Commercial reform is a big issue right now – especially within Government. While the pace of change varies, public sector agencies around the world are embarking on a journey towards massive change. In some cases, they appear to be leaving their private sector suppliers far behind.
As I have reported in previous blogs, a growing number of large corporations are introducing ‘commercial academies’ or embarking on initiatives to embed ‘contracting excellence’. The drivers for these are varied, though ultimately it is about revenues and profit. However, specific concerns vary from the need to tackle demanding and fast-changing market conditions (oil and gas, pharmaceuticals), improving performance and competitiveness (telecoms) or instituting faster, better decision-making across the business (IT and outsourcing).
But these efforts often pale into insignificance when compared to the scale of activity going on within some governments. For them, commercial reform is top of their priorities and, because it has not been a major factor in the past, they come at it with new perspectives. Their efforts are being driven by the core challenge of maintaining a competitive economy relative to other countries, which means achieving effective service delivery at affordable cost. Essentially, globalization has reinforced the importance of commercial thinking – as recent events in Greece have demonstrated.
Governments have the disadvantage of a workforce that may be somewhat resistant to commercial principles; they feel that ‘public service’ demands a different ethos. So they have to persuade existing staff that their commitment to social well-being actually depends upon a new approach and that being commercially-minded is not the same as ‘making profit’. In consequence, there is massive commitment to skills analysis and development, to multiple forms of training, to re-thinking contracting models and supplier selection and management. There is also major interest in research and benchmarking, a wish to understand what ‘excellence’ looks like and to set ambitious goals for the future.
Transition takes time, but my observations tell me that right now, Government is leading the way in some aspects of commercial thinking and investment. Certainly there are aspects of their work from which the private sector could learn; it is time to stop assuming that, when it comes to commercial and contracting excellence, the private sector always knows best.
Last week, Jon Hansen wrote a blog in which he observed that people are increasingly unwilling to pay for content. I responded to him regarding the challenges this represents for organizations that seek to remain objective in the advice they offer – and how it means they must increasingly consider how to package their insights or knowledge into fee- based services, rather than traditional models such s charging for membership.
Jon picked up on my comments in a further blog and expands the question of whether, in a fee-based world, objectivity and independence can be maintained. Is it inevitable (he asks) that Associations will become ‘for sale to the highest bidder’?
In the past, the value of Associations tended to rely very heavily on being a point of focused content and professional networking. Some also offered training and / or professional accreditation, essentially seeking to make membership a dependency for career advancement. In essence, such Associations are an extension of the trade union movement – both essentially derived from the ancient craft bodies that go back to Roman times and perhaps earlier.
Today, people can gather information from many sources and simple aggregation of information is not enough to drive membership. Similarly, there are many options for how to network, both physical or virtual. In both these areas, Associations can offer superior quality or more accurate search capabilities, but this can only command a small fee. Similarly, education and training is increasingly available through multiple sources and a variety of media, so Associations may struggle to maintain their stranglehold on supply.
So what does this leave? Some organizations are indeed tending to ‘sell their soul’ by capitalizing on their member database. Service providers may well be prepared to pay a fee for access – and in some cases, if given relative exclusivity, this may be a large fee. But I rather doubt this is a sustainable model. The service provider soon builds its own database from the information it receives; members depart when they feel their Association no longer has real value or integrity. Other organizations seek to aggregate ever more information and to appeal to employers to enforce their qualifications as a standard. I see no signs that this will work either.
So in the end, non-profit Associations have to accept that their future depends on delivering distinctive value. I believe they can do this through drawing on the innate loyalty of members to build and share knowledge and insights. They can undertake in-depth analysis and package those insights in ways that others cannot easily rival – and certainly at much lower cost. I think they also need to swing away from being run by association management experts and revert to leadership that is primarily from a practitioner background, supplemented by other managerial skills.
The challenge for Associations is no different to that of any other business. To survive, they must be flexible and adaptive to change. They must be ready to alter their commercial assumptions and deliver new forms of value. That doesn’t mean selling core assets; it means being in touch with the market and offering unique or superior services – some of which will likely compete with the services of for-profit service providers, but typically at much lower cost and (perhaps) greater integrity.
