$2.6 billion over budget, 7 years late in delivery … and that’s just the revised estimate. If only the Department of Homeland Security and the IBM Corporation had studied IACCM’s guidance on ‘the 10 pitfalls of contract management’ before they embarked on their project to automate major elements of the US immigration process.
Once again, we have the story of a technology project going badly awry. From initial cost estimates of $500 million and a completion date of 2013, the current projections have now climbed to $3.1 billion and delivery around 2020.
Reports in the Washington Post (November 9th, 2015) associate the problem directly with two of the IACCM top causes of value loss – failure to agree scope and goals and failure to employ the right form of contract. One can only assume that other principles of good contracting were also breached – for example, the quality of transition and on-going contract performance management must have been lacking for such a large problem to have remained hidden for so long.
Perhaps the only way to avoid these costly blunders is to convert the 10 Pitfalls into the 10 Commandments of Contract Management and to require obligatory sign-off of each element by the responsible contract owner in both buyer and supplier before they can proceed. It is otherwise remarkable that we see so many projects push ahead without clarity over goals or how they will be achieved or what governance and performance process is in place. I am sure there are many excuses – political pressure, the need to secure or retain funds, the good intentions of the parties to get started and sort it out later, the confidence of DHS in their supplier …. The thing is, we have seen and heard this so many times before and there are ways these pressures can be handled without jeopardizing success.
Good contract management is very cheap compared with losses and reputational damage on this scale.
Today sees the launch of IACCM’s ‘massive open online course’ (MOOC) on contract management. Some 20,000 students are enrolled for this 3 week program and already the chat boards are filling with comments and discussions from around the world.
Due to its popularity, this is the second running of the program, which was developed in partnership with Southampton University and FutureLearn. The inspiration behind it was the UK Government, which is leading the world in its appreciation of the essential role that contract management plays in today’s complex business environment.
The MOOC reflects the UK Government view that contract management matters to an audience that goes far beyond lawyers, procurement managers or commercial specialists. It is something that has been massively under-rated as a business discipline and contributor. The participants on the course mirror that opinion. Many are from areas such as project management, HR, marketing and operations – people who have felt disadvantaged by their lack of insight to contracting process and practices.
It’s not too late to join the program – and it is free. Simply go here to register. All sessions are recorded so you can quickly catch up!
IACCM research is showing a direct correlation between attitudes to risk and ease of doing business. Both these elements are significant in our approach to negotiation and in turn impact the quality of business relationships – and thereby affect results.
86% of respondents to a recent IACCM survey believe that the approach to risk allocation during contract negotiation has a medium to high impact on the relationship. This rises to 90% who identify a substantial effect on time and cost. These statistics explain the growing trend by major corporations to re-think their approach to negotiation and to bring an end to the traditional ‘battle of the forms’. Indeed, a number are backing off their traditional attitude to the sacrosanct legal terms such as liabilities and indemnities. Instead, they are focusing on provisions that help reduce the likelihood of things going wrong – and thereby demonstrate their confidence and competence to perform. Even areas such as intellectual property rights are becoming topics for intelligent discussion rather than hard-coded compliance issues.
The complexity of the contract is also a significant factor. 88% noted that it has a medium or large impact on the relationship. “In today’s increasingly complex business environment, we must eliminate avoidable and low-value sources of complexity”, observed one respondent, reflecting the fact that poor contract structure and design also cause delay and increased costs. Again, leading companies are appreciating that this is avoidable and are looking at innovative approaches to contract design. For example, one global consumer goods company has recognized that contracts should be a source of clear business communication, not purely legal communication. They are introducing graphics, flowcharts and other devices into their standard procurement agreements to aid understanding by suppliers in more than 80 countries. This approach is already reducing costs, shortening lead-times and resulting in improved compliance. Overall, the digital world is changing how and where we do things.
Approaches to contracting and negotiation must keep pace – otherwise they become a visible source of lost value and increased risk.
All too often, the phrase ‘strategic relationship’ seems to mean ‘Do as I tell you’. As with words like ‘collaboration’ and ‘partner’, when they come from the mouth of a powerful customer, it is simply an attempt to make demands for concessions sound more reasonable.
That at least appears to be the view of Adrian Gonzalez in his article about Walmart’s latest cost-cutting initiatives. Based on the reports that are emerging, it does indeed seem that the claims by Walmart that it wants to “do right by our suppliers because we want to create strategic relationships,” is perhaps somewhat disingenuous. But as the article points out, this simply brings Walmart into line with most others in its industry – and arguably almost all major corporations.
