As businesses struggle with managing their diverse and volatile trading relationships, is increased use of relational contracting almost inevitable?
Extensive data points to the fact that businesses are becoming more inter-dependent. On average, external spend as a percentage of revenue is growing. The extent – and volatility – of partnering and teaming is also increasing, as is the diversity of sales channels and routes to market.
All of this leads to growing complexity and a shifting risk profile for business management. Cloud computing is an excellent example of this. In the past, the enterprise bought or leased hardware and then developed or licensed software. The IT department was large and relatively autonomous. Cloud services fundamentally altered this dynamic. Hardware needs are slashed; licensing transforms to use-based charging; and ease of acquisition means that just about anyone in the business can start using external programs or apps.
The challenge for the CIO is very different. They need to develop an overall strategy and plan for technology services and they need to institute some form of control over internal policies and purchases. In addition to this, they become far more dependent on managing external relationships and integrating those relationships to ensure coherent service delivery.
That is where a big player like IBM tries to step into the scene. If they can “create an ecosystem of technology partners”, they offer to simplify the world for the CIO – and of course establish IBM as the partner of choice. Commenting on this strategy, Colin Cram wonders how IBM will manage this ecosystem and asks whether it may lead to the creation of a Relationship Management Office.
Certainly Colin is right to highlight the key challenge that relationship management represents to businesses as their inter-dependency grows. While corporations like IBM have some outstanding relationship managers (and accompanying tools and processes), they operate for a selected group of customers and ‘relational competence’ is an evolving discipline. IBM’s strategy with regard to ‘ecosystem development’ is not new. I recall in the 1990s a similar approach to the application development market. At that time, it was Hewlett-Packard (and the now disappeared DEC) that managed to ‘surround’ IBM through its strategy of partnering with application developers. IBM raced to catch up with a diverse range of agent and remarketer programs targeting especially the application development community.
I recall the excitement that many small providers felt when they signed a partnering agreement with one of these technology giants. They believed their break-through moment had come. The problem was, for around 90%, nothing ever happened. There was no effective way to integrate or promote their software to a global Salesforce. The central program owners at IBM or at HP had few levers to create awareness and lacked resources to offer any meaningful ‘relationship management’.
Has anything changed today? Certainly the networked technology now available will increase the chances of visibility and success. But I somehow doubt that IBM will be investing a whole lot of money in developing a ‘relationship management office’. I also suspect that they are providing this approach as a customer convenience and that they are careful to limit their liability for the quality or results achieved from these third party offerings.
While sharing Colin’s enthusiasm for relational contracting, I rather doubt that IBM’s approach to selling cloud services represents the break-through moment.
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d you know that monitoring compliance remains a key focus for contract management groups and the most common area for reporting? Would you have guessed that only about 8% of organizations typically succeed in always imposing their standard terms or that, for the average company, around one third of contracts are completed without any negotiated amendment?
These are just a few of the many statistics emerging from the 2015 IACCM Benchmarking Study, which looks at a wide range of performance and management data related to contract and commercial management. At a time of growing executive interest in contract and commercial capabilities, having benchmark data is becoming increasingly important.
How many contract managers does it take to write a contract?
Part of the challenge is around efficiency. For example, At one extreme, a contract manager may be overseeing as many as 250 separate contracts, while at the other there may be an entire team dedicated to a single mega-deal. Benchmark data gives answers across this spectrum. For example, it tells us that the average bid and negotiation cycle time for low complexity agreements is under 6 weeks – though for bottom quartile companies this stretches to over 8 weeks. We also gain insight to other factors, such as the fact that ‘international’ contracts typically take 25% longer to close than purely domestic agreements.
Is my contract management organization delivering value?
In leading-edge organizations, executives are becoming far more interested in contract and commercial effectiveness. That means they want to know whether their contracts are delivering the right outcomes and optimizing financial results, as well as protecting against risks. Here, benchmark measures are quite varied, but include comparisons of how time is spent, the reports provided to management and the skills of staff. Our data tells us that the quality of market research is generally low, with less than 20% having significant insight to competitive terms and contract structure. Many organizations still deploy substantial resources on low complexity contracts, whereas in high performers more than 70% of contract management time is spent on high complexity deals. Another benchmark is training and skills development, where there are dramatic differences in investment, with staff in bottom quartile organizations receiving an average of less than 2 days training a year.
Some useful benchmarks relate more to market trends. For example, we often hear that the average duration of contracts is reducing, yet according to the survey that is not the experience of most organizations. Just 24% report this trend, against 31% who say the term of their contracts is increasing. Another confirmed trend is the steady shift towards web-based and distance learning, which is now twice as likely to be used as classroom programs. However, even though we now have access to on-demand programs, the overwhelming favorite for training remains on the job experience and learning from colleagues.