This article reflects the author’s personal views of the Association market and not necessarily those of IACCM.
This weekend I spent more than 7 hours battling with my telecommunications providers. Neither provided resolution, but you reach the point where even reaching the right person feels like a massive victory. I am not going to name the two providers involved – one in the US, the other in Europe – because it isn’t about pillorying them. It seems to me an industry wide problem: they are quite simply incompetent and unable to manage their business.
I don’t plan to regale the details of my specific issues, but more to use them to illustrate what goes wrong and why I think that may be happening. It is an object lesson to every business struggling to maintain or build profitability – and perhaps to those who regulate them.
The telecoms industry appears unable to extract itself from rigid rules and procedures – all of which create bureaucracy and many of which quite clearly operate to the firm’s disadvantage. In part, this can be blamed on a regulatory environment where, in the name of consumer interest, government authorities endlessly interfere and create levels of complexity that make the consumer a victim. One guiding force is supposed to be the maintenance of competition, but this doesn’t seem very successful. Providers seem very similar – including in the dreadful quality of their customer service and the mindlessness of their rules. Just two quick examples: one of my calls was to terminate a service. It took me eight attempts to find someone who even recognized my account. This individual could see that I own the account and that I pay the monthly bills – but could not talk to me because someone has changed the address and created a PIN on the account. He could not explain how it was possible for this to happen, nor could he tell me what address was showing because it is ‘confidential information’.
In the other example, a friend wanted to move her children off the family account that had been created years ago. The ‘children’ are now in their mid-20s. However, the only way they can be moved is if they terminate service and take a new contract – and if they do this, they also lose their current phone number. However, if they move to a different provider, they can take their number with them.
Regulation is certainly part of the issue here, but I believe that the operators have created much of the complexity themselves. In their efforts to segment markets and maximize revenues, they have created an impossible array of charging structures and then erected a protective maze around them. Their organizations are split into so many parts, none of which seem able to communicate. Their systems also rarely speak to each other and of course, no one has been given any authority to make judgments.
Is the incredible cost of these operations really worthwhile? I recall working with a software company that had similar pricing complexity. Over 65% of their invoices went out wrong. Customers refused to pay. The software company’s reaction was to threaten the customers. It went out of business. The story seems very similar to that of the telecoms industry. Surely someone will one day decide to fix the problems; I hear that several are seeking to outsource operations so that they can focus on ‘building the brand’. I’m not sure that is a viable commercial solution; maybe the best start point would be to drive simplification and focus on the customer experience.
When we think of contracts, most of us envisage a paper document, full of dense typing, with formalistic style and wording. Or we may even think of an on-line version, a ‘click-here- to-accept’ contract – but with just the same hard to read typing and hard to understand language. Certainly not something we avidly pick up to read.
The arguments for this approach are mostly based on tradition. This is the form and format that is familiar to lawyers and hence to judges. Therefore our approach to contracting is driven by the belief that the overwhelming purpose of a contract is legal in nature and that ease of interpretation by legal experts is of paramount importance.
Attorneys would add to this by suggesting that a key purpose for a contract is to ensure the avoidance of doubt (a position which I wholeheartedly endorse). They might then proceed to claim that lawyers are trained to write with clarity and precision, using specific words in ways that may be critical in the event of dispute – and therefore that producing contracts must remain the preserve of the trained lawyer.
And there, m’lud, I rest my case!
The importance of clarity and precision cannot be doubted. There are innumerable instances where contract documents lack precision or create ambiguity and doubt, leading to protracted claims, disputes, even litigation. An interesting example came to my attention just this week, in a case where the parties had failed to define the term ‘new’ (see Reliable Contracting Grp., LLC v. Dep’t of Veteran Affairs for details). The vast majority of such situations never reach a court – the parties recognize that it is much smarter to give in or to compromise.