I agree with Adrian’s comment that it would be nice if Walmart acted as an industry leader in finding new ways to handle the cost-based challenges that it faces. GE CEO Jeff Immelt seemed to support such a view in recent comments when he explained that ‘the first 20 years of my career were all about achieving advantage through low cost. Now they are about speed to market, productivity, integration and data”. Though GE and Walmart are in different markets, might there be opportunity for a similar shift in value and strategic advantage?
It seems to me that there are several commercial barriers to driving meaningful change in supplier – customer relationships. One is the impact of short-termism. So often, cost reduction initiatives seem to be driven with great urgency, almost as if they are a surprise. In such an environment, arguments regarding potential for longer-term value are simply drowned out by the immediate demand for savings or cash. Once the crisis action has been taken, everyone goes back to business-as-usual until the next time. In this context, Procurement is just the hammer being wielded by the executives in Finance. Suppliers effectively have no representation, no one standing up for the quality or value of ‘a relationship’.
But does this mean suppliers are free of any responsibility for the cycle of negative behavior? I think not. Relationships always involve more than one party and unreasonable demands and bullying are ultimately sustained by the behavior of both participants. Walking away is obviously one option, but there are many others. An obvious approach (which I suspect many actually take) is to anticipate these cycles of demand and be prepared for them. In collaborative industries, suppliers share their innovations and improved processes with their customers. In industries such as retail and automotive, they mostly keep them hidden – storing up their savings for the day when inevitably they will be demanded.
At IACCM, where we study trading relationships on a cross-industry, international basis covering both buyers and suppliers, we gain insight to the variety of behaviors and cultural attitudes. Many of the embedded practices are simply a game – and that includes the inevitable squeals of protest. After all, if I don’t squeal, the demands will become even more onerous.
Is that game productive? Does it lead to the sort of benefits that Jeff Immelt is seeking? Probably not. But in the battle for corporate survival, everything is a balancing act – and most suppliers simply will not be ‘strategic’.
It has been 10 years since IACCM conducted a mock trial over the legality and enforceability of electronic signatures. Our panel of high-status lawyers came out in favor of electronic signatures – but then almost nothing happened. It is therefore great news that a top corporation like IBM has moved forward with global adoption – and you can learn more in a webinar this week – for details and to register click here.
Lawyers tend to be risk averse and, in the case of a subject like electronic signatures, they are unfamiliar with the law between jurisdictions. So the simple answer, when asked to change, is ‘no’.
And that’s the way it has been in most of the intervening 10 years. But now it is different. The IBM Corporation has moved to adopting a universal electronic signature. Along with this initiative, IBM has simplified the contract wording and structure as part of its efforts at ‘ease of doing business’. It is all part of its work to enable simplified commerce and a recognition that most transactions will steadily move to mobile devices and hand-helds.
The announcement by the U.S. Administration that too much school time is absorbed by testing is just another indication of the revolution in how we look at knowledge, its value and application in a networked world.
Increasingly, the people who are valued will not be knowledge workers, but application workers – that is, those who grasp the context of the issues or challenges they confront and can apply knowledge to achieve the right solution or result.
Why is this happening? Quite simply because knowledge itself is embedded in technology. To know things is of reducing relevance because it is so easy to look things up. The value comes in appreciating when knowledge is important, understanding where to acquire it, how to validate it and then in applying it.
In this emerging world, where access to mobile technology is fast becoming ubiquitous, ‘experts’ will no longer be those with great depth of knowledge. Rather, they will be people who show their capability in applying knowledge to great (and often innovative) effect across diverse conditions and circumstances. Initiatives such as those at the Minerva schools are an example of what is to come.
In recent IACCM member meetings, we have been challenging our community to think about the implications of these changes to the nature of the skills they need to prosper. Their enthusiastic response reveals that many are excited and energized by the prospect of escaping from the task-driven environment of today. They welcome the prospect of applying their knowledge to drive business improvement and innovation. Already we have been adjusting the IACCM training and certification programs to reflect this shift from imparting knowledge to supporting and teaching its application. Over coming months, we will be sharing insights to the attributes and competencies that underpin success – and, of course, reflecting these in our many member programs.
I was reading an article on CNN that ranks the world’s worst (and best) airports. Travelers ranked them on criteria of comfort, convenience, cleanliness and customer service.
Most of those at the bottom of the list are in emerging or highly troubled markets. For example, I doubt many people go to Kabul or Karachi airports with high expectations on any of the named criteria. Poverty and political instability clearly do not help when it comes to rankings for comfort, convenience or cleanliness.
The top of the list is dominated by facilities in Asia, holding 6 of the top ten spots. The remainder come from Europe (3) and Canada (1). In most – perhaps all – cases, I think these winners see themselves competing with alternative airports, both for originating flights and as destinations / transit facilities.
