I have written several blogs recently on the topic of performance or outcome-based contracts. This reflects growing pressure on suppliers to take responsibility for results and the momentum is especially strong in the public sector.
As with all contract models, the key question is whether their use drives greater levels of success. IACCM research (a recent report is available from the IACCM website) suggests that performance-based contracts have a substantial positive impact – reducing the percentage of ‘failed’ agreements by almost half. But this depends on a shift in the behaviors and management systems of the contracting parties. If they do not invest time in clarifying requirements or fail to establish the right governance mechanisms and incentives, most or all of the benefits will be lost.
Yesterday I presented to an audience of project managers from the Canadian Department of Defence. Canada is just one of the countries moving steadily towards increased use of performance-based agreements. I also sat in on a presentation by Deloitte, which revealed the results of their audit of US performance-based logistics contracts. The US DoD started switching to this model about 15 years ago, but (as with many organizations) kept no data to show whether there was overall benefit. About 5 years ago, Deloitte developed a methodology and ran a pilot review of 11 contracts. Subsequently, they added a further 11 to the list. Based on their analysis, 21 of the projects reviewed were generating improved availability and responsiveness at significantly lower cost. These findings have helped support the steady expansion in use of performance-based agreements.
Among the many interesting insights that Deloitte shared was the fact (and their surprise) on how little performance data is generated in respect of contracts. They had great difficulty in extracting demand data, cost data, consolidated availability or supply data from either the customer or supplier. In other words, no one know whether a different form of contracting was generating any real improvement in results, at either a transactional or portfolio level.
To me, this was once again the critical point. IACCM research regularly points to the substantial effect that improved contracting can have on business results. Our frustration is the absence of solid data. Our only method to establish impacts is through ‘crowd sourced’ input. When member organizations go away and test this data by undertaking their own in-depth audits, they actually find the results are quite accurate. But sadly, they remain the exception and many contracts groups prefer to dispute the results than to undertake the research. Hence, the move towards performance and outcome-based agreements will doubtless remain slow – and in many cases will be driven by other parts of the business.
At a recent meeting of General Counsel, the question was asked “In the future, will the General Counsel need to be a lawyer?”
While only a few answered in the negative, it was interesting that there was no impassioned defense of the need for lawyers to hold the role. And indeed, given broader trends in business, it seems wise for the legal community to consider this possibility and the reasons behind it.
It is increasingly the case that heads of function are not drawn from within that function. They are often selected for their business talents and the drive for their appointment may be to bring reform to a specialist group that is not delivering the right value. But they may also be put in place to act as a more effective conduit between the functional specialists and the broader business – ensuring that in-depth professional knowledge is evaluated and communicated in ways that are practical.
The in-house legal department was often established as an alternative to using outside lawyers. As such, it often acted in a quasi-independent role, with the belief that it should not get too close to the business in case this influenced its objectivity. For many reasons, that thinking is under increasing pressure and lawyers are not quite as special as they once were. Indeed, the same pressures are evident in law firms, where a growing number of non-lawyers increasingly add significant value and, in leading jurisdictions, the need for law firms to be owned by lawyers is fast eroding or under challenge.
There are certainly already instances where the General Counsel may not be admitted within the jurisdiction where they are based. It seems only a matter of time before in-house legal groups start to appoint the best person for the job – and that job may not require them to be legally qualified.
The MBA market produces an ever-higher number of graduates. Leading business schools promote enticing programs, offering the leaders of the future key skills such as a global mindset, entrepreneurship, decision-making. The problem is that these skills are increasingly common – and employers do not generally value them.
Bloomberg recently issued a report based on input from leading recruiters. It sought to identify the skills that really can get you employed or advance your career – that is, those that are both valuable and rare. Towards the top of the list are analytical skills and the ability to work collaboratively – two areas consistently highlighted in this blog. But while these are valuable, they are also relatively easy to find (though interestingly they are not among the most common skills for contracts and commercial professionals).
Two areas that are often highlighted by the contracts and commercial community as being important are industry-related knowledge and adaptability (the ability to perform a wide variety of tasks). Unfortunately, both of these feature on the ‘less wanted’ list.
So what are the premium skills – those that are both rare and highly valued? There are four of them:
- Strategic thinking
- Creative problem solving
- Leadership skills
- Communication skills
All of these feature among the key skills measured by IACCM competency assessments. Our benchmarks show considerable variability within the contracts and commercial community. For example, those in commercial management tend to be stronger on the first two. Contract managers are slightly ahead when it comes to communication skills. Neither group scores well on leadership. But overall, there is considerable room for improvement. Even those applying for Expert level certification are frequently weak on strategic thinking and creative problem solving. They are much better at seeing problems than at solving them. This means that creative opportunities are mostly missed. While technical skills are often very high, these do not lend themselves to strategic thinking – indeed, growing specialism can create a blindness to the bigger picture.