So my question is this. Given the frequency with which parties disagree over their contracts, why is it that we still believe that today’s approach offers an effective or efficient process for creating and recording agreements? Why do we think that generally accepted, legally-driven methods actually deliver optimum value to our business? Is it simply that we are scared to challenge tradition or are we failing to explore alternatives?
At last we are seeing the emergence of truly disruptive technology. In a short blog (which I strongly recommend that your read), Brian Powers writes about how ‘smart, connected contracts are coming’. He lists the exciting ways that contracts will drive business information and decision-making. What he does not mention – but what is actually of tremendous significance – is that driving this value will force a very different approach to the way that contracts are assembled. Essentially, to be programmable, a contract really will have to be complete and avoid doubt.
To provide a parallel, look at the world of engineering design and drawings. Like contracts, these are critical documents, prepared using traditional methods and formulas and the preserve of experts in their creation. But increasingly, this is not the case. The introduction of methods such as BIM (Building Information Management) is taking engineering and construction into the age of virtual reality, where designs are being programmed and where stakeholders and users can ‘walk through’ their planned structure. What is especially interesting is that the process of programming demands far greater precision than is ever achieved through traditional methods. A computer program does not allow omissions or inconsistencies.
Already, with many contracts being so long and so difficult for users and management to understand, we see many businesses going to the time and expense of ‘translating’ their legal contracts into alternative documents or extracting data to embed in relevant applications. This is the only way that they can ensure rights and obligations are understood and to avoid the risk of performance failure. Yet this translation process is itself risky, often leading to misinterpretations or missed items.
It is no surprise that enterprising lawyers and designers are increasingly exploring new approaches in contract design, starting to embed the visual techniques or graphics that improve understanding and test the integrity of the terms. They are structuring agreements in ways that facilitate decomposition and communication to those who must perform. They are re-purposing agreements as business enablers, rather than the preserve of the lawyer.
Ultimately, redesigning contracts is important because contracts themselves are important. They must address the needs of today’s more complicated business environment and recognize that the world of instant information via portable devices demands a radical shift in conventional thinking.
IACCM works with a number of design, simplification and legal experts in undertaking contract design assessments, together with market and competitive analysis, which result in agreements designed for users and ‘ease of doing business’.
We often hear about the benefits of becoming a ‘trusted advisor’. Certainly it is a role that most consultants seek to fill, even if only in the context of a specific assignment. But it is also a term widely used by commercial managers and lawyers, representing an aspiration for the value they might deliver. IACCM training includes extensive discussion about the qualities needed to gain this status, especially for those who complain that they are often not consulted or, more commonly, ‘not involved early enough’.
Research undertaken by ICCPM resulted in a paper called ‘The Conspiracy of Optimism’, which highlighted a tendency by executives to be overly optimistic and therefore to initiate projects with unrealistic expectations of results, or underestimates of the costs or complexities involved. This theme has now been picked up by Chief Executive magazine, but making the observation that a tendency to optimism needs a reality check – and that this is best provided by a trusted advisor.
Given that many of the projects or initiatives sponsored by senior management involve contracts and commercial relationships, it is logical that lawyers or commercial managers should be able to fulfil a trusted advisor role – and indeed some do. But the majority do not. One reason for this, based on my experience, is that they somehow expect to be consulted as a matter or right, rather than considering that they are personally responsible for making things happen. By failing to consider the characteristics that make someone a trusted advisor, they naturally fail to become one.
The Chief Executive article offers several pointers to the way you need to think and behave if you are going to make advisor status.
1. Business leaders have different aims. Some are focused on growth, others may be driving major change programs or seeking to develop new products and markets.You must position your expertise to align with their priorities. Too often, we approach executives with our perspectives or issues in mind, not theirs. A trusted advisor is someone who assists on the journey, not someone who simply trashes ideas or plans and offers no insight to alternatives.