Continuing on the travel theme, I then noted a message from the Business Travel Coalition, bemoaning the state of competition in the US airline industry. It cites efforts by the four main carriers to disempower their regulator, prevent competition and eliminate distribution channels, backing this up with comments by Presidential candidate Hilary Clinton:
“Over the past year, oil prices have fallen from over $100 a barrel to under $50, and the price of jet fuel has dropped more than a dollar per gallon. But the four major airlines—down from 10 airlines just 15 years ago—are charging as much as ever for tickets, even as they hit travelers with extra fees, for everything from checking a suitcase to picking a seat when they fly home at the holidays.”
These articles caused me to think about the companies that I find worst to do business with and the criteria on which I make that judgment. I have clear winners and they come predominantly from the telecoms industry, though I would certainly add several airlines to my potential list and would also put car rental companies into the rankings. Software providers represent the fourth category on my personal hit list.
What is it that causes me to wish some of these companies would disappear? I think the main frustrations (as both a consumer and a business manager) are:
- a sense of unfairness.Pricing and charging systems are often opaque and appear designed to limit transparency and increase the chances of maximizing revenue from hidden or unethical practices.
- a sense of complexity. Complicated charging formulas seem to be linked to complicated internal systems and procedures, leading to a high ratio of mistakes. The focus on revenue is accompanied by tortuous internal control systems such that no one seems to be in control or to know what is going on.
- abysmal customer service. A result of control and complexity is that no one has any authority to do anything. Even if you can reach ‘customer service’, chances are that they cannot help and need to transfer you multiple times – usually to other people who can’t help. In the end, you dread calling and so you give up.
In every case that I can think of, it seems to me that Finance is the most powerful function within the business. In many cases, they seek to use market power (or claims of hardship) to support consolidation and restrict competition. None of them can be viewed as innovators when it comes to commercial models and in many cases they operate through franchises, alliances or distribution networks which support their efforts to point fingers at each other and deny responsibility or authority over problems.
IACCM research has shown the importance of clear and fair business practices and of empowered interfaces. Companies do not have to be especially flexible in order to win customer loyalty – indeed, many that are flexible subsequently suffer in their ability to do what they promised.
So what do you consider the most important practices or behaviors when it comes to the best and worst companies to do business with? Share your thoughts – and we can perhaps test market sentiment with a survey.
“Business today is increasingly digital, services-based and driven by intangible assets, including rights to exploit intellectual property, from patents to logos.”
This quote from The Economist (‘New rules, same old paradigm” – October 2015) indicates the challenge facing the world of contract management. The Economist article points to the fact that the laws and regulations relating to trade were mostly designed for the manufacturing age. Not only are they inappropriate, but they add to the complexity of dealing with a fast-changing environment.
Might that observation also be made with regard to contracts and contract management? In a soon-to-be-published article, IACCM will point to the ineffectiveness – indeed actual damage – of today’s contract design and primary terms and conditions. The apparent inability of this discipline to adjust to the digital age is making it increasingly anachronistic (register with IACCM if you would like a copy of this article).
But is there light at the end of this particular tunnel? Dalip Raheja believes that there is. He recently attended the IACCM Americas annual forum and I found his observations both interesting and encouraging. This is what he had to say:
“As we have observed in the past, this is one forum where professionals from both buy-side and sell-side get together and talk about their respective processes. What has been fascinating to watch is how the language has changed in this community from contracting to commitment to relationships. While there were still a few slides that talked about contracting and compliance being the main outcome, it was pretty obvious that the train has left the station on that one and most people are already on board having a great time on the relationship express!!”
(To see Dalip’s full article, click here)
Whether consciously or otherwise, the world of contract management is morphing into a world of outputs, outcomes and relational agreements. For leading corporations (and a growing number of government agencies) there is a real commitment and hunger for change. Practitioners are enthused by the idea of being associated with success, rather than spending their time fixing problems and handling contention. As Dalip observes, the IACCM Forums and meetings appear to be the one place they can go to gain insight to how they might institute those changes. In this context, he omitted one group that is critical to success – that is, the technology and service providers who were present at this year’s Americas conference in record numbers (and with a waiting list to attend).
Contract management in its traditional form will indeed become far less visible in the digital age. Like so many other activities, it is steadily moving to an automated process. But this creates a wealth of new opportunities, as we start to generate a mass of value-adding data and insights, releasing the potential for new commercial offerings and market intelligence. Among these will be the integration of ‘the contract’ and ‘the relationship’, no longer adversaries but rather complementary forces for driving business value.
