“Optimism is the enemy of action”, according to a recent article in The Atlantic Magazine.
The article reviews a recent book by Dr. Gabriele Oetiggen which questions the benefits of positive thinking. Based on some 20 years of study, Dr. Oetiggen concludes that ‘positive thinking’ often equates to unbridled optimism and leads to a failure to recognize or address obstacles. She therefore introduces a new concept which she calls ‘mental contrasting’.
It seems to me that any experienced contract or commercial manager will already be familiar with this particular syndrome. Indeed, any successful business already addresses the issues highlighted by Dr. Oetiggen through its organizational structure and management systems. Groups such as Sales are recruited and paid to be optimists; commercial staff in contracts, legal and finance are there to address realities. The key is of course to achieve balance – or ‘mental contrasting’.
Problems arise mostly when senior management is over-optimistic and either does not seek or chooses to ignore commercial advice. This again has been identified on a number of occasions, including work undertaken by ICCPM in partnership with IACCM, which led to a paper, ‘The Conspiracy of Optimism”. The good news is, it did not take 20 years, a book, or a new nomenclature to identify the issues!
High-performing organizations often view contracts – and the contracting process – as a form of ‘connector’. They understand that the process draws together the views and interests of a wide variety of stakeholders. It acts as a method to reconcile disparate views, which are then reflected in the agreed terms of contract.
Connectivity does not end there, because the contract is then used as a management tool to support implementation and performance management, ensuring a series of connections throughout the lifecycle. Under this approach, contracting is a source of quality control and protects against value erosion.
While this may be true for a few leading organizations, it is not the norm. In a recent IACCM survey, members were asked to rate the capabilities of their organization against a range of key maturity indicators. More than 300 corporations are represented in the results, which show encouraging growth of executive interest – one might say awakening – in the role that contract management can play in today’s increasingly complex and volatile business environment. To some extent, that interest has been reflected in investment, though the results show this to be rather variable.
There are interesting differences between regions – for example, who would have thought that the region with the biggest growth in capability over recent years would be South and Central America, or that the region with the greatest increase in management awareness would be the Middle East. But of course, different regions have very different start points – and the findings suggest that most organizations have many opportunities for continued improvement.
A summary of the results from this survey will feature on a free webinar to be aired on October 21st and which will then be added to the IACCM library. To register, visit the event website.
One challenge facing contract and project managers is how to improve their anticipation of problems. Contract administration was mostly a reactive discipline, reporting after the event. Contract management should be far more proactive, seeking to anticipate and remediate issues before they become major problems, leading to potential claims or disputes.
The question is, what are the warning signs? We recently posed that question to a group of experts within IACCM and they produced the following list – a sort of ‘top ten’, though in no particular order of priority. We plan to add to this list and increase its sophistication because it represents important knowledge and insight which may assist many in delivering greater value through improving project success – avoiding delays, budget overruns and quality defects.
Here is the list of things to watch out for, to measure or to test; please add to it, change it and comment upon it.
Actual versus plan cost or cash flow
Broken communications
Finger-pointing / blame
Lack clarity over authority / decision-making
Failure to maintain / update business case
Staffing not in accordance with plan
Disputes / disagreements over change
KPIs / measures inconsistent with goals
Poor or incomplete documentation
User dissatisfaction or disengagement
There is growing evidence that the form and design of a contract has substantial impact on the results achieved. The evidence ranges from studies on major projects, which often suffer from use of the wrong contract model, to more focused investigation of the behavioral impact of specific terms, such as the liability or indemnity provisions.
The steady move away from traditional product-based sales into a world of solutions and services is changing the emphasis of contracts. Rather than each transaction being driven by a specific delivery or input, many agreements now relate to phased activity where ‘completion’ is rather less precise and ‘success’ can be gauged only over time and linked to an extended output or outcome.
Inevitably, this leads to a growing interest in outcome and performance based contracts. Yet according to the input to a current study, their use remains limited and contract professionals generally develop them through ‘trial and error’. There are also some important differences in perspective between the customer and supplier community. For example, suppliers have recognized the extent to which extended performance periods depend on active cooperation with their customer (and potentially their numerous sub-contractors); buyers seem slower to grasp or accept this point. Both buyers and suppliers appear slow to accept the organizational and operational implications of this enormous shift in the contracting model.
These are among the early, high-level conclusions from a survey IACCM is undertaking in partnership with Newcastle University Business School (UK) and the University of Paderborn (Germany). The research includes insights to the types of outcome based agreements most commonly used, the nature of the benefits and the challenges with their implementation and management. The overall output from this study will include not only the research results, but (over time) more detailed recommendations on different models for outcome and performance based contracts.
