There is a tendency by many of us to view technology with a degree of skepticism. We have heard it all before – this wave of transformational change that never seems to arrive.
The truth is that technical advances tend to creep, rather than explode. As a result, they steadily insinuate themselves into our lives, in a way that we often fail to notice. It isn’t so long ago that there were no mobile phones; when contracts were produced on typewriters; when virtually all negotiation was face to face and there was no e-mail – most communications used a physical postal system.
Yet another large bank – this time HSBC – has announced the roll-out of biometric banking – the use of voice and fingerprints for customer recognition. I am sure many of us will welcome the elimination of today’s increasingly complex password systems. It has taken about 20 years for the banks t0 become sufficiently confident in biometrics that they are making this switch. I recall projects at IBM in the early 1990’s which failed because of the error rates – about 20% of people were not recognized.
So what, you may ask, has this to do with the world of contracts and negotiations? Well, biometrics is just one area of increasingly intelligent systems and collectively they will change our world over the next few years just as much as the advent of networked technology and email disrupted our ways of working in the 1990s. Certainly archaic concepts like signatures will rapidly disappear. One of my colleagues is meeting today with a voice recognition expert who has developed a matching system for negotiators – technology that helps you align with your counter-party, ensuring you have a negotiator who is most likely to build empathy and reach a more favorable outcome.
Nanotechnology also falls into this ‘intelligent’ category. I have written before about the FDA’s provisional approval of nanotechnology-coated drugs which transmit messages to their manufacturer. Similar technology is being embedded into packaging, so that we could, for example, charge on opening or use. Such developments will lead to a surge in contracts where the supplier takes responsibility for on-demand availability – once one product is used, it is automatically re-stocked.
There are even more radical proposals to use collaborative development systems in generating ‘contract standards’, similar to the way that open source software was developed. ‘Smart contracts’ using the blockchain sytems that underpin Bitcoin is another area of development.
As I have written previously, many providers of contract management software moved down a blind alley, led by consultants and analysts who had little appreciation of the role of contracts in 21st century business. The issue is not automating what we have done in the past; it is about managing contracts as core business assets through increasingly versatile and intelligent systems. For anyone working in this field, it is essential that we start to understand the impact on job roles and future skills; we need to lead the transformation, not wait for it to overwhelm us.
Once we start to erect tribal boundaries, where does it stop? Advanced economies depend on being open, on working to establish accord rather than discord. By working together we create an environment of potential harmony. By excluding others, we create an environment of likely conflict.
Many of us know this – and sadly experience the consequences of ‘tribal protectionism’ – in our work as contract and commercial experts. Whether the boundaries are internal, between functions or profit centers, or external, between customers and suppliers, they create inefficiencies, they detract from value, and they make our daily work less pleasant. Since our activities focus on trading relationships, current debates about world trade are certainly relevant to us.
Trade lies at the heart of human development. It has enabled progress, yet it has also been the source of imperial expansion and wars. Economic and technical progress cause massive fluctuations in the relevance and importance of different geographic regions and the need for specific skills. At any point in time, this is good news for some, bad news for others.
Given this environment, it is not surprising that the issue of trade lies at the heart of political debate. There will always be a desire by some to expand and by others to protect. Each has valid arguments. But ultimately, I think it is important to reflect on the fact that human development has been driven by our unique capability to trade with each other. It lies at the heart of our economic and social well-being.
Therefore we must be cautious about political leaders who offer protection, but in reality have no sense of the consequences of such protection. It is essential to remember that for every action, there is an equal and opposite reaction. The thing we must always ask is “if your policies are implemented, what will the reaction be – and is that something we will welcome?”
And indeed, it is the same question we should always be asking within the context of our own organization or company – are we protecting or are we enabling and which policies will actually have beneficial results?
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.
Commitment Matters 