On Successful Workplace, Chad Garrett writes about ‘the death of the enterprise salesman’. He describes the growing sophistication of customers, who undertake far more independent research and no longer rely on the sales interface for information or requirement development.
On this blog, I write extensively about change and in particular how it is impacting the way trading relationships are formed and managed. I agree with Chad’s observations – in fact, I would go further. The pressure from regulators is forcing a new era of honesty and transparency, driving the need for far greater integrity and openness throughout the sales process.
As with all periods of transition, there are teething problems. First, while customers are trying to improve the skills of their teams in researching the market, it is clear that areas such as requirement definition and documenting specifications / scope are still problematic. The frequency of a mismatch between a customer’s perceived needs and a supplier’s capabilities seems to be increasing. Also, this new environment means that many contracts are based on ‘customized ‘wants’ rather than ‘market needs’; that undercuts supplier economies of scale and increases the risk of failure.
As the blog points out, this evolution alters the skill set needed for both promotion to and interaction with the market. The role of holistic opportunity assessment and alignment with capability becomes even more critical and the cycle time for doing it is shorter. Meantime, squeezed by current role and measurement system, sales staff become more desperate to win and the likelihood of poor assessment or over-commitment increases …
Overall, this is just one more perspective that adds to the pressing need for improved commercial judgment and the importance of more disciplined ‘commercial assurance’. Inserting this capability at a much earlier phase of opportunity management will be critical to future success.
I don’t know whether future marketing staff will have enhanced commercial and contract skills, or commercial and contract staff will have enhanced sales and marketing skills. But I am sure that greater integration of these competencies will be a feature of the rapidly changing market.
For years the analysts predicted meteoric growth – and it didn’t happen. Now, the complaint I hear is that the analysts largely ignore contract management software and see it as a sub-set of ERP.
So what went wrong? Why did contract management software fail to meet expectations – and is it doomed to be the success that never was?
Let me start by saying that I believe there is still massive market opportunity, but realizing it will require a significant shift of approach.
Software developers started in this space with the myth that contract management is a largely administrative discipline. This led to a focus on basic functions such as document management, repositories and monitoring milestones and events. The software automated existing processes, rather than challenging businesses to think differently about the issues associated with contracting. The early analysts added to the problem because they focused on high volume procurement contracts, largely in sectors such as retail, and saw the potential return on investment coming primarily from increased efficiency.
This meant that the industry failed to recognize the spectrum of relationships typical to most companies and actually ignored the higher value, more complex agreements that represent strategic significance. Hence, most implementations resulted in high levels of software customization accompanied by expensive consulting services. The resulting software was rarely capable of dealing with an organization’s overall contract portfolio and was not user-friendly, resulting in low adoption levels. Many large corporations implemented multiple packages, none of which gained enterprise status.
Providers and analysts saw contract management software as a tool to manage transactions, missing the point that businesses actually establish relationships and operate with a portfolio of contracts. This meant that they overlooked the big opportunity and the core return on investment – the issue of contract effectiveness and usability.
Struggling to establish a market, the industry has been driven by customer wants, rather than helping to shape their understanding of needs. Even now, most projections of return on investment make contract management software at best marginal and in many cases irrelevant.
To succeed, focus must change (and some providers have already started to grasp this). Here are five key areas that can revive opportunity:
- Contracts are related to relationships. Software must facilitate the various relationships through which a business operates.
- Many contracts are interdependent; that is, the performance of one depends on the performance of others (supply networks, teaming arrangements, sub-contractors etc.). Software must create and oversee these connections.
- The software must be designed to facilitate business users, supporting their ability to make effective decisions and to oversee contract performance.
- Rather than operate as an adjunct to ERP, it must focus on overcoming the problems created by ERP. Contracts are about interoperability between organizations, not internal efficiencies.
- Contracts and their performance are one of the great untapped bastions of data. The potential for generating critical management information is only now starting to be grasped – and it can be revolutionary in terms of value, quality and competitive advantage.
These factors cause me to have continued optimism that contract management software will succeed. But which suppliers are the best bet? Well, that is a different question – and a topic for another day!
There are those who would argue that the scale of fines being imposed by US courts and regulators on major corporations reflect high principles and a determination to raise ethical standards. Others take the view that this is a cynical way to raise cash and that it damages longer-term US economic interests.