The implications of this are significant. Systems, processes, organizations and job roles will need substantial adjustment. The IACCM event touched on many of these changes, harnessing the enthusiasm of those who have boarded the train that Dalip references and are already waving goodbye to the debates of the past.
The collapse of the U.S. / EU safe harbor provisions covering transfers of personal data is a reminder of how fragile key trading principles can be. It is especially pertinent at a time when major cross-regional trade agreements are being negotiated and signed.
There will always be those who oppose trade, for either political or personal reasons. They will be looking for weaknesses, betrayals of trust, as opportunities to pounce and undermine relationships. Safe harbor is a good example. While it was on one hand convenient to pretend that it represented true cover for the rights of EU citizens, that was most likely a myth. Various political and industry groups always opposed the measures, believing that they entrenched the power of US technology giants. When Edward Snowden revealed the scale of US intelligence gathering and abuse of the safe harbor principles, it was only a matter of time before a challenge would be mounted. Now it has been successful and some new principles will need to be agreed. Meantime, European tech companies have a window of opportunity to offer locally based services.
Once again, the lesson here is that there are no secrets in a networked world. Governments – at least those which are democratic – that abuse trust or trample on principles will be found out and suffer accordingly. The same applies to business. Failure to operate with integrity is increasingly punished. On the counter side, regimes that pervert the truth condemn their people to poverty and are forced in most cases to operate outside the world trade systems.
Every parent must at some time look at their child and wonder “What will you do when you grow up?” Today, it is perhaps harder than ever to predict or offer guidance. Jobs that once seemed safe and secure are increasingly under pressure or disappearing; at the same time, new roles are emerging – a recent report suggested that 15% of the jobs in London today did not exist 15 years ago.
Yesterday I presented at the PASA conference in Melbourne, Australia. My topic was ‘Is the world of Procurement disappearing?’ And my answer was in many respects yes – because the role and its potential value are changing fast. I suggested that all the ‘C’ words that have been associated with the function (control, compliance, categories, commoditization, cost) are becoming supplanted by higher value issues that have much greater appeal to top management – for example, ‘the 4 R’s’ of reputation, relationships, risk and return.
Underlying the challenge for all workers today is the relentless rise of networked and digital technology. ‘On-demand knowledge’ means that simply knowing things or performing process steps has limited value. I made clear that this challenge is universal – one has only to follow the debate in other professions to appreciate that they are all insecure and that roles which perform tasks or offer general advice are disappearing – no one will be willing to fund them. Doctors, lawyers, accountants – many of the services they provide can be performed faster and more accurately on-line.
So the important question is ‘what’s left?’ And it seems to me there are two fields on which we can focus. Both are related to the management of the changes going on around us – one being to deal with the complex and innovative possibilities created by our changing world and the other to establish and maintain the framework that enables the performance of others.
Organizations survive if they establish competitive advantage. While product differentiation is important, it is relatively hard to sustain. Therefore it must be accompanied by commercial differentiation – the ability to deliver things that others cannot do, or to deliver them more reliably and at lower total cost. At one end of the scale, this may mean highly complex and innovative projects which demand exceptional judgment, teamwork, ingenuity. At the other end, it would be represented by agile and efficient standardization to support mass production of goods or services – demanding replicable yet adaptive processes where human operatives are empowered to be highly self-sufficient.
So where does Procurement play in all of this? My suggestion is that businesses will soon stop thinking about ‘buying’ and ‘selling’ as opposites and will instead start to see them as integrated activities that depend on an ability to coordinate a portfolio of trading relationships that deliver organizational goals. In other words, there will be a specialist group that oversees the capabilities associated with implementing commercial strategies. They will focus on the portfolio of required relationships and the mechanisms through which these are transacted and performance is overseen.
For today’s Procurement practitioners, as with other professionals, their underlying knowledge will be assumed. Value will come from their skills in leadership, influencing, creativity, judgment and coordination. They will engage either in supporting high risk projects developing innovative and demanding solutions (for example, major capital projects or transformational service delivery); or they will be developing and maintaining the tools and systems that perform the roles of today’s procurement practitioners.
Their measures will no longer be based on the divisive formula of today (compliance and cost), but instead on their contribution to revenue and reputation.
Forming and managing trading relationships lies at the very heart of human development and economic wealth – so a role in this field will continue to offer tremendous opportunities. But it must be as an enabler of performance, not as a constraint. So what advice should you offer your children? I think quite simply, they must always focus on roles that deliver value and benefit to others and which draw on their ability to make good judgments, to be creative and to be energized by innovation and change. Hopefully, we can ourselves exhibit those characteristics and prepare them to take advantage of the volatile, uncertain environment they will inevitably face.
Commitment Matters 