No matter where you look, the need for greater competence in contract and commercial management is obvious. Whether it is through the comments of leading business publications or the statements of top management and politicians, the days when these disciplines were either ignored or pushed into the background are fast coming to a close.
The Economist, the Financial Times, the Wall Street Journal, McKinsey, E&Y, KPMG, Deloitte, PwC – the list goes on and on. Each of them, at different times and in different ways, has highlighted the critical role of commercial and contract management skills in assessing markets, defining capabilities, establishing commitments and overseeing performance. It is not hard to see why: 2015 has witnessed continued trends towards a world defined by outcomes and outputs, an environment where reputation matters, where non-compliance carries a heavy cost – while failure to innovate and change brings decline and eventual collapse.
New businesses are being built through the economy of ideas and commercial innovation. Emerging markets are awakening to their urgent need for the contract and commercial skills needed to flourish on the world stage. Yet the leading economies are recognizing the same issue, as they seek to promote the growth of small and medium business and to redefine delivery of public services through contracted relationships.
All this comes together in highlighting the shortage of relevant skills. It is revealing the absence of trained personnel and the fact that ‘commercial staff’ (lawyers, procurement, contract management, finance) are far too limited in their understanding or empathy with commercial issues. There has been growing urgency in addressing these issues of organizational and individual competence.
For IACCM, the only Association focused in these combined fields, it has been a remarkable year. The confluence of trends has been met with the launch of the Journal of Strategic Contracting & Negotiation (JSCAN), the first ever academic publication in this field; it has seen the running of two ‘Massive Open Online Courses’ (MOOCS), attracting almost 40,000 students; it has been supported by the growth and enhancement of IACCM’s learning programs and training syllabus, as well as the Association’s continued entry into global markets, with participation now from more than 160 countries.
What this year has shown us is that there are remarkable opportunities for individuals and organizations that excel in their contract and commercial skills. IACCM’s industry studies clearly show that investment in these areas delivers a substantial return – financial, reputational and in the management of change. My next blog – 2016: A Year In Prospect – will explore the implications for the year ahead.
Many organizations are focused on simplification and cycle times. They know that initiatives in these areas can boost revenues, reduce costs and contribute to market reputation.
Those initiatives include growing interest in steps to simplify the contracting and negotiation process. For example, many large corporations are now engaging in discussions over ‘industry standard terms’, in an effort to cut the frequency and extent of negotiation. At IACCM, we are working with several industry groups on such projects, as well as specific company assignments on simplified contract structure and design.
There is mounting evidence that both of these approaches yield benefits. For example, we have seen companies like Hewlett-Packard introduce ‘principles-based negotiation’ and as a result, market perceptions of ‘ease of doing business’ with HP have improved. In another example, a large corporation that worked with IACCM on contract design has seen average cycle times to reach contract closure improve by almost 40%.
But while Finance may be pleased with the results from projects such as these, it often fails to undertake market impact analysis when it introduces new policies and can finish up adding complexities that undermine speed and simplification. Action on payment terms is a good example of this.
As anyone in the world of contracting will be aware, the long-term trend by large corporations has been to extend their payment terms. IACCM reported on this in May 2015, showing that the average payment term is now around 60 days, with the largest companies moving to 90 or even 120 days. In a recent blog, I questioned the logic behind such a move at a time when interest rates are negligible. I observed the complexity that is being introduced to the supply chain when such moves are accompanied by the introduction of factoring.
An article in GTNews confirms this point. Essentially, what seems to be happening is this:
- Finance departments want to reduce input costs from suppliers
- Aggressive price negotiation is no longer generating enough return
- Finance is turning to other mechanisms to create levers in negotiation: payment terms is one of these
- Right now, extended payment terms offer little real value …. BUT
- when interest rates start to increase, it will be useful to have flexibility on when to pay – keeping cash for longer will have real value
- the longer the payment period, the greater the discount that can be demanded for early payment – and hey presto! We have just created a lower price
Of course, suppliers are not stupid (they have Finance departments too), so they add to their prices to reflect these longer payment terms ….. but they can’t do that with established customers, they can only do it with new customers.
So here is where the games being played ultimately undermine the simplification of other initiatives. Through this one policy change, Finance have added considerable complexity to the underlying business process; they have added new relationship sand elements to the supply chain; they have impacted supplier costs and undermined supplier loyalty, further encouraging the need for regular re-bidding and supplier switching.
Was there really a business case behind all this? Is there a business case supporting many of the practices and policies that drive contract negotiation? When it comes to negotiating, do we actually have much idea of what we really want and why we want it?
More than half of Americans think there is more risk in storing their banking information in the cloud than there is in driving without a seatbelt.
This statistic compares two very different forms of risk and in a sense those who make this evaluation are right – the statistics certainly show that the probability of on-line fraud is greater than that of a serious car accident.