The United States is certainly unique in the degree to which it claims ‘extra-territorial’ rights. In both the extent and the scale of the penalties it imposes on foreign businesses and their top management, it presents itself as an imperial power, policing the world stage. While many other nations may applaud and adopt the ethical principles which these reflect, none comes anywhere close to the scale of the financial levies imposed by the US judicial system, nor do they act so freely in extraditing and imprisoning foreign citizens (indeed, it is impossible to imagine the US ever operating to such arbitrary rights with regard to its own people).
Recent judgments such as those against France’s BNP or the UK’s BP have generated increasing concern in European capitals and warnings to the US authorities that their legal system is seen as lacking balance. Certainly these high profile cases add to the perception that the US operates with a high level of unpredictability and that operating and investing in is markets is therefore risky. Ironically, it is the sort of reputation that causes hesitation about investment in markets such as China, India or Russia – that is, doubts over the extent of the ‘rule of law’.
Part of the problem is the extent of localism in the US – there really Is not a national legal system until you reach the Supreme Court. Another is the entire culture of litigation and excessive numbers of lawyers chasing fees, regardless of the merit of their cases. A system controlled by lawyers, who are then major beneficiaries of that system, always runs the risk of lacking balance. Certainly the BP case appears to lack equity and is enriching people who are undeserving.
But on the counter-side, this same system has also imposed major penalties on US corporations and this tends to undermine arguments of institutional prejudice against foreign firms. On balance, I believe that the intentions behind the system are honorable and are driven by a genuine desire to raise ethical standards.
The challenge is this issue of balance and how external behaviors are influenced. I think the US does try to operate as a force for good in the world, but in order to gain credit for this position it must be seen to operate fairly and with reasoned judgments. The decisions of its courts do not consistently meet these standards; they need to be better controlled and there needs to be a central authority that can step in far faster when review is required.
Max Bazerman is a behavioral economist and he has recently written a book, The Power of Noticing: What the Best Leaders See. He draws from his personal experience in failing to notice things, which he attributes to his tendency to focus.
In the book, Professor Bazerman offers many illustrations from the world of business, including examples related to negotiation and contract terms. For instance, he highlights a case study involving Walmart, which one of my colleagues has summarized thus:
“In their contracts with Walmart, suppliers must agree to accept any financial or criminal liability resulting from the sale of their products. …Perhaps because it is protected from liability, and its value proposition is so firmly focused on low prices, Walmart historically had limited incentive to act on issues related to quality.
It is stated that, back in 2006, a company called Blitz presented a revised gas can design to Walmart that would prevent explosions and burn injuries by installing an “arrestor,” a device that would prevent a flame from flowing into the can, at a cost of between 80 cents and $1 per can. According to testimony, Walmart rejected Blitz’s design on the basis of the price increase, and Blitz halted its redesign project because it would be difficult to launch a national product that Walmart refused to purchase.”
The root of the problem seems to be that a narrow focus on price and risk allocation stood in the way of broader business or ethical judgment. And before we are too critical of Walmart in this regard, we must ask how many negotiations (and business decisions) are similarly driven by narrow value criteria and measurements that cause the negotiators either not to notice or to ignore the bigger picture.
The key to good commercial decisions and effective contracting is to ensure breadth of perspective. As Professor Bazerman points out, this is challenging, but essential to achieve.
“Outsourcing is moving backwards; it is tired and outdated”.
“I see no future for the major outsource providers: they have become trapped in out-tasking.”
These are just two of the comments I have recently heard during conversations with experts in the outsourcing field. There is no doubt that many client organizations are questioning the value of outsourcing and that many providers are struggling to make a decent margin. Add to this on-going questions about the integrity of the provider community and there appears to be a volatile mix of negative sentiment.
Managing internal relationships is hard; managing external relationships is even harder. And few organizations have yet grasped what it takes to build productive and sustainable relationships with an external partner. Providers are often caught in the dilemma of customization versus standardization; the former appears responsive, but actually adds dramatically to costs and to risk of poor performance.
So is outsourcing in decline? Will its use become more selective and more limited?
I believe that outsourcing offers many potential benefits, but realising these will take a continued shift in attitudes and behaviors. A few things that need to be addressed are:
- Establishing requirements: clients must know what they want and express it clearly. This requires engagement with the market to establish and evaluate capabilities. Needs must be properly documented to avoid regular disagreements over scope and goals. Current measurement and motivation systems do not help; they should be altered to rewards based on results, not on getting a contract signed.
