‘Just because you can doesn’t mean you should’ …. That is a principle which every organization should apply when developing its terms and conditions and underlying business policies.
It certainly seems to be the case in the recent announcement by Amazon that it will no longer require contract staff to sign non-compete agreements (at least in the UK). Many of these workers are on minimum wage and on variable hours. The inequity of such a term should surely have struck any fair-minded executive at Amazon and resulted in such a provision never being imposed. But it did not – and this calls into question the internal review process for policies and contract provisions.
According to a recent study of European CEOs, ‘honesty and integrity’ are today’s most important attributes for business. They may well be right, since public and political opinion is increasingly hostile to what is seen as unfair and manipulative behavior by many large corporations. Examples abound – for instance on issues such as payment terms, rights of termination and ownership of intellectual property. Amazon is certainly not alone in using its power to impose one-sided contracts.
It sometimes seems as though companies take the view that if there isn’t a regulation prohibiting it, any action is acceptable. But of course it is not – and this points to a key failing in many organizations today: a lack of judgment.
This issue of judgment is not new, but it is increasingly complex. Our interconnected world, the growth of specialism, the shift in public and political expectations have combined to multiply the range of stakeholder views that must be taken into account. At the same time, functional silos within business have made it increasingly difficult to reach balanced decisions on a timely basis.
It is this set of dynamics – and the need to project ‘honesty and integrity’ – that underpins growing interest in ‘commercial acumen’. Organizations need their staff to have greater awareness and sensitivity to the potential consequences of their actions. Those who prepare or draft such terms must, in particular, be a last line of defense and ready to challenge the wisdom of the policy sponsor. For those in procurement, contract management or legal, the opportunity is clear: it is time to have the courage to demonstrate capacity for judgment.
So Microsoft now requires its suppliers to commit that their workers in the US receive a guarantee of paid leave. This requirement will apply to all employees who do ‘substantial work’ for Microsoft.
This announcement has a number of fascinating implications – and reinforces my past blogs suggesting that the contract and commercial management community need to start taking sustainability issues far more seriously.
First, I was interested to note that it was Microsoft’s General Counsel, Brad Smith, who made this announcement. It’s not the sort of issue that would typically have been associated with the Legal function – but this is just one indication of how fast the role of in-house legal is altering.
Second, the broader rationale for this move is to enhance (or protect) Microsoft’s reputation in an environment of growing public hostility to Corporate ethics and practices, especially in matters of finance and income distribution. So expect much more of this type of initiative, as others jump onto the bandwagon and try to build their reputation. What might come next? Perhaps push-back on zero hours contracts, or demands that workers receive health coverage, or insistence on specified minimum wages? And issues around ‘ethical practices’ won’t stop there. What about caps on executive compensation, or limits on employee bonuses, or elimination of tax arrangements that are viewed as ‘unfair’?
Third, just think of the practical issues associated with implementing and managing the Microsoft requirement. Even if there is agreement on what constitutes ‘substantial work’, can suppliers really start to differentiate among their employees in this way? Issues of morale, employee relations and potentially litigation would suggest that Microsoft suppliers will have little choice but to change policy for all their US employees. And can they limit geographically? Indeed, can Microsoft justify the geographic limit to US workers?
Microsoft say that they recognize the potential cost impact of this change and are willing to negotiate with suppliers accordingly. Other customers may not be so happy to follow suit. So that leaves a supplier wanting either to pass all resultant costs onto Microsoft, or of having to accept a potential hit on margins. It will be interesting to discover how Procurement at Microsoft has been instructed to deal with these situations and in what way their measurements are being adjusted; for example, will Procurement continue to be measured on savings, or increasingly on maintaining corporate reputation?
Finally, if you think this move will be complicated to manage, just imagine what it will be like when others start jumping on the bandwagon. There is little point in them following the Microsoft approach – it is no longer newsworthy. So each initiative needs to have originality – and imagine for a moment what that could mean for suppliers. How can they possibly manage in a world where individual customers start to set rules for personnel policies and broader business practices. For example, Oracle may now say they don’t want to deal with suppliers who avoid taxes through offshore operations (unlikely I know, but I use it simply as an example).