If you complete this survey, you will of course automatically receive a copy of the results and be invited to a webinar with the academics conducing the research. Please visit http://ww3.unipark.de/uc/contractingforsolutions/ to participate.
Last week I was running a capability review with an IACCM member company. During a break, one of the attorneys said that he had been struck by the session we had just done on communications and told me a story about his former company.
He explained that this organization was a leader in its field and based its success on engineering excellence. Its technical and production teams were especially proud of the quality of their designs and their associated documentation.
However, like so many manufacturers, they faced market pressure to cut costs and therefore decided that manufacturing must move to low-cost facilities; they opened a plant in Mexico and transferred all their know-how via the manuals and instructions used in the US and Canadian facilities. Unfortunately, quality plummeted. Many were quick to blame Mexican workers – they were accused of being less skilled, having bad attitudes, being incapable of training. But someone in senior management was smart enough to understand that all that state-of-the-art documentation (of which the production engineers were so proud) was actually the problem. It was too difficult to understand – not only because it was in English, but also because it used words and was complex to follow.
Translation was not enough; the documents needed a re-think in both form and structure. They were re-designed to maximize use of graphics and to be visible at understand them. each phase of the production process, to the people who needed to understand them. Quality levels soared, soon surpassing those of the other plants.
The analogy to contracts is obvious. These increasingly complex documents contain a wide array of operational instructions, yet are rarely designed to make things simple or obvious. As a result, there is then either an expensive translation process, or quality of performance suffers.
Those engineers in my story were among the best professionals in the world, but if someone had not intervened to make their work comprehensible they might have destroyed their company. As contract and legal professionals, are we similarly putting our companies at risk?
Intellectual Property lies at the heart of many litigations. Negotiations over IP have boosted this topic into the top five negotiated terms and there is hardly a contract these days that does not include some sort of IP clause.
While most of us applaud the concept of IP rights and the ability of inventors and artists to gain rewards for their work, many are also concerned about the constraints this can impose on future invention and creativity, as well as the scope of what might be deemed ‘an invention’. Too often, patents and copyrights appear more as ‘get rich quick’ schemes or deliberate restraints of trade.
It may therefore come as a relief to learn that self-portraits by animals are not deemed registrable by the US Copyright Office. The latest draft of its Compendium’s third edition states that registration of “works produced by nature, animals or plants” shall be rejected, and only original works performed by human beings shall be registered.
The issue has arisen because a monkey stole a camera and proceeded to take multiple photographs, including a ‘selfie’. Some of these pictures were reproduced on the internet and went viral. Wikipedia was challenged by the camera owner, who claimed copyright.
Given the constant drive to reduce costs through labor arbitrage, this should act as a warning to anyone intending to use animals in the production of intellectual property.
When business travel plans go awry, the impact is substantial. That’s according to research conducted by the Global Business Travel Association.
A delayed or cancelled flight, by far the most common issue, affects 87% of business travelers each year. And the impact is significant, causing lost hours. missed meetings, incremental costs to re-arrange … In fact, the survey suggests the average cost is $1457, plus missed work hours.
The reason I find this interesting is because disrupted travel is essentially similar to a disrupted contract. We thought we had a commitment, we planned on it being executed … and the commitment was not honored. Assessing the cost impact in this way is relatively rare. Also, as the survey points out, if travel managers understand the relative frequency of different types of disruption, they can better plan for them and reduce either the likelihood or the consequences that arise.
Essentially, this is just another example of the importance of contract managers assessing impact and monitoring overall frequency so that they can drive improvements for their business, both as a buyer and a seller.
Tesco, a major retailer, becomes the latest in a growing line of private sector companies that appear unable to properly manage their contracts. In this case, there is a black hole of more than $400m from over-stated revenues, apparently stemming from commercial agreements with suppliers. Essentially, I presume, Tesco has counted forward revenue (rebates) and applied it in the wrong accounting period, in order to boost results.
The Chairman dismisses the incident with the words ‘Things are always unnoticed until they are noticed” – an obvious truism, but scarcely an effective response. Today, regulatory authorities, shareholders and society rightly expect more. In this era of automation and ‘big data’, top management should have better insights to what is going on, especially in the performance of contracts.
And it is in the area of contracts and external trading relationships that most of these commercial issues seem to occur. Whether it was the financial crisis, the repetitive issues over bribery and corruption, the scandals of overcharging or the inability to properly count revenue, weaknesses in overall contract oversight are a common theme.
No wonder, then, when we talk about the growing need for commercial competence, we see a direct link to the quality of contract management – both within individual deals and across the contract portfolio. But executive action in addressing weaknesses in contract management are woefully slow. Levels of automation lag well behind other functions. The role is still seen largely as administrative, rather than analytical. And until this changes, situations like that at Tesco are bound to be repeated.