But the statistic – which comes from a Norton study of cybersecurity – perhaps better indicates the weaknesses in making risk assessments. It is not storing data in the cloud that is especially risky; it is the broader issue of how we handle activity in the on-line world – for example, in our use of passwords, or public computers, or the sites we access.
The approach to contractual risks has many similarities. Despite the claimed expertise of contracting professionals, many allow themselves to focus on the wrong aspects of risk. They see their role in terms of battles over risk allocation, rather than working with the counter-party to reduce or eliminate risk probability. This approach has been in large part driven by too much focus on the specific interests of the legal and risk management communities, both of which have a vested interest in risks occurring (because it keeps their work relevant and ensures they remain employed).
My observation about lawyers is not intended to challenge their opinions or contribution to contracting, it is simply making the point that they represent one element of the overall picture. They are one stakeholder among many. And if we allow any particular stakeholder to take a dominant position in creating contracts, we are not in fact handling risks – we are ignoring reality, just like the people who reject cloud computing.
Imprecision, uncertainty, major differences of opinion – these are the types of situations that a commercial manager relishes because they represent an opportunity to exercise judgment, to develop creative ideas, to deliver innovation and value.
In many respects, commercial management is the antithesis of compliance management. Of course a commercial manager must be aware of standards and policies, but they view these as a framework that must be understood to support evaluation of the impact of potential deviation or change.
There is a big gap today between the executive management view of commercial skills and contribution and the view of many who have a commercial management job title. Far too many commercial managers are actually closet compliance experts – skilled at identifying problems and possible exposures, rather than seeing opportunity and creating viable solutions. Unfortunately, many have come from functional backgrounds that offered no background or training in the real meaning or attributes of commercial management.
I see evidence of this in many situations. For example, IACCM’s Expert-level accreditation requires completion of a complex case study, which involves multiple stakeholders and some significant risks. Most candidates are very good at spotting risks; they then tend to think in terms of ‘the rules’ and their enforcement. This approach is almost certainly doomed to failure – alienating key stakeholders, ensuring confrontation with their trading partner, unlikely to win management support. These case study inputs generally miss the creative opportunities that could transform relationships and generate a positive, non-confrontational outcome.
Similar evidence comes from our frequent round-table discussion groups. The general reaction to situations where there is uncertainty or ambiguity is to be dismissive, to perceive the market requirement as unreasonable and ‘risky’. A conversation yesterday about the UK’s Social Value legislation was a good example. Rather than seeing an opportunity to create differentiated offerings, the core reaction was that this legislation is too vague, too difficult to interpret and unlikely to lead to any benefit.
Good commercial managers need a sense of realism. Certainly they must not be caught up in the over-optimism that often permeates sales teams and the top executives. But that does not mean they should move to the other extreme and operate as cynics or pessimists. Commercial management is about taking a balanced view and finding solutions that support executive optimism.
In a conversation yesterday, I summed up the key attribute of commercial management as ‘informed inspiration’. If the commercial community is to flourish, they must recognize that markets today are surrounded by imprecision, by uncertainty, by ambiguity. They must embrace these conditions as providing remarkable opportunity for innovation and new ideas that address the risks and provide competitive advantage.
The future of public service is to manage contracts. That’s how The Economist (December 4th, 2015) sees the emerging role of government in the digital age. It highlights the growing spend on public procurement and increasing dependency on privately provided services. And it observes that ‘if managed well’ these contracted services are provided more cheaply – but that this demands advanced levels of oversight. The alternative is continued headlines about expensive failures and massive cost overruns.
The Economist does not question Government’s direction in placing more reliance on contracted services, but it does question its competence to manage performance. In many respects, I find this unfair. Of course Government cannot overnight transform its staff into contracts and commercial gurus, but at least in some jurisdictions they are trying. And if they slow the pace of change, they come in for criticism for failing to address financial reality.
The truth is that qualified contract and commercial professionals are in short supply because neither government nor industry anticipated the scale of need. Few companies have made substantial investment in this field. Exceptions – such as Accenture – appear to be flourishing. And rather than criticise government, what about the role and responsibility of the private sector to operate efficiently and with integrity? Why would government need to invest so heavily in oversight if its suppliers were competent and honest?
So the problem that I see is that neither government nor the private sector has yet adjusted to the realities and expectations of a digital world, in which agility, performance, global markets and reputation come together in a potent mix that calls for astute management, adaptable commitments and robust commercial judgment.
While IACCM continues to train and certify several thousand contract and commercial managers each year, it has been alone in this endeavour and right now, supply falls far short of market demand. Increasingly we also work to support in-house commercial competency centres and this will help boost the numbers, but rather than criticise government, The Economist might do better to turn the spotlight on industry’s failure to spot the emerging trends that are transforming the role and importance of contracts and the staff who negotiate and manage them.