As the Corporate world awakens to the need to rebuild public trust, we have to anticipate a mass of sustainability initiatives – and it is hard to see how they can be achieved without significant cost and price increases.
Procurement, legal compliance, accounting, marketing … These are all necessary activities within a business. The problem comes when those activities become enshrined within rigid policies and practices which are not well aligned and then undermine business goals and performance.
A recent report from Deloitte illustrates this point perfectly. It is just the latest in a number of audit reports that highlight how procurement practices damage economic results, frequently overwhelming the declared ‘savings’ that are generated by today’s Procurement functions. Yet when you review the causes identified by the study, most Procurement groups would deny responsibility: the problems are associated with poorly defined objectives, unbalanced allocations of risk …. ‘Not my job’ will be the reply. ‘That’s because of senior management, engineers, lawyers ….’. And in fairness, they are right – because the real problem is that process responsibilities are not aligned and the business lacks holistic insight.
This immediately illustrates the point that we must distinguish competency to perform a task from the assumption that it will then be achieved by a specialist business function. Firstly, the job title frequently does not reflect the span of responsibility. Secondly, there is a very real danger that the specialists become a barrier to good performance because their practices become sacrosanct, rather than the quality of their output.
Output is often hard to define and measure. You need to find critical indicators. That is why IACCM promotes the idea of measuring contract performance. Contracts are, after all, tangible assets – far more so than the sales revenue forecasts or procurement savings that are such a focus today. Smart organizations take these predictions of contract performance and monitor the actual results. More importantly, they explore and analyze the reasons behind performance gaps.
Contracts represent an overall measure of business effectiveness since every activity within the business contributes to them. If looked at through the lens of the contract, almost any shortcoming – or success – can be tracked back to its origin. This analysis, when the results are considered, quickly starts to reveal the practices and processes that are out of step with business needs – or which should be promoted to ensure success.
Increasingly, analyses are pointing to issues like insufficient stakeholder engagement, selection of the wrong supplier, use of the wrong incentives, inappropriate allocations of risk, over-commitment of resources …. All of these are readily evident from analysis of contracts that fail or underperform. Yet rarely are such analyses undertaken. Why? Ironically because contracting is one area where there is rarely a defined process and even more rarely any point of accountability for overall performance. While individual contracts may have ‘owners’, these unfortunate people typically do not receive substantive guidance or support. Indeed, the contract they are handed is frequently flawed from the outset due to the various policies and practices that governed its construction .
‘Commercial excellence’ is a term that every business leader should adopt. They should see this in terms of whether their organization’s contracts are delivering intended results. They should be demanding insights to the causes of under or over-performance. Essentially, business leaders need a small team that undertakes forensic analysis into business policies and practices as they relate to performance on contracts. Their key target should be to drive incremental revenues and cost reduction through improved performance of the contract portfolio.
You don’t have to search far to discover all that is being written about increased complexity in today’s business world. At the top of the list come issues such as managing interconnections and interdependencies – many of which cross traditional boundaries of language, culture and commercial norms. Networked technologies and social media mean that we cannot any longer ignore diverse stakeholder opinions. Old assumptions that power will prevail are no longer true – so is empathy the new source of strength?
Last week I attended a conference run by the Wharton School in Philadelphia. Its focus was on megaprojects – and this name alone conjures up an image of complexity. Time and again, presenters emphasized the importance of stakeholder management and engagement. We discussed the many challenges of understanding and reconciling diverse perspectives, especially since most megaprojects are focused on infrastructure development, which is often contentious. Developing mines or oilfields, building rail networks, roads, power stations … these are the types of initiatives that seem good in concept, but may meet violent opposition from local communities, environmentalists, religious groups or political opposition.
If we fail to address those stakeholders, our project is at risk. Modern media means that no voice goes unheard. Campaigns can arise from the smallest beginnings.
