A survey recently published by The Ethical Corporation suggests that the ‘most exciting opportunity’ to achieve sustainability is through collaboration with suppliers. However, while this was the most popular approach among those surveyed, it was selected by just 24%.
Those polled report that their main incentives are linked to eliminating supply chain risks and avoiding reputational damage. Topping their list of issues were traceability (56%) and environmental concerns (53%), although these varied by region with North America seeking to ‘eliminate dependency on unsustainable raw materials’. Answers also varied depending on markets served.
The question of how we achieve sustainable practices – and where responsibility lies – is complex. Clearly there is an opportunity for suppliers to gain competitive advantage through their ability to make distinctive commitments. These will come from product innovation – for example, alternative materials, technical innovation – such as improved control or measurement systems, and increased control over supply chains. Yet many of these improvements require investment and may increase costs – and there is little sign that most customers are willing to pay for increased sustainability.
Overall, the range of issues highlighted in the Ethical Corporation report represent demanding and exciting commercial challenges. They reflect the growing array of opportunities for commercial experts to contribute to the business through innovative approaches to the formation and management of key trading relationships.
To view a copy of the report from The Ethical Corporation, click here
How often have you heard that ‘it’s the relationship that matters?’ Either by inference or quite explicitly, ‘the contract’ is pushed into the background as having either little significance or, in some cases, being a downright impediment to that all-important relationship.
Steadily, the evidence is mounting that this widely-held view is a myth. ‘Relationships’, according to leading sales authority Dave Kahle, are often used as an excuse for poor selling. In a recent article, Dave observes that the claim of “”great relationships” is too often a veil that sales people hide behind to keep from exposing the weakness in their sales skills”. He goes on to point out that businesses must remember that their goal is to sell things and generate revenue. Whereas with friends or family, your primary objective may be a strong relationship, that is absolutely not the case with customers – unless it is visibly leading to strong growth and increasing penetration.
So the fact that ‘the relationship’ is not really so important does not of itself alter the proposition that contracts also have limited – perhaps negative – significance. So what evidence is there to challenge this element of the myth?
First, we certainly know that contracts can have an extremely negative effect. There are many connections between contract terms and important issues such as trust, integrity and ease of doing business. We know, for example, that contract terms and their negotiation frequently undermine the promises made during the sales or marketing process. We know that unfair or unbalanced risk allocations often result in negative behavior. It is in organizations that work this way that the tendency to emphasize ‘the relationship’ is strongest – and that is hardly surprising. I once worked for a company where Sales were trained to tell customers “It’s not what the contract says that matters, it’s what we actually do”. Inevitably such statements undermined trust – and suppliers who were ready to make stronger commitments started to win more contracts. So certainly contracts are a potential differentiator.
But there is more than this. One IACCM member recently reviewed several thousand customers and they discovered that customers with a formal contract were almost twice as satisfied as those without. Their subsequent research confirmed a point that IACCM has been promoting for some years – that good contracts define and set expectations and therefore represent the framework for a relationship. In this case, customers were indeed happier because they knew what to expect; there was discipline to the way the organizations worked together. Indeed, it was almost the opposite of the loose management through a ‘great relationship’.
Best practice does indeed lead to a conclusion that ‘relational contracting’ is the right way forward – an embedding of relationship principles into the contract and a refocusing of negotiations to establish structure to the way that organizations will work together. Top performing organizations are edging towards this approach – re-thinking the timing and connections between Sales and contracts / commercial staff, developing centers of excellence for ‘relational negotiation’, re-designing contract structure and content to emphasize collaborative performance and governance.
So it is time that all of us challenge the myth of ‘contracts don’t really matter’.
I find the accusation that Volkswagen has been deliberately falsifying emission levels on its cars quite remarkable (see New York Times article here). US authorities have demanded the recall of half a million vehicles and presumably Volkswagen faces not only substantial costs to ensure compliance, but also heavy fines. If proven, it will not be surprising if class-action law suits follow.
The story is that Volkswagen installed software that would specifically deceive emission test inspections and yield false readings. The thing I find amazing is that a company like Volkswagen would believe that it could keep this secret – though if the allegations are correct, it seems to have succeeded for at least 6 years.