According to Workforce magazine, “It’s easy to recognize a vacant position in your company, but it’s much harder to identify the skills a potential employee will need to fill that void. The inability to match qualified people to vacancies is costing companies billions of dollars in lost revenue.”
When it comes to contract and commercial management, this statement certainly appears true. We know that weaknesses in these areas are indeed costing billions of dollars a year. We know that the market for suitably qualified staff, already tight, has become almost impossible as demand levels grow. We know that the sources of new recruits are very limited – this is not a traditional career path and there is virtually no graduate-level recruitment or training.
There is every sign that demand for contracts and commercial staff will continue to grow at a rapid rate, especially now that Government and companies have awoken to the need for these skills to supplement (or in some cases absorb) traditional procurement activities. Unfortunately there is no quick fix that will suddenly generate large numbers of suitably experienced candidates. Therefore the point made in my opening sentence is crucial – the importance of ‘identifying the skills a potential employee will need’.
At IACCM, we have a well-established skills profile for people filling a contracts or commercial role. It is used as part of our professional certification program. But given the shortages of supply and the relative immaturity of defining the contracts / commercial job role, we know very well that organizations must be open-minded in their recruitment or development of contract and commercial staff. This means that they must be ready to use skills assessments as part of their recruitment process (several major corporations already use the IACCM skills profile). It is an approach that enables them to look beyond established practitioners and potentially identify people from other – often related – job roles who can successfully make the switch.
Some organizations consider that the best way to tackle their needs for improved contracting may not be through recruiting specialist contract / commercial managers, but instead by raising competence levels in other functions. Once again, the smart way to do this is by first assessing current skill levels, thereby identifying the people best suited to an enhanced role and also identifying major gaps in proficiency.
Either way, whether recruiting new staff or improving the capability of an existing workforce, it is essential to have clarity over the skills required and a robust method to assess and test the personnel who will ‘fill the void’.
Last week, the UK’s National Audit Office provided Parliament with its latest reports on Contract Management. They are encouraging, in that they reflect the robust focus that government is placing on this discipline. At the same time, they reveal the depth of the challenge in driving improvement.
Such is the depth of these reports that I will cover them in several blogs this week; we will also shortly be interviewing the author of the reports on a webinar. It is interesting that a number of Governments are now committing significant resources to improving their contracting capabilities. IACCM is working closely with them. Indeed, it seems to me that the public sector is actually starting to out-strip most private sector companies in its grasp of the importance of contract management in today’s business environment. I often have to smile when I hear from our public sector members about the assurances they have had from senior private sector executives about their commercial skills and processes.
IACCM’s Capability Maturity Assessments are increasingly used by the private sector to review their contracting processes – and for many, the issues highlighted by the NAO ring true. Therefore I am going to start these reports with the listing of weaknesses that the audit office uncovered when it tested 73 contracts from UK ministries.
Problems with contract management
The reviews found widespread problems with how government manages its service contracts. As well as testing for overbilling, 73 contracts were tested against the 8 areas of the NAO’s 2008 good practice framework for contract management. Issues were found on all 8 areas, for example:
Planning and governance (issues on 38 out of 73 contracts tested)
Departments lack visibility of contract management at board level and lacked senior-level involvement.
People (40 issues)
Government does not have the right people in the right place for contract management. There were gaps between the numbers and capability of staff allocated to contract management and the level actually required.
Administration (39 issues)
Contract management is not operating as a multi-disciplinary function. There was often limited interaction between finance, commercial and operational contract management functions.
Payment and incentives (48 issues)
Government is not fully using commercial incentives to improve public services. Levels of payment deductions allowed by contracts are often insufficient to incentivise performance. Open-book clauses were rarely used.
Managing performance (50 issues)
Contractual performance indicators are often weak and government is too reliant on data supplied by contractors.
Risk (47 issues)
Government does not have sufficient understanding of the level of risk it is retaining on contracted-out services. None of those in the cross-government review shared risk registers with the contractors to ensure all understood who was managing what.
Contract development (50 issues)
Departments are paying insufficient attention to the impact of contract change. For example, departments made changes at operational level in isolation from other service areas. Systems for maintaining up-to-date versions of contracts remain weak.
Managing relationships (31 issues)
Not all departments have had a strategic approach to managing supplier relationships. Senior management engagement with suppliers has not been widespread across government. A lack of meaningful incentives for innovation can inhibit shared approaches to problem solving and mutual improvement.
Do these same issues impact you?
I wonder how many of us can say that similar weaknesses do not apply in our organization, or in our suppliers or customers? At least Government is awakening to the issues – and the very real financial consequences that come from failure to address them. In the private sector, while some have made real investments in developing their contract and commercial capabilities, I fear that many executives have not even awoken to the need.
Commitment Matters 