rapidly move to codified content and that contracts become standardized artefacts which increase security and also enhance them as ‘tradable assets’.
How quickly this grand vision occurs, I have no idea. But I do know the momentum for change is now here and that the practical examples of it are increasingly visible. Of course there will be those who resist, just as many in the clergy resisted the spread of printed books in the 15th century. Anything that demystifies activity and makes it accessible and understandable is a threat to those who own ‘the mystery’. The forces of history are firmly on the side of those who want simplification and self-help.
Almost 60% of contract practitioners expect contracts to become more ‘relational’ and less ‘transactional’ in the next few years. That’s according to the results of a worldwide survey on ‘The Future of Contracting’ that IACCM has been conducting since last November.
Why do they feel that this is the way forward? The answers vary, as do the motivations, but key factors include:
- for buyers, there are various pressures suggesting that transactional behavior is no longer a good idea. Since the late 1990’s, Procurement has focused on driving down prices at the expense of relationships. Supplier loyalty was a thing of the past. However, that approach carries risks and longer-term costs. The loss of supplier loyalty is one example. The difficulty of overseeing quality and performance is another – and this is especially the case in an area such as regulatory compliance. Frequent supplier switching also carries direct costs in administration and management, which can undermine the savings from a lower price or charge.
- for suppliers, there is generally little attraction in transactional business. Certainly in the b2b environment, it is disruptive, makes planning hard and is linked to commodity pricing. So the transactional pressures from buyers have forced many suppliers to re-think their business model, to seek ways to differentiate and bring added value. An example of this is a readiness to accept more risk, to take greater responsibility for outputs or outcomes.
Together, these factors have been reflected in the steady shift from pure product sales to an increasing volume of packaged solutions or services (indicated in the growth of indirect procurement and the percentage of world trade in services). However, this growth has exposed real weaknesses in ‘relationship management’, until now a rather woolly, sales-led activity.
Hence the scale of interest now in ‘relational contracting’. There are many myths about relational contracts, top among them being that it introduces a ‘softness’ to the contract that creates legal doubt or threatens enforceability.
The reality is very different. Relational contracts are fully recognized by the courts and subject to a growing body of case law and precedent. It isn’t vast – but that is because relational agreements are less likely to fail and lead to litigation. And in a business context, they actually reduce doubt by creating greater discipline and clarity in the relationship, its governance and performance. They introduce positive measures rather than relying on negative incentives – in other words, more control, less need to use the stick!
Without fundamental change to its goals and purpose, can the typical procurement function really contribute to business integrity?
One of the largest procurement associations has defined member responsibilities in the following way:
1) Enhance and protect the standing of the profession by being ethical and having integrity in all business relationships
2) Promote the eradication of unethical business practices such as infringing human rights, fraud, corruption
On the surface, these are noble aims – yet are they actually effective or relevant? To what extent are current procurement practices (and associated training) undermining the very values that lie at the heart of these responsibilities?
I write this because the common experience of most suppliers remains that Procurement practitioners are focused almost entirely on price negotiation and obtaining ‘savings’ – far too often with no regard to the impact this will have on quality and, I regret to say, integrity. I don’t question the ethics of those professionals – but I do question the judgment of organizations that measure success in such narrow terms. I also question procurement leadership that accepts such measures and does not challenge top management (especially the CFO) to monitor value achieved, not theoretical savings.
What needs to be different? First, it is the integrity of the supply base that should be of greatest concern to the procurement function. Having responsibility for personal integrity is surely a given; it is assessing and validating a supplier’s integrity and honesty that really matters in generating business results and protecting reputation. Far too often, this does not happen – and hence the concerns about human rights, fraud and corruption.
Second, and more fundamentally, seeking to maximize discount and minimize price is quite simply not compatible with the defined responsibilities. It drives unethical behavior; it favors the dishonest supplier; it encourages short-cuts and bullying in the supply chain. We see evidence of this time and again, especially in low-margin or price driven industries – for example retail, construction and the public sector. Stories such as the Taiwanese earthquake and buildings constructed with oil cans illustrate the human cost that comes with such practices.