This is just one more example of the transparency of business conduct in the world today. The idea that our policies and practices can be kept secret is something that must be challenged. From a commercial perspective, if Volkswagen truly did commit this offence, it represents a failure of ‘commercial challenge’ and confirms the importance of having a strong business practices function or role within business.
Is there really such a thing as a ‘procurement strategy’ (beyond the initial make / buy decision), or is it rather a contracting and relationship strategy?
That is a question that IACCM has been posing – and indeed extending the question to sales strategy as well – so it is interesting that the same point is now being picked up by academics and researchers as they look at increasingly volatile and unpredictable market conditions.
Let me offer some background.
Today I conducted a webinar with Professor Rob Handfield, who teaches supply management at North Carolina State University and is the Executive Director of the Supply Chain Resource Cooperative. We were presenting to a large audience from the oil and gas sector – an industry where collapsing prices have caused rapid focus on issues of value efficiency and effectiveness.
Rob recently published a research paper on “The role of effective relationship management in successful oil and gas projects”. Some of the research was undertaken in conjunction with IACCM and the results were published in JCSCAN (the Journal of Strategic Contracting & Negotiation), available from the IACCM website. His findings point to the critical importance of contract management and its integration with key aspects of relationship definition and oversight.
Among the key points coming from the research are:
- the need for earlier engagement of commercial resources
- the importance of focus and definition of goals, objectives and their relative importance.
- the critical issue of stakeholder inclusion and engagement.
- the need for risk management to be integrated into performance management and to develop a practical and structured approach to handling risks.
- the importance of engaging the right people, with the right attitudes and at the right time.
The chances of project failure were shown to increase if the parties simply rely on ‘the relationship’. Today’s business environment demands far better definition of performance and governance techniques. Therefore ‘informal, relationship structures’ such as frequent meetings, the sue of phone and email, just don’t work. Face-to-face meetings similarly can often be an excuse for lack of definition and discipline – and are therefore often associated with unsuccessful projects.
Success factors are associated with robust and well-defined contracts which offer defined approaches to goals, their oversight and governance. They are also linked to contracts with a contract management plan, where well-trained contract management professionals are deployed and where they are engaged early in the project. Performance measures must be few in number and relevant in form. Technology also plays a growing role – and the study confirmed that many of the procurement systems now in place have little or no relevance to project success since they are too mechanistic and generate little or no relevant data or analysis.
Returning to the opening sentence, once again we see evidence that thought leaders are seeing procurement (and perhaps soon also Sales) as a sub-element of the contract and relationship management process.
IACCM’s announcement this week of new learning programs and certification standards is about much more than a product launch. It reflects the emergence of an exciting and dynamic career path for a new breed of practitioners and experts.
“Contract and commercial management has for too long been the poor relation,” said one senior executive in a recent panel discussion, mirroring an observation by the UK’s National Audit Office in 2014 when it reported that “the biggest problem with contract management is that management does not take it seriously enough”.
Sentiments are changing fast. ‘Commercial excellence’ is rapidly rising on the Board and executive agenda – that is, visible operational integrity, the ability to make good judgments and to remain agile in the face of fast-changing market conditions. Yet the urgency of this agenda means that investment in the necessary skills and systems has been lacking. Organizations are struggling to find people with adequate vision to lead commercial operations; they are struggling to identify the tools and applications that support management of new business relationships; and they are struggling to develop and implement the contractual terms and models that underpin high performing, collaborative relationships.
It is in recognition of this environment that IACCM has fundamentally overhauled its portfolio of training products and its standards of professional accreditation. A new advanced curriculum reflects the need for deeper and broader skills. Strongly research based, the material equips a practitioner community to deal with the challenges of change. Revised certification standards build from this curriculum and, at Certified Expert level, require demonstration of the leadership and influencing skills demanded by the Board and top executives.
For more information about these exciting new programs, visit https://www.iaccm.com/news/?id=8814
Sustainability initiatives can deliver benefits worth up to 70% of an organisation’s average earnings. That’s one of the conclusions McKinsey has reached from its research. But of course, many initiatives do not yield that level of benefit because they are not made operationally effective.