- Executive sponsorship: client organizations must appoint a sponsor with experience of developing or managing contracts and supplier relationships. Too often, those in charge may be technically proficient and understand the subject area, but they often fail to test the commercial issues or capabilities of either organization and thus end up with the wrong supplier, or inadequate internal competencies.
- Use of third parties: if a third party is really needed, they should be very carefully controlled. In my view, third party involvement has been one of the major causes of value erosion in outsourcing. If they act as an expert mediator or facilitator, there can be major benefit. If they act as a partisan representative, they distort negotiations and performance, often creating an adversarial environment.
- Outcomes: if the only goal is cost reduction, then out-tasking existing activities may be fine. But if the aim is continuous improvement or innovation, it will be achieved only through focus on outcomes and continued discussion as these evolve. That means the parties must focus on what is to be done, not on how to do it. If the supplier is not expert in the field, why are they being hired?
- Governance and performance management: good relationships need the right structure – and this needs to be provided through an appropriate form of contract. The adversarial, risk-consequence focus on many contracts and contracting processes means that the parties lose their fundamental business management tool. After so many years, it is remarkable that there are so few examples of good performance based / outcome based contracts which integrate ‘the contract’ with ‘the relationship’. Yet given the factors above, perhaps this is not surprising ….
So can the industry survive and prosper? This depends on significant shifts in the way that outsourcing is approached and handled. Meanwhile, Shared Services will increasingly represent a dynamic alternative.
Many contracts, procurement and legal staff want to increase their influence. Many complain about not being involved earlier, or not being part of the ‘core team’.
Research has shown that one key element of being respected and included is to bring incremental knowledge and connections that others do not have. That is one aspect of ‘professionalism’ – being connected to a professional network, having access to a respected body of knowledge.
But that is not enough. Many contract managers and lawyers are knowledgeable and well connected, yet still do not feel these attributes are fully recognized. As Cendrine Marrouat points out in a recent blog, professionalism is also about showing care and respect for your audience, especially in how you communicate. If we appear arrogant, or dismissive, if we fail to pay attention to their views, it should not surprise us that we are not included – because our behaviour is then not inclusive. Key to being wanted is the sense that we listen, ask questions, take time to appreciate the views of others and why they hold them. We need also to explain the rationale for our position based on what we know the other party’s interests to be.
For example, if we want to promote a new contract management system, our message to the CFO will most likely promote the bottom-lime impacts it can have, as well as the improvements in data flows. The General Counsel will like the idea of being able to access contracts reliably and to improve the quality of insight and governance. But these benefits are not going to have much appeal to the head of Sales. They will most likely interpret those ‘benefits’ as meaning increased control over the sales force – and greater control equals less business. So with Sales the message has to be one of more empowerment, easier access to standard forms and agreements, speeding up of cycle times.
Ultimately, our success is driven not solely by what we know, but also by how we communicate that knowledge to others. But if we don’t take time to learn, then our knowledge is also limited.
I thought I would share extracts from an internal company report that I just read. I think it will resonate with many.
“Contract Management and negotiation skills and knowledge are increasingly important. Our need to be more flexible in the market, to accept and manage higher risks, to build new solutions and commitment capabilities, is resulting in many groups within the Corporation developing or negotiating contracts.
We have identified approximately 800 people in more than 20 organizational groups whose primary role is contract development or negotiation. There has been no consistent training to help them perform their task. In addition, there are many more employees with either contract or negotiation skills defined as a component of their job and skill requirements (e.g. Project Managers, Procurement, Sales).
Currently, each group develops its own training materials (if any), typically without reference to any other group. Not only is this inefficient (high cost, limited re-use, frequent redundancy), it also creates process inconsistency and organizational conflict. Groups define overlapping roles, they are unaware of tools or databases developed or used by others, they consider aspects of Corporate practice or policy to be optional. To date, we have identified more than 40 different training programs, delivered by a similar number of providers.
This confusion inevitably spreads to the market, where customers and suppliers suffer from inconsistent approaches to the way our contracts are delivered and negotiated, often encountering more than one group involved in the same bid. This is especially the case in more complex, high value business, which typically requires our organization to provide integrated projects or solutions.