While it may not be possible to address every stakeholder’s wishes, we can – and must – bring them to a point of reconciliation and acceptance. And I would argue that this goes to the heart of good commercial and contract management. The job of a commercial / contract manager should be to avoid disputes – and to do this, they have to understand diverse perspectives and anticipate likely reactions, both within and outside their organization. Such considerations are already having major impact on contract and negotiation practices. For example, the growth of local content or offset arrangements are no longer simply about keeping Governments happy, they are increasingly focused on bringing direct benefits to affected communities. In addition, there is growing need to consider not just the impact of the construction itself, but also the entire aftermath of commissioning or decommissioning – people want to know these things in advance. And even when it comes to negotiating or contracting with local communities, there are many lessons to be learned. One speaker explained how they provided a community with negotiation training so they would be equipped to have effective discussions on the issues to be resolved. Another spoke about the need to have highly adaptive approaches to contract content, wording and terms – for many markets, large corporate contracts appear very threatening and undermine trust. They also contain many terms or assumptions that simply cannot work – such as the need to link to an ERP system or to take substantial insurance.
Good contracts and commercial relationships have always depended on a readiness to listen and understand the perspectives of others. I think this used to be a skill that many contracts, commercial and legal staff possessed. Unfortunately, the imposition of rules, standards and compliance have transformed the discipline to one of imposition, rather than understanding. And this regularly undermines the value we can offer. It is time for commercial staff to develop their skills in empathy. And then we would be welcome members of every project team.
Technology has reshaped business capabilities and business relationships on a global scale. Yet somehow, the process and instruments through which those capabilities are expressed and by which those relationships are managed (that is, contracts) have largely managed to escape untouched.
The lawyers and contract managers responsible for contracting have (mostly) accepted the need to use email and some are very proficient with a variety of applications; many companies have implemented some rudimentary contract management software, though rarely is it enterprise wide and in most cases it covers elements of the process only. For example, the most recent IACCM benchmark data tells us that 77% of respondents have a repository. But that drops to only 52% who use software to support internal review and approval and other functionality falls away rapidly.
Much of this seems to be because senior management fails to take contracting seriously. It does not understand the cost to the business of the inefficiencies and value erosion associated with a fragmented approach to contracting. In most organizations, contracting remains activity- based, spread across multiple stakeholders, lacking clear authority and ownership. In such a situation, it is enormously difficult to build consensus for a solution, let alone gain funding.
But unfortunately, those within legal and contracts functions who could be leading the charge for new and better approaches in general do not do so. In some cases they may be technophobes; in others they lack confidence in the available technologies; and some who should be leaders simply do not lead.
Contract management technology should be transforming the way that the world does business. And before long, I am convinced we will see a true revolution, where software is not simply about raising internal efficiency, but is about creating more sustainable and higher-yielding relationships. Already a few encouraging signs are emerging. Two recent examples are of a system that oversees performance management – at a shared level, with both parties having direct access. This has resulted in a strengthened relationship and revenue growth for the supplier. Another is around the use of artificial intelligence that can remove the pain of dealing with individually negotiated agreements.
I am convinced that we will soon grasp the point that contract management software is not an extension of ERP – it is the application that helps business overcome the fundamental weakness of ERP in enabling or managing external relationships. And I also believe that advanced systems will drive us to adopt more industry standard agreements that avoid the time-wasting battle of the forms. Negotiation will be focused on true value trade-offs and this will be supported by powerful analytics. The contract management or legal group of the future will be targeted towards revenue and profit maximization through intelligent term selection.
And the technology that delivers this really will be something worth having!
In speaking with groups around the world, I find a degree of confusion over use of the term ‘sustainability’ when applied to trading relationships.
Increasingly, for specialists in the field of compliance, the term is used to refer to a range of environmental and ethical issues. it therefore tends to apply to the standards and behavior of suppliers or supply networks and whether or not they demonstrate ‘sustainable’ practices.
For many others, the term is used in the more traditional and rather broader sense of whether a relationship is sustainable – i.e. does it have a long-term future? in this context, it has mutual application and relates not only to issues of behavior, but also to questions of policy or strategy. This group often gives limited thought to the compliance issues that are fundamental to the emerging supply management specialists.