2. Business leaders want relevance and objectivity. Have you developed expertise in your business’s core competencies? Has your role exposed you to broad understanding of stakeholders and their perspectives? If you are doing a commercial role effectively, the answer should be yes. To be a trusted advisor, you must show that you understand the market, potential threats and that you possess a strategic mindset that will help your executive get where they want to be. In addition, you must be objective, not seeking functional or personal benefit from your advice. Again, this objectivity is something that should be fundamental to a commercial or legal role, so it should be a natural fit … but where we often fall down is the wider market knowledge and real empathy with other stakeholders.
3. Are you well networked? Having an effective and extensive network is increasingly important to status in any organization, but in a trusted advisor role it is important for the credibility it offers as well as the connections it represents. And just being networked in your own professional community is not enough. That might make you a trusted advisor on very specific issues, but not on a wider scale. Contracts and commercial staff often have quite narrow networks (I base this on data from IACCM skills assessments). Lawyers frequently have bigger networks – but with other lawyers.
4. Trust is critical. In addition to being objective, can you avoid being judgmental? A trusted advisor asks lots of questions and assists in both raising and handling doubts or obstacles. They don’t argue a case or simply pose lists of problems or risks. They assist in finding viable alternatives.
The truth is, being a trusted advisor is a valuable quality at every level within an organization. It is something that contracts and commercial staff must aspire to, if they want to do their job well and have security. Whether you are advising an executive, a sales person or a project manager, gaining their trust as an advisor is a major achievement. To do so, it would be wise to reflect on whether you have the right approach.
What observations do you have about the best ways to gain trusted advisor status?
Increasing activity in international markets and increasing use of outsourced or contract labor are two of the current trends in business. So what happens when these two trends converge?
Many corporations want to expand into new markets, but they want to conduct thorough tests before they commit to major expense. Indeed, in some cases the nature of their business or the potential volume make it unlikely they will ever formally register a local company. At the same time, they need feet on the ground and sending staff on occasional visits may not be enough to build local credibility. So what are the options?
For some, the preferred route may be to appoint a local agent or distributor / reseller. However, this is often risky because many countries have onerous laws protecting the interests of these local representatives. Such appointments can be difficult and expensive to terminate. Therefore an increasingly popular approach is to hire local staff as independent contractors. For corporations based in the countries like the US and the UK, this seems a logical extension to the types of local arrangements they often follow. And indeed, in countries with liberal labor laws, it may be a fine approach. But unfortunately there are not many countries as liberal as the US and the UK.
I write about this partly because it is an interesting topic, but also because I encounter a growing number of situations where companies win an international contract and then need to hire local staff for its fulfilment. Therefore anyone involved in international contracting needs to be aware of the potential challenges associated with contract performance.
Many will be aware already of the issues associated with sending your own staff from an overseas location. Potentially they will be working illegally (no work permit) and in addition may fall foul of local tax authorities at both a personal and corporate level (for the company, it could be deemed that they have created ‘permanent establishment’). So hiring independent contractors seems an attractive option. They are arm’s length; they are personally responsible for reporting income and paying tax. It seems simple. But it is not; and getting it wrong can be costly in terms of compensation, penalties and taxes levied.
There are several things you must consider in this situation. While specific rules vary across jurisdictions, the basic principles tend to be similar. The tests applied to determine whether this is really a contractor or a de-facto employee include whether or not they market services to others; the duration of their appointment; whether they determine their own work schedule and workload management; whether their independence is evident to external parties; whether they receive benefits from the principal, such as vacation entitlement or health cover; whether they carry business risk and in particular the potential for profit and loss.
If you need to know more on this subject, law firm K&L Gates has produced an invaluable guide.
The UK government’s announcement of a new ‘Commissioner for Small Business’ is just the latest in a series of initiatives by administrations around the world to encourage economic growth.
One area of concern is the belief that large companies tend to bully their suppliers, using their size to impose unfair and unbalanced terms and conditions. The most obvious example is payment terms, where the period for payment continues to grow and getting paid can be difficult and time-consuming. IACCM recently issued a report on this topic.
These initiatives have to be seen in the context of two distinct, but related, concerns. One is to support the growth of domestic small / medium businesses. Another is the challenge of holding global enterprises to account, whether it be through anti-competitive behavior or creative schemes to avoid tax.