Moving forward, the roll-out of consistent education and training modules will be critical to competitiveness and customer satisfaction. To ensure simplification and to maintain consistency, these modules must be available to all relevant groups, irrespective of geography or function.”
The report goes on to describe the steps needed to undertake development and ensure adoption ….
All of this may sound very familiar to many of today’s contract and commercial practitioners, who face similar fragmentation in their procedures and authorities.
This report was written 20 years ago, within a Corporation that was a leader in global reengineering of its contracting process. The improvements supported a major turn-round in its market performance, transforming contracts from a liability into an asset, especially in its growing services and solutions business.
Twenty years on, is your organization still struggling to make these changes?
A key reason for IACCM’s existence is to offer this consistency of organizational training, skills development and certification. Visit www.iaccm.com for details.
An IACCM member asked me for a view on lean contracting – what is it, what impact does it have?
My thoughts on this relate to ‘lean’ in the context of quality – and therefore overall efficiency through error-free activity. To me, that means we can think of ‘lean’ in a number of contexts when it comes to contracts: I believe those responsible for contracts and contracting should be asking these questions:
- Are individual contracts produced and managed in an efficient manner?
- Is the overall contracting process operating efficiently and tackling repetitive quality issues / defects?
- Is the contracting process being used effectively to test the quality of broader business capabilities and their alignment with business or market needs?
For item 1), the parameters may be quite narrow, in the sense of measuring cycle time or compliance. In that regard, something could be ‘lean’, but not necessarily high quality (‘lean’ does not automatically translate to ‘fit for purpose’ – my terms and conditions may be losing me business, but the process through which the contract is created and delivered might be very efficient).
Item 2) should begin to offer more tangible ‘quality’ indicators, because it would start to look at portfolio performance and should include deeper analysis of the effectiveness of contracts. For example, this analysis might reveal you are handling a lot of claims or disputes or a high volume of invoicing errors. The process through which these are resolved could be very effective and the contracts team may consider they are doing a good job – but that is because they do not look at the business consequence of their ‘lean contract’. So item 2) presumes that there is greater consideration of the effect of the contract on the business.
Item 3) almost turns this on its head. It sees contracts as a reflection of business policy, process and practices and uses the contract to test whether business capabilities reflect market needs and values. For example, the market might want truly global commitments, but the internal measurement and management system might frustrate that commitment. This is immediately visible in the nature of the contracts that are offered to the market. The contract becomes a tension point and can be used to highlight such issues to management. In that sense, the contract is a source of lean thinking and tackles the frustrations that otherwise people spend time trying to work around.
What are your experiences of lean in the context of contracts?
Many organizations claim to have a process for contract management, yet this claim often does not stand up to scrutiny. This becomes evident as soon as anyone starts to ask questions about process efficiency or effectiveness; quite simply, there is no data because ‘the process’ lacks an owner and is typically quite fragmented in its operation and oversight.
This issue is becoming more evident as executives awaken to the importance that contract management has in the delivery of business results. As they ask more questions, it is rapidly obvious that no one has answers and no one actually feels accountable (or capable) of providing them. Examples range from wanting to know how effective the contracting process is in handling business risks; what types of contract should be deployed to optimize business results; how the contracts and contracting process compare with those of competitors …. the list goes on and right now, very few organizations have answers.
Of course, some turn to IACCM and we are able to assist with broad industry information. In a growing number of cases, we are asked to conduct specific research or to advise on the best way to improve the process. But in many cases, the challenge is much bigger. Executives are calling for ‘increased competence’ in contracting or commercial management – and that is a relatively undefined concept. When responsibilities are fragmented and business units see the process as somewhat optional, when process steps lack definitive guidance on timing and when there is little data flowing on actual operation, it is very hard for anyone to step forward and take accountability.
Major improvements depend upon ownership. And that ownership has to be at a sufficiently senior level that the broader organization takes notice. This does not imply that any specific individual or function has unilateral decision rights – there are many stakeholders involved in contracting (and this is a key reason for the problems). However, it does mean that there is a focal point for the efficiency and effectiveness of the contract management lifecycle. With that ownership comes a more holistic view that starts to yield meaningful data on performance and a focal point for driving continuous update and improvement.
A process that lacks data is not really a process at all. It is a set of loosely connected activities that may or may not operate in the organizational interest. Today, contract management far too often falls into the latter category.
Commitment Matters 