With some 12,000 professionals now having undertaken the IACCM skills assessments, we have invaluable insight to the current state of the profession (both buy-side and sell-side). Our regular talent surveys also tell us which skills the community thinks are important. Frequent conversations with top management offer us insights to their thinking and expectations. And now we have the Bloomberg survey to add to the mix. Overall, Bloomberg’s findings broadly align with what we hear from executives when they talk about contracting competence or commercial excellence. Right now, there is a significant gap between these messages and the community’s view of what skills they have or deem important.
Public procurement is going through testing times. The approach to service delivery is changing radically and demanding a depth of commercial skills far beyond those of the past. There is a need for far greater market awareness and engagement, to keep pace with emerging supply trends and technologies. It is also essential for government to ensure innovation and value for money through improved contract management.
These demands have led to major reform programs, many centered on the need for ‘smart buyers’ or ‘government as an intelligent client’ or ‘making government a better customer’. In other words, there is broad understanding that the public sector must focus on greater collaboration, increased transparency and ‘ease of doing business’. But as with most reform programs, the right words and sentiments at the top are often frustrated lower down in the organization. That appears to be the case with a number of today’s well-intentioned initiatives.
However, there are encouraging signs coming from the defence department in Australia, where a commitment to performance-based contracting means that public sector leadership is not just saying it wants a change in behavior, it is actually doing something about it (and I should acknowledge here that counter-parts in Canada, the US and the UK are working closely together on related concepts).
The Australian direction is not new. The first performance-based contracts go back some 10 years and in the last 3 years have been accompanied by growing use of relational contracting models. However, these moves are now supported in a recent review paper, ‘First Principles’, which builds on existing foundations and seeks to accelerate progress.
The paper contains some important directions. First among these is a re-definition of ‘the enterprise’ to include all organizations contributing to an outcome. This acknowledges the fundamental significance of the customer / supplier relationship and the approach to its governance and oversight. This is supplemented by initiatives such as interactive bidding and renewed commitment to the engagement of small-medium enterprises. Another development is the provision of related training – but not just for defence personnel: the intent is to run joint supplier-buyer programs. Each of these developments seeks to drive alignment of purpose and capability between the buyer and supplier.
At a sell-out conference last week, staff from the Defence Materiel Organization led reflections on the approach to performance-based agreements and the contribution they are making to improved relationships and results. This represents a rejection of the short-term, adversarial methods that still bedevil so many procurements and demonstrates that the right practical measures can drive real change and kindle wide enthusiasm.
There are still improvements to be made – and the conference included some hard-hitting assessments by suppliers, highlighting areas of policy and terms and conditions that still stand in the way of optimized results. But many of these are being tackled and, importantly, there are the forums for issues to be discussed openly and addressed.
IACCM’s research on performance-based contracts shows that failure rates are lower than in traditional contract models, but they require a shift in attitudes and behaviors which many (on both buy-side and sell-side) tend to resist. A lack of trust, a failure of imagination and an absence of visible leadership often combine to frustrate change. In Australia, there are clear signs that the mould has been broken and that true improvements in performance are being realized.
In a fast-changing world, new ideas abound. Many will go nowhere. Others will be a raging success. What sets them apart?
Some ideas are simply not good. But even good ideas may not succeed and often this is because of poor commercialization – a failure to ask (and answer) the right questions or a determination to push ahead even in the face of massive obstacles.
It is commonly understood that innovation requires strong commercial back-up. Indeed, some innovations are in essence purely commercial – for example, Uber and airbnb which simply transform a supply chain through the use of technology and a new delivery system. This implies that contract and commercial managers should be playing a major role in evaluating and enabling new ideas – yet in most organizations they do not. Indeed, frequently those in commercial roles complain that they are involved too late, when their ability to shape or influence is almost non-existent.
In my role at IACCM, I am often the recipient of new ideas and as an organization, we promote innovation in contract and commercial management. I observe the reaction of our members, who tend to fall into two very distinct camps. A minority are clearly enthused by new ideas. They engage actively in discussing them and providing support, including suggestions for possible improvement or additional markets or applications. Others are more evidently thoughtful and immediately consider the idea in the context of their professional knowledge. They immediately move to practical questions such as funding, payment streams or potential liabilities and risks.