Does this matter? perhaps not, but it always seems unfortunate when the words we use create confusion and add to potential for misunderstanding. if we always have to define the context in which we are using a word, it makes its use somewhat inefficient and redundant. Perhaps we just need to think of qualifying terms – for example, to distinguish sustainable practices from sustainable relationships.
Winning contracts, placing contracts with suppliers, executing on contracts – the ability to undertake these activities successfully lies at the heart of any sustainable organization. Shifting business models are making capabilities in these areas ever more critical.
Yet for the majority of organizations, contracting remains one of the few undefined business processes and probably the least automated.
For most businesses, the ability to win contracts with customers has always been important. The significance of contracting with suppliers continues to grow, as a higher proportion of revenue is spent on external supply (in some industries, as much as 80%). But this is only part of the story because steadily, the role and importance of contracts has increased and the complexity of performance has also grown.
In the past, executive surveys revealed that most CEOs saw little importance in contracts except for their symbolic value in winning business. The exception to this was if they perceived significant risk or uncertainty. Today, risks and uncertainties abound – ranging from a myriad of regulations, through increasing internationalism in trade, into contracts that often commit to long-term outputs or outcomes. For many, gone are the days of simple commodity supply; the contracting process has become critical to addressing a wide array of business risks – financial, legal, regulatory and performance.
Yet old habits die hard and many organizations continue to operate with highly fragmented commitment processes, with ‘the contract’ viewed as a legal or administrative output. As a result, relationships often suffer from the wrong form of agreement, inappropriate terms and conditions and poor management of performance and governance standards. As IACCM research demonstrates, good contracts offer a framework for successful relationships and provide structure for subsequent performance.
There has been almost endless investment in defining and automating internal business processes and structures. In many cases, this has actually been at the expense of the external relationships on which organizations rely. It is time for executive management to shift focus from internal operations onto external effectiveness and the integration with trading partners. The contracting process offers the route to this integration, through insights to market needs and value as well as actual performance standards and capabilities.
It might be argued that all regulation is ultimately political, but notices issued by the Chinese Banking Regulatory Commission and the Ministry of Industry and Information Technology appear to cross new boundaries. They threaten operations in China by all foreign banks, undermine competition in the technology sector and show complete disregard for the intellectual property rights of non-Chinese software companies.
In common with most jurisdictions, China has concerns over cyber-security and wishes to ensure effective oversight of the banking sector. However, the authorities appear to be making this into an opportunity to either eliminate competition or to acquire trade secrets via access to source code and encryption keys. Presumably such access would also enable the Chinese government to mount cyber attacks of its own against foreign countries.
Speaking with representatives of the banking industry, there is of course massive concern. One executive explained to me that the regulations as currently published would leave banks with two options. One would be to leave the Chinese market and the other would be to create a unique entity, using only Chinese origin software and technology. The problem with the latter solution – in addition to the expense – is that such an operation would then prevent the bank from meeting regulatory obligations elsewhere, since it would no longer have integrated visibility into worldwide operations.
It is hard to know what goals the Chinese authorities are pursuing. Is their intent to eliminate domestic competition in financial services? Do they really believe that non-Chinese institutions will obtain and hand over source code (which they of course do not have and which would leave them in breach of license terms) which will then be used to enable Chinese firms to replicate and undercut foreign rivals? Or is this simply posturing and a negotiating ploy that leads to some other goal?
This incident reveals the hidden danger of regulation. The more we have, the more that Governments will be tempted to use it for domestic policy and political purposes. In a networked world, it becomes very easy for authorities to justify their actions on the basis of ‘national security’; sadly, we must anticipate a growing threat to world trade driven by many forms of protectionism, of which this example is just one.
“There is a profound shift going on”, according to John Elkington, Executive Chairman of Volans.
John was my co-presenter at the Ecovadis conference in Paris, discussing the progress and challenges of sustainability. The size and quality of the audience at this event, together with the growth being experienced by Ecovadis, are clear illustrations that sustainability is very much on the business agenda.