Procurement and supply chain management are critical activities for the success of business and should indeed be major contributors to the delivery of ethics and value. But for this to have meaning, I suggest that practitioners must challenge the way they are trained and measured and re-think the role they play in developing and managing trading relationships.
If we ever want to achieve excellence in contract management, we must start thinking of it as a distinct business process and equipping it accordingly.
In many organizations, contract management is seen as a sub-element of other processes or disciplines – procurement, project management, legal, CRM, SRM etc. This fragmentation means that it is generally inefficient and ineffective – leading to the revenue and value erosion identified in multiple IACCM research studies.
Of course, some organizations have awakened to this issue and invested heavily in building their contracting competence. They have realized that the goal of sales and acquisition processes is to generate successful contracts. In other words, contracts are the core business asset and sales and procurement activities are the means to achieving them.
In today’s technology-driven world, one of the biggest obstacles to driving value from contracts and contracting processes has been the absence of relevant technology. Rather than challenge existing perceptions, many software providers have designed products that reinforce existing approaches. Their products are targeted for sales, or for procurement, or as an adjunct to ERP or CRM. As a result, they are seen as irrelevant to the needs of many parts of the business and hence adoption rates are low. Recent IACCM research showed that 62% of organizations have contract management software, yet less than 20% have achieved widespread adoption.
It is this background that causes me to feel optimistic about the announcement of amalgamation between Contiki and Exari. Together, they believe that they bring robust lifecycle management software that combines with powerful document creation and management. More importantly, they emphasize that their focus is on contract management as a competency in its own right – not as some sub-element of another process or function.
Of course, we have yet to see whether this vision translates to a powerful new player in the market, but it is an important step forward and offers the potential to support ‘excellence’ in contract management.
“We are living through a time of rupture, initiated by fast, dramatic changes in technology, institutions and values, and accelerated by IT innovations, globalization and deregulation in many areas. As a result, projects are now more than ever subject to complexity, change and unpredictability.”
Add to this quote the fact that deregulation is now accompanied by waves of new regulation, that globalization has resulted in geopolitical chaos, and that complexity, change and unpredictability apply as much to business relationships as they do to projects. Overall, we are left having to accept – and deal with – an environment of real uncertainty.
In the world of project management, this realization is steadily leading to new thinking about the processes, tools and skills needed to deliver successful results. One consequence of this new thinking is an increasing overlap between the role of the project manager and the role of the contract manager, together with recognition that the contract models and typical approaches to the management of uncertainty are not ‘fit for purpose’.
Contract managers and project managers tend to seek control and they see their approaches as providing a platform for certainty. While they may be good at initial planning within an established framework of business goals and stakeholder values, the instruments and methods they then use are not suited to the fast-changing environment in which they operate. In other words, current project management methodology and contract management disciplines tend to constrain change rather than anticipate and enable it. As a result, performance is often either derailed or delivers an outcome that no longer meets requirements.
For those in Project Management, there is a growing belief that new and better forms of contract, along with more flexible contract and relationship governance procedures, may hold the key to managing unpredictability. Indeed, they can point to an array of available contract models (NEC3, FIDIC, Relational) that already exist, but have largely been ignored by the commercial community. In consequence, there are early signs that professional associations for project management are steadily moving to the view that project managers may themselves need to become contract managers, or at the very least become proficient in this field.
Historically, many contract management groups were subservient to project management. But this was at a time when the role was in fact about contract administration and formed part of the control culture mentioned above. I welcome the fact that project managers are awakening to the importance of contract and commercial skills and the tools and instruments that this discipline can offer. I am also pleased that they want to include increased content in their training. And I hope the contracts and commercial community will respond by building closer relationships with project managers and in answering their needs for delivering successful projects in an unpredictable world.
Commitment Matters 