On the former issue, governments are introducing a variety of schemes through local content requirements (note IACCM ran a webinar on this topic last week) and use of public procurement to favor small businesses. Often these depend on large businesses for implementation. They also challenge the commercial skills of the small businesses – their relative immaturity is part of the problem.
On the issue of holding big business to account, we must expect a growing wave of intervention and regulation. The UK initiative is one example; recent legislation on human trafficking and slavery is another; the focus of national tax departments on commercial models and practices is a third.
‘Fairness’ is not easy to mandate and is best achieved through the sort of ethical standards and policies that some corporations clearly follow. It is my belief that the contracts and commercial function must sit at the heart of ensuring terms, conditions and business practices reflect favorably on corporate reputation and brand image.
My blog earlier this week drew an interesting response from Ken Adams and his co-author in a recent article offering “Top Ten Tips in Drafting & Negotiating International Contracts“. The ensuing debate seems to me to encapsulate the dilemma facing the legal community today. Essentially, are they narrow (but important) specialists in law, or should they be applying their knowledge of law within a much broader remit of ‘business advisor’?
The former role can be problematic – and I was pointing to those problems in my commentary on the original article. Essentially, good drafting or negotiation is driven by overall context. If you do not consider the broader purpose of the contract, it is probable that the resulting terms will either be inappropriate or inadequate. My view is that the suggested ‘top tips’ run into precisely this issue because they are being made without reference to context – and the context will in many cases change the priorities or choices of what or how to draft and negotiate.
Much of the work undertaken at IACCM aims to provide an increasingly factual base for decision making. We seek to reduce the extent of ‘mystery’ and ‘opinion’ and move towards positions that are based on solid research data, experience and judgment. It is in that context that I produced my counter-view of the ‘top tips’ for any lawyer drafting and negotiating an international contract. Essentially, their work must begin by understanding the context and establishing the risks. Only then can they decide the issues around use of language, use of local counsel, choice of law etc.
There are many examples to illustrate the importance of lawyers engaging with the business issues. For instance, in my blog, I highlight the challenge of getting paid. This is fundamental to an organization’s survival and is frequently an issue in international contracts. If the lawyer does not understand the practices and norms of their counter-party, they will struggle to draft and negotiate terms that bring security in this area – and potentially the rest of the contract becomes pretty much irrelevant. Similarly, anyone preparing an international contract must be aware of the regulatory environment in the country or countries involved. Ideally, they have developed personal expertise in key areas such as data protection, competition law and export regulations – but if not, they need to be aware of their ignorance and find a way to fill the gaps. Finally, what is the time-line for getting this contract completed and what is the budget available for its production? Understanding factors such as this are critical to the lawyer operating in the real world – and again will influence the way they set about their work, the terms they draft and the priorities they establish.
Without knowing these things, how can you begin to draft or negotiate anything?
As I highlighted in my original comments, the ‘top tips’ article raises important considerations, but practical experience and research suggests that other items must come first. If lawyers are going to maintain status, they must become more effective in offering business advice. This is not a personal opinion; it reflects discussion with many lawyers – in-house, within law firms and at law schools. Indeed, it is a challenge that is common to all professional groups.
Ken Adams is a respected expert on the topic of contract style. I do not always agree with his pronouncements on this topic, but I defer to his expertise and fully expect him to challenge my rare ventures into this aspect of contracting. On this occasion, Ken went beyond style and into substance – an area where opinions start to give way to facts and processes, where what you are writing takes precedence over how you write it. Because this area of substance is where so much of my work is done, I feel it is appropriate to suggest alternative priorities – and in doing so, have inevitably ventured into the debate I mentioned at the outset – ‘what is the role of a lawyer today?’
In a recent article, the Association of Corporate Counsel offers its ‘Top Ten Tips In Drafting & Negotiating International Contracts’.
While the items listed are worthy considerations, they miss the most critical issues and in some instances, fly in the face of good practice.