Contracts and commercial practices have a big role to play in delivering business results from sustainability. For example, many initiatives are focused on supply chain security. This requires a rethink of traditional approaches to contract terms and supplier management, essentially to develop partnering and shared commitment to results. Many companies are now investing in training and equipping their suppliers to ensure supply security, quality and integrity. This may include providing materials, support technology or research. Adversarial approaches designed to drive short term cost reductions are being replaced by longer term relational terms and agreements that ensure a robust and loyal supply base.
The counter-side of this approach is the new emphasis for suppliers to compete on better serving customer interests. The most stark example is in the area of sales measurement and motivation. The days when the supplier’s main goal was to maximise volumes are fast receding. Instead, customers want suppliers who offer innovative approaches to reduce demand, especially in areas such as water or energy use, or in the need for raw materials. This is propelling us fast into different forms of contract, such as shared benefits or payment by results.
Sustainability is not a fad. As the McKinsey study clearly shows, it delivers tangible business benefits and represents an unstoppable social, economic and political direction. Trading relationships sit at the heart of sustainability – so if you are not already involved in understanding and implementing associated contract and commercial practices, it’s time to get engaged.
There was an inevitability that some law firms would start to promote class action lawsuits on behalf of the ‘exposed’ clients of Ashley Madison. Is this just another indication of the declining moral and ethical standards of the law, or is it a commentary on society more generally?
It troubles me that attorneys seek to profit by acting in the interests of clients who, in many cases, have been exposed as people who are less than open or honest.
Data privacy is unquestionably important in some instances – for example, when it affects your bank account. In reality, it is a very recent (19th century) concept. Prior to that, it was almost impossible to keep secrets because of living conditions. So the illusion that our privacy is some God-given right is exactly that – an illusion. It was created, one might argue, to protect the privileged few.
Today, it is far harder to remain hidden and the spread of economic wealth makes many of us targets for infinite sales efforts. In this regard, data protection is a good thing: I don’t want to be bombarded with spurious texts, phone calls, emails and advertisements.
But a situation like Ashley Madison – a site specifically dedicated to illicit affairs – seems to me rather different. In this case, people are trying to keep secrets because they know what they are doing is potentially damaging to their reputation or hurtful to others. They fear for the loss of trust or credibility that may result from exposure. But they had a choice – they took a risk. Should they really be protected or compensated if they are now exposed?
I am not suggesting that everyone should be whiter than white, that extra-marital affairs should or will never happen. My issue is that I don’t see why the courts – or opportunity-seeking lawyers – should protect them from the consequences of their actions. Indeed, the idea that a law firm makes a profit from pursuing such cases seems to me also immoral.
Should lawyers make moral judgments? To me, that is intrinsic to the rule of law and the answer should be yes.
Continuing revelations about corrupt contracting practices at Brazilian oil giant Petrobras continue to hit the headlines. It is interesting that they are one of the few major oil and gas producers which does not have active membership in IACCM. Might there be a connection between these two facts?
The answer, quite clearly, is ‘not necessarily’. Some of the recent scandals in the corporate world make it clear that bribery and corruption can flourish yet be hidden from most of the staff – including those who are negotiating or managing the contracts. ‘Special arrangements’ may be hidden away in secret places or never even documented. Satyam had a robust and well-trained contracts and legal group (arguably one of the main reasons it avoided total collapse), yet that did not prevent high-level fraud. Also, corruption is often confined to specific subsidiaries or country operations, such as Walmart in Mexico or GSK in China, where few have visibility.
In many cases, however, it seems to me that companies which engage in illicit acts tend to be very secretive and inward looking. Their participation in external associations is often limited; they are less keen to be on public platforms or to be at networking events. Management inevitably discourages openness and transparency.
There are occasions when contracts or commercial professionals are caught up in corrupt practices. While typically they may not personally benefit, they are aware of the actions going on within the business. Since it is clear that such actions are against the interests of society and of world trade (not to mention illegal), professional ethics say that those practices should be reported. But is that practical? What advice would you offer to a contract manager in this position?
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.
Commitment Matters 