For any supplier, receiving payment is the most fundamental issue. That is why payment terms will always be a contentious issue – and why current trends to extend the payment cycle are arousing such interest.
Earlier this year, IACCM undertook a global survey which confirmed that large corporations are pushing their suppliers to accept longer payment periods, with 90 days now quite common. This mostly impacts smaller businesses – a finding confirmed by a recent YouGov poll in the UK. For small and medium enterprises, it found that roughly 60 days worth of revenue is tied up due to non-standard payment terms.
Most of these suppliers have encountered demands to accept later payment and few have felt able to resist. One consequence of this is the increasing development of supply chain finance – just one example being a recent announcement by AIG and Prime Revenue. In return for ‘early payment’ (i.e. getting paid in accordance with the more traditional payment cycle), the supplier pays a ‘small discount’. And hey presto, the problem is fixed! In fact, the announcement envisages that this solution will allow customers to continue extending payment terms ad infinitum with the only inconvenience to the supplier presumably being an ever-larger discount.
In many ways , this development smacks of lunacy. At a time when large corporations are mostly awash with cash, with interest rates at a record low, why precisely do they need to drive greater cash retention through delaying supplier payments? After all, the introduction of these supply finance intermediaries simply adds cost and complexity to the process. Ultimately, suppliers are not stupid, so they will be adding the ‘payment discount’ into their pricing. This move seems to achieve nothing except adding costs into the supply chain. (The only counter-argument I have heard being that it creates a war-chest for potential M&A activity).
Perhaps the motivation is less to do with current market conditions, but more an anticipation of the next cycle. It is easier and less controversial to impose extended payment terms while money is cheap, so do it now and reap the profits when interest rates increase. Alternatively, switch back to early payment offerings with a sizeable discount and claim these as ‘negotiated savings’. But whatever route this follows, does it really make sense?
There are many who see ‘the relationship’ and ‘the contract’ as independent elements – and indeed, who perceive the contract as potentially damaging to the relationship.
As I work with companies around the world, I am increasingly discovering that this is often far from the truth, especially in the case of larger corporations. An example arose in a conversation that I had yesterday with a former senior supply chain executive with one of the world’s best known brands, whose ‘no contract, just a handshake’ approach has been taken to indicate strong and collaborative relationships.
According to this executive, the ‘no contract’ approach applied only to the top-tier suppliers with a ‘strategic relationship’. These were indeed closed ‘with a handshake’. Other transactional suppliers always had a contract of some sort – e.g. a purchase order.
However, behind the scenes, the appearance of ‘collaboration’ masked the fact that the corporation in question was using the lack of contract as a lever to pressure its suppliers. In fact, in recent years, the top tier suppliers started to ask for contracts to protect themselves from what they saw as ‘abusive behavior’. According to this former executive, the reason for the no-contracts approach was not because of a close, collaborative relationship, but was actually because the customer didn’t want to be committed. They used this lack of commitment to threaten the suppliers with discontinuance if they did not meet requirements. This way, they pushed suppliers to take low prices or to bear the risks of entering new markets. It was made clear to top-tier suppliers that ‘they were accountable for growth’.
Driven by these approaches – and the very low margins that resulted – there was substantial market consolidation, so over time the power balance shifted and suppliers were no longer prepared to accept the one-sided relationship. They insisted on having contracts. This need for contracts was actually becoming mutual because of issues such as regulatory compliance, which required far more discipline.
Within the customer organization itself, I am told that the handshake system contributed to a culture of limited executive accountability. Since handshake agreements depended on personal relationships, they often eroded – damaging performance, trust and sustainability. When things went wrong, executives were able to deny accountability since there was no written record, no set of commitments, no signatures.
The story is fascinating because it shows the very real risks of short-term, cost-based behavior based on market power. It is tempting for top management to use such power in its supply management strategies, but as this example shows, such an approach cannot be sustained. Rather like the automotive industry, which for many years exhibited similar aggressive tactics, it will take a long time to restore trust and, in the meantime, corporate performance will suffer.
Once again, we see the important role that contracts should play in ensuring an ethical framework to a relationship and establishing ‘the rules of play’. Rather than seeing no contract as a good thing, perhaps it should raise our suspicions about the true intent of our counter-party.
When it comes to winning business, are contract managers a liability or an asset?
Interview any group of sales people and you will receive mixed answers. For some, contract managers are a key area of support, facilitating internal reviews and ensuring the production or negotiation of a timely and appropriate agreement. For others, they are a source of problems, an obstacle to be avoided.
These divergent views reflect differences in approach, personality, skills, process and organizational culture. But what about the customer view? In general, do they prefer doing business with companies that have invested in contract managers?