In my presentation, I highlighted the point that reputation is now of massive importance to boards and executive management. Indeed, recent CEO studies emphasize this point, with a survey in the Financial Times revealing that ‘honesty and integrity’ are now top of the CEO agenda. So if market perceptions matter so much, it is clear that there needs to be greater focus on ensuring the right relationships and the right suppliers. Organizations are growing increasingly dependent on their supply network – many now spend 70% or more of their revenue on external supply. So ensuring the integrity of supplier behavior is no longer optional – it is essential.
Several speakers illustrated this point, outlining how top corporations like Nestle, Nokia, Societe Generale and L’Oreal are embedding sustainability principles into the way they do business. They have moved beyond simple codes of conduct with steps that include:
– significant weighting is given to each supplier’s ethical behavior within the selection process
– individual buyers are measured and rewarded on their sustainability performance
– the frequency and rigor of supplier audits is increasing, with remedial steps identified and agreed
– sustainability issues now form part of the contract, with direct consequences for failure (including immediate termination)
These steps indicate that health and safety, remuneration policies, working conditions, compliance with environmental laws and regulations are all being take seriously.
Challenges remain. Among them, the question of how widespread ‘good practice’ actually is. And when it comes to increased costs, are companies willing to trade off savings for sustainability? Based on the CEO surveys, I think the answer increasingly is yes – executives understand that a failure to observe sustainable practices carries a very real cost.
For commercial lawyers, the practice of law is transforming. Acting as a semi-independent advisor on specialist risk and legal issues is no longer enough. Today, the business expects much broader appreciation of opportunities and challenges – and that the support and contracts produced by lawyers will directly contribute to the best possible outcome.
Lawyers are no longer operating purely at a transactional level seeking to protect assets and avoid worst-case scenarios. They are being called upon to assess the wider economic consequences of the agreements they help put in place.
Many in-house counsel – and some law firms – would argue that they have always been ‘business advisors’ and in some cases I would agree. But the demands today go much further. As trading relationships change, the nature of legal support must also change. Here are a few of the factors and examples of their impact:
1) many trading relationships now focus on longer-terms outputs or outcomes. This requires underlying agreements to be more flexible, more adaptive to change. Increasingly, it is evident that many existing contract models and underlying terms and conditions are not suited to this world of outcomes – so lawyers are expected to ensure the contracts they produce are ‘fit for purpose’.
2) business leaders are swinging away from adversarial models of contracting, focused on price and risk allocation, and switching to more collaborative, open relationships. These require quite different terms and quite different negotiating skills. Lawyers (trained in win-lose) are required to rethink their traditional approach and also to understand the elements of a ‘collaborative contract’.
3) litigation is very much the exception – and the switch to more relational forms of contract, plus the international nature of many agreements, is accelerating the use of alternative dispute resolution. Once a business realizes how unlikely litigation has become, the focus of the law department changes significantly. It must enable good business decisions rather than sit remotely as a reviewer and approver.
4) the business wants to know whether the contracting process is optimizing financial returns. Lawyers have rarely thought about the big picture of contract economics. Indeed, the impact of terms and conditions or contract structures on financial results can seem very theoretical when viewed at a transactional level. But it is not. Lawyers are being pushed to understand how the contracting process impacts the bottom line.
My recent conversations with General Counsel are noticeably different from those of the past. They want to know more about emerging contract models – for example, relational contracts. They appreciate that they need to be more engaged in understanding how contracts perform – for example, where do things typically go wrong and how could problems be avoided? They recognize the need – and value – of looking across portfolios of contracts to observe common risks and identify opportunities for improved financial results. And they grasp the point that if they do not show leadership in this area, the business is exposed and they are missing the chance to drive real value for their organization.
New technologies are changing the capabilities of the law department, enabling the collection and analysis of data on a massive scale. But also, the nature of business is changing. Traditional compliance and management of risk consequence will be managed through different and lower cost methods. The real art of lawyers must be in helping the business make things go right, not in simply protecting against things going wrong.
Commitment Matters 