So what is wrong? Essentially, the article displays an absence of appreciation for the key risks associated with doing business internationally and the role the contract can and should play in avoiding failure. For example, many experts would suggest that the number one issue in any contract (but especially in an international agreement) is around the financials – ensuring you get paid or you get what you paid for. This puts overall payment terms and the related security provisions in the first two places – though they are missing completely from the ACC list.
Today, the regulatory environment is critical to any contract and its negotiation. Awareness of relevant regulation and appreciation of its consequences is a fundamental issue that your legal team must address, whether on competition law, data security, environment or the myriad of other local and global regulatory requirements. So I am placing this at number 3.
Closely tied to this is the whole issue of reputation risk and sustainability. Gone are the days when ‘out of sight, out of mind’ seemed to prevail for many negotiators. The networked world means that mistakes in international contracts quickly make global headlines. High performing lawyers are strongly focused on reputational issues and ensuring that the deal and the counter-party are ethical, that the business relationship is sustainable and that local customs or practices will not threaten integrity.
Competent lawyers also appreciate the challenges of speed, cost and communication when transacting internationally and consider ways to tackle these. On speed, IACCM data reveals a remarkable diversity in the cycle times required to close international business. Not only does it take on average roughly 50% more time than an equivalent domestic deal, but also top quartile performers operate roughly 4 times faster than those using the method of contracting implied in the ACC article. The smart lawyer understands that cycle times are sensitive and that failure to address this issue will damage their credibility and lead either to loss of business or to the rest of the organization working around them.
On cost, it is simply unaffordable to engage local counsel in every country or to have local in-house resources. Modern business is finding ways to address this, sometimes through use of low-cost LPOs, but more often through use of alternative dispute resolution. ADR has the effect not only of slashing the legal costs of deal-making, but it also typically cuts cycle times by more than 50%. By following this route, several of the ‘ten tips’ become redundant.
Communication is a challenging field for the jurisdictionally-trained lawyer. Especially for those from a Common Law background, they feel comfortable using specific terms and wordings which will often be alien to their counter-party. Of course it is always far easier to operate in our native language. But attempting to impose our methods and approach on an international trading partner, with limited effort to ensure common understanding to respect their way of doing things, is frequently a recipe for disaster. At best, they do not really understand what has been agreed; at worst, they view the process and the agreement as unbalanced and feel no real commitment towards it. Good contracts are increasingly designed as communication instruments, not as legal weapons.
The ACC list is interesting and certainly reflects items that should be considered by the parties. However, they focus primarily on the lawyer’s role in dealing with the consequences of failure (that old security blanket that makes us indispensable) and presume adversarial behaviours. If this reflects the aspiration of the average lawyer, it explains the challenge they face in establishing business relevance and value. In reality, top lawyers aim much higher; they want to provide legal advice in the context of business realities.
I have to thank an IACCM member for bringing this particular article to my attention. As a General Counsel, she also made the following generous observation: “It is certainly an interesting subject addressed by great experts. Their selected focus though is precisely the reason why I personally find IACCM so enriching for lawyers when compared to other corporate lawyers associations”.
It’s not only companies that impact the ‘ease of doing business’ – it is entire countries.
When it comes to negotiating or performing contracts, there are major international variations. It isn’t just the obvious differences such as language or the rule of law. Factors such as the depth of negotiating skills or insistence on performance bonds or guarantees are equally significant.
In a current survey, IACCM is assessing nine elements that directly impact ‘ease of doing business’ and comparing them across 50 countries. The effects are quickly evident. For example, nearly 40% of respondents highlight that they have turned down opportunities to do business in Nigeria because of perceived risk or difficulty.
Perception is often key in how organizations approach international business. For example, it impacts the way that negotiations are conducted. Many hold the view that the United States is risky because of its legal and regulatory system; this causes negotiators to approach the market in defensive mode and reinforces their focus on risk allocation within the contract.
If you have any experience of international contracts, the current survey can be accessed at https://www.surveymonkey.com/r/intcontracting2015. It takes only a few minutes to complete and results will be shared with all participants later this month.
Commitment Matters 