In recent days, staff at IACCM have spoken with a number of large corporations about their experiences working with major providers of outsourcing and IT services. They appear to have little doubt about their preference – and they increasingly see organizations which lack trained contract management staff as unreliable and unprofessional.
One major financial services company made the point that it isn’t just about having people with the contract management job title – it is also about having them working with a consistent role and professional skills. In this context, they cited the value they have observed in personnel that undertook IACCM training and certification. Several went further and mentioned how helpful it is when the contract managers from both organizations have completed the IACCM programs because that creates a common understanding of approach and generally yields a far more positive outcome.
This should come as no surprise. Professions generally do not distinguish between personnel who work in customer versus supplier organizations. One reason that lawyers or finance professionals are often able to reach speedy resolution is because they speak the same language and had similar core training and education. It seems obvious that having buy side and sell side staff operating with a common body of knowledge will accelerate the speed and quality of contract closure and performance. But several of these interviews went further because they cited examples of companies that are making no investment in their development of a contract management function – and how increasingly they are starting to avoid doing business with such companies ‘because they can’t be trusted’.
So the message seems to be, if you want to win in the market, adopt a certified Contract Manager!
It’s not uncommon for business functions to lay claim to ownership or proficiency in another domain – but that doesn’t make it right.
In the case of contract management, the procurement, legal and project management functions are among those who assert it is ‘theirs’, that it is in some way a sub-set of what they do. That is, they make that claim until things go wrong – at which point it conveniently becomes someone else’s fault.
i am making these observations because people frequently question whether contract management is a discipline in its own right. They do not immediately register its importance for each party in a trading relationship, its role in ensuring benefits are realised and obligations are fulfilled. Quite obviously, it is not about Procurement – it is about establishing an effective relationship under the right terms and then overseeing their performance – and that requires a contract manager within the customer and a contract manager within the supplier.
it is of course quite possible that this contract management role can be a sub-set of another job – such delegation occurs in many areas of business organization. The problem comes when those with a delegated authority fail to realise the limits of their knowledge and expertise.
It is attitudes and behaviours like this that cause so many contracts to go wrong or to under-perform. No one has ever prevented any of these functions building proficiency – indeed, I have personally made many efforts to rouse their interest. The fact is, contract management is not core to their perceived purpose or expertise. They mostly want to own it, rather than actually do it – because in reality, contract management today is a complicated field, requiring the sort of skills and knowledge that is not taught in the law, supply management or project management syllabus. And that is why contract management has become a discipline in its own right, with its own body of knowledge, tools and methods.
I am not suggesting that practitioners in law, procurement or project management know nothing about contract management, nor that they should have no role in it. They should simply appreciate that just because they know something about the subject does not make them an expert – any more than a contract manager (who is trained in aspects of their role) is expert in their disciplines.
Contract management aggregates across many specialist fields and interests and, in a sense, is a servant to all of them. One reason it is being claimed by these different groups is because, unlike many of them, it is less threatened by new technologies and job losses. It will therefore continue to be an attractive career path in its own right – and not simply a sub-set of another discipline.
For anyone wanting to pursue this path, IACCM offers a globally recognized portfolio of training programs and certification, backed up by extensive research and continuing professional development programs. They are available worldwide.
Category management is now a widespread approach within supply management. For some, it is about aggregation of spend and achieving lower prices. For others, it is about increasing the expertise and value delivered by their procurement function. As with so many initiatives, it is often hard to tell what precise benefits have resulted.
One concern that is often expressed is whether a category approach limits perspectives and creates a narrow focus. In this context, I was interested in a conversation today with a team from a company called New Information Paradigms (NIP). One of their projects contained the term ‘category leadership’, which they defined as ‘aligning capabilities through relationship assets’. The project had involved collaboration across a portfolio of suppliers, in which they had worked together to identify efficiencies and deliver savings to their customer. For example, they explored opportunities to align transportation and warehousing – even, in a few instances, to switch product lines.
The NIP approach had caused organizations to explore their relationship as a potential asset and to examine their mutual partnering capabilities. It led to key questions, such as:
- are we both prepared to adjust the way we do business to better align processes?
- how well do we share and manage information as a joint resource?
- how well do we understand relationship risks?
- how well are we leveraging the relationship asset to do business in a new way, to innovate and to protect or grow mutual value?
It strikes me that there is a further step in this approach – and that is to achieve ‘category integration’, where there are specific initiatives to develop collaboration across inter-dependent supply networks and to establish opportunities to optimize performance. We see this to some extent in approaches to relational contracting, where facilitated workshops establish common procedures, discuss relationship risks and generate a shared commitment to continuous improvement.
My belief is that category management in isolation delivers limited benefits. As with any segmentation, it needs approaches that offer incentives and methods for integration and cooperation that go beyond single transactions or individual suppliers.
Commitment Matters 