The first group – the minority – do not ignore these practical questions, but they operate in a different sequence. They see their role as assisting in the ‘ideation’, in ensuring full understanding and exploring its applicability and purpose. Only then do they move into the more fundamental questions of overall ‘commerciality’.
As I watch the faces of the innovators, it is quite clear which conversation they value – and ultimately, which advice they are more likely to accept. Those who share their excitement are immediately part of the core team; those who identify ‘challenges’ and problems are left on the edges.
These differences are important. Given the speed of change and the importance of innovation, the interesting jobs of the future will be those driving competitive differentiation and introducing – commercializing – new concepts and ideas. If you are in a commercial role, it is good to reflect on how you behave, whether you are perceived as risk-averse, obsessed by compliance and process, or whether you add value through a readiness to contribute, using your knowledge and experience to assist innovation, rather than frustrate it.
25 years ago, management guru Gary Hamel was telling CEOs about the need for self-surgery. Facing the chill winds of globalization, he explained their need to urgently reassess many of the structures and policies that had come with their former greatness. Among these were the need to rethink the management systems that had been fundamental to their success, such as operating with multiple profit centers and promising ’employment for life’. Practices like these stood in the way of lean, efficient operations and collaborative, skill-based delivery systems. They faced the choice of self-surgery or the mortician – and in the subsequent 25 years, more than half the Fortune 500 have disappeared or left the list.
Those businesses that have survived did indeed engage in self-inflicted bloodbaths. They cut non-core operations; they slashed established head count; they outsourced a myriad of functions; they automated, standardized and maximized operational efficiency. They re-thought products and services, often transitioning their core market value proposition.
As part of this process, many internal functions grew in stature and were centralized, partly to increase efficiency, partly to develop new global capability and partly to embed central controls. Legal, Procurement and Contract Management are all examples of this. And now it is time for them to engage in their own self-surgery, to enable yet another new era.
Globalization happened. It brought many changes to the way we do business. The administration of sprawling operations demanded increased controls and compliance. It created a wave of price-based opportunities, driving commoditization. It required worldwide knowledge and intelligence to take advantage of local market opportunities, cheap labor and new ideas. But now, those attributes are not enough – and many of them either get in the way or can be automated. So Legal, Procurement and Contract Management must adjust – or be adjusted!
What needs to change? High on the list are purpose, skills and technology. First of all, these groups must stop believing they are special, that they (or their business) is in some way unique. ‘Being special’ is an attribute that arises from the outside looking in, not the inside looking out. So these functions must focus on issues such as how they enable the speed, flexibility and commercial creativity needed for a digital age; how do they empower good decision-making; how do they acquire and distribute the knowledge needed for good judgment and to support differentiated products or services? The purpose of these groups must be to establish competitiveness – which means operational excellence, intimacy in relevant trading relationships and commercial innovation. The changes involve discarding old, risk averse contracting models and moving to relational structures; creating contracts designed for users, not for courtrooms; changing measurement systems to monitor outcomes; discarding redundant technology and embracing the collaborative, performance-enabling tools of today; welcoming accountability for results and ending the culture of isolation, blame or powerlessness. They need to undertake honest, objective appraisals of their existing process, skills and tools – have the courage to benchmark and to confront the steps needed to be among the best.
A new world is upon us. As someone observed last week ‘We are working in an environment where the speed of change is unprecedented. And it will never be this slow again.’
Are you ready for self-surgery?
Once again, a group of major banks face massive fines for illegal trading practices. And once again, a cynical public has its disillusionment with the business world reinforced.
It is in many ways ironic that those imposing regulation (the politicians) are even less trusted and respected than the industries they are regulating. Indeed, one risk is that they use regulation of others as a way to try and demonstrate their own integrity.
But according to a recent report by Deloitte, the massive costs of compliance are not especially due to external regulation. I am told (because I have yet to find the report) that their research suggests just 38% of those costs are due to regulation and 62% arise from internal rules and procedures.
The big question, of course, is how many of those internal rules and procedures are really necessary? How often are they challenged, reviewed, updated? In a fast-changing world, populated with new ideas, techniques and technologies, many rules or practices are outdated – and nowhere is this more evident than in the world of contracts. IACCM data shows the lengthening leadtimes for contract review and approval. We know that ‘compliance’ is a major (and growing) aspect of supplier selection and management. As a community, we have insight to the major causes of delay – but relatively few of us capture this data and challenge whether a) it is necessary or b) it could be streamlined.
Using the contracting process to test effectiveness and efficiency of business controls is a tremendous source of potential value-add. It illustrates the cross-functional nature of what we do and reflects our capacity as ‘agents of change’ rather than administrators of the status-quo.
Too many procurement groups are on a path to nowhere. They are missing the golden opportunities being created by today’s dynamic markets.
That is the conclusion I have to draw from the many conversations I have with practitioners, consultants, executive search firms and business executives. In a fast-changing world, the possibilities for growth are numerous. But in many cases, procurement professionals and their leaders are simply ignoring them because they do not fit existing paradigms, or they are too busy to pay attention to the warning signs.
For years, supply chain consultants and professional associations have been hammering on issues like compliance, category management, control – all based on the assumption that commoditization is the route to sustainable savings. This has led procurement into increasing isolation, making them masters of process, but disconnecting them from meaningful relationships with other business functions or suppliers. Indeed, many seem to glory in this isolation, feeling that it somehow confirms their objectivity and superiority as moral guardians of the business. They talk about key issues such as commercial skills and then delude themselves into thinking they are masters of these skills.
In reality, nothing could be further from the truth. Suppliers continue to see procurement as ‘the enemy’. Internal functions see them as an obstacle to good, balanced decisions. And markets are adjusting, to move beyond the pernicious effects of modern procurement practices. Suppliers have consolidated, eliminating competition in many industries. They are moving away from products towards services and solutions. They are shifting from unit prices to payment for results. These – and many other trends – are transforming the world of supply management and calling for skills that support integration, collaboration, overseeing outcomes and exercising judgment – attributes that are largely alien to the world that procurement leaders have created.
One would hope that professional leadership organizations would be assisting their members to change, providing a vision for the future. But instead, they often seem wedded to the past, calling for official status as ‘Licensed procurers’ or promoting even more draconian steps that would drive ‘savings’ or simply proclaiming the illusion that it’s only a matter of time before they ascend to the top table.
As enterprises disaggregate, needing ever more flexible and creative supply networks, this should be a golden age for those charged with selecting, forming and managing trading relationships. But as with every craft or trade of the past, relevance depends on the readiness to adapt. Right now, most procurement organizations are following a path that leads to more and more attrition as automation fulfills the roles that they perform and others step into the shoes they could be filling.
Those with vision are grasping that the future lies in the strength of relationships, in research and innovation, in creative ideas and insights – the attributes that machines find hard to replicate. It’s a world that excites IACCM and its members; its a world we must embrace, rather than retreat into the comfort of the past or find excuses to avoid.
If you are in Procurement, it’s time to rise up, to demand more, to assert your abilities and potential. The function is in desperate need of true leaders who act as drivers of change and creators of value. But to do that, you must challenge the status quo, the current mantras of control and compliance, and instead become enablers of transformation in trading relationships.
When they respond to IACCM’s talent surveys, 80% of contract and procurement professionals say they are confident that they understand the skills needed for the future. They also believe that they either have or can acquire those skills.
Are they right?
In a series of member meetings in Australia, the subject of skills has arisen on numerous occasions. There are several organizations – such as the Brooke Institute – that have undertaken significant studies in this area. All those studies suggest that skill needs are changing fast – and that the current practitioner community lacks the right profile for the challenges that lie ahead. IACCM benchmarking and skills assessments suggest they are right.
The nature of contracts and trading relationships is changing fast. We are moving to an increasingly complex environment where many projects and contracts are impacted by high levels of uncertainty or ambiguity. A growing number are performance or outcome based.
Complexity changes the sort of competency needed, from following process, ensuring compliance, obeying rules to instead making judgments. This means a need to be aware of the process and the rules and to understand how to work around or within them in ways that do not threaten success. It also demands a set of leadership skills and a readiness to engage with the outside world, to understand market trends and practices.
The problem we face is that the standard skills of following process, obeying rules and ensuring compliance will rapidly be automated. Right now, there is limited evidence that the practitioner community is acquiring the competencies needed for the future. But this is an area on which IACCM is working and will steadily introduce new approaches to training and skills development.
Over-hyped, inward-looking, of no practical use or value. That’s the conclusion any rational leader would reach in an objective analysis of the sprawling risk-management industry.
Recognizing and grasping opportunity lies at the heart of human and social development. Everything that can go right can also go wrong. Achieving balance is the core of commercial management and resides in attitudes, intelligence, adaptive design – not the mumbo-jumbo of self-serving specialists.
Life is not measured by slide rules. It is often unpredictable and we weather much of that unpredictability through exercising judgment. As a discipline, risk management tries to take us back to the days when medicine was performed by ‘balancing of the humors’. It served no practical purpose and often left the patient far worse off than they were before they exposed themselves to ‘the experts’.
Commitment Matters 