Where can I get this benchmark data?
The IACCM benchmark studies currently in process are detailed below and remain open for input. Click on the link to access the survey. Participants will receive an early copy of results:
- Performance Measurements: This survey looks at headcount, contract complexity, measurements used to gauge both individual and functional performance and a range of efficiency indicators (e.g. cycle times, number of contracts per professional etc.)
- Primary Areas of Activity: This survey looks at scope of role, where responsibilities are performed, time allocated to different activities and use of outsourced or offshore services.
- Value Proposition: The survey you are about to complete focuses on the value that you deliver to the business. It looks at reporting line, objectives, challenges you are facing, the use of automation and skills
While many continue to question the value and relevance of contracts, there are indications that our world is becoming more driven by rules and litigation.
Society, ever less tolerant of ‘bad behavior’, seems to welcome regulation. Perhaps this is an inevitable consequence of the breakdown in trust, itself caused by the erosion of traditional loyalties and communities. So while regulation has influenced many aspects of human tolerance in a positive way, general levels of polite behavior often appear to have fallen.
What exactly are the standards when it comes to a 5-year-old’s birthday party? That is the question being put to the test in Cornwall, England, where no-showing for a party has resulted in an invoice and threats of court action to recover resulting costs. The offending child (or parents?) accepted the invitation and then had second thoughts. Their host incurred fees of approximately $25 which could have been avoided if there had been a cancellation.
Justified annoyance? Probably. Appropriate reaction? I suspect not. And indeed, not only is this attempt at recovery most likely doomed to failure (for background and expert opinion, click here), but the host parents would seem not to have undertaken effective stakeholder analysis when launching their attempted recovery. For example, what will other parents think? What will other children at their son’s school say? There is every chance that next year, the boy will celebrate his birthday alone. Play dates? Forget about those – they are too risky.
In the end, every smart individual (and organization) must weigh their desire for recovery (or revenge) against the wider impacts on their brand or reputation. That is why litigation is so rare. Most times, it is far smarter to simply write off the losses and forget about them, or to seek compensation through reasoned discussion.
Fact-based decision making is gaining the attention of business leaders worldwide. That is because they recognize it has critical importance to survival in today’s volatile, competitive and complex markets.
Many of today’s business decisions are based on opinions or flawed data. For example, there are people who believe all suppliers are intrinsically dishonest, or that all customers are unreasonable. There are those who believe that good performance is best achieved through consideration and encouragement, while others think that the threat of punishment is more effective.
Most of us have plenty of opinions and we find comfort in them. Sometimes these are based on facts. Often they are influenced by specific experiences or education, which may or may not be indicative of norms or reality.
When we look at how contracts are drafted, or how business relationships are conducted, we rapidly see evidence of very different opinions. Indeed, we need only to conduct an internal review and approval process to discover wide variations in the underlying attitudes of different functions or individuals. When challenged, we may often hear about specific incidents, or about ‘someone who told me’, but it is rare to find positions that are well supported by factual data. For example, what is the actual impact if commercial staff are involved late or whether or not a ‘professional’ contract manager or lawyer oversees performance? What is the actual impact of onerous liability clauses or liquidated damages? What is the actual effect of extended payment terms or more generous rights of return or of mandatory arbitration rather than litigation? And how do these answers vary according to the type of relationship, or the culture within which events are occurring?
Ask around and you will receive a multitude of different opinions. I challenge you to unearth many facts.
Effective management seeks to harmonize these viewpoints. It recognizes that diversity of opinion can be a creative force, but unless there is control and balance it will rapidly lead to destructive contention. We see plenty of evidence in the world today where strongly held beliefs, often lacking a factual basis, become a source of massive destruction.
Developing harmony in the way we construct and manage our trading relationships is surely the key to improved performance, but it is unlikely to be achieved while so many decisions and behaviors are based on individual opinions. That is why organizations are becoming so interested in data that can lead to fact-based decision-making. In a recent article, The Economist pointed to this development in the world of economics, where the long-ignored field of microeconomics is now surpassing macroeconomics in terms of interest and influence. That is because we live in a data-rich world with technologies that can now undertake meaningful analysis. The result? A mass of hitherto unknown facts, which increasingly drive business strategies and offerings. Take for example the recent collapse in the oil price. The ‘macro’ world should have been forecasting this – but it wasn’t. So the ‘micro’ world now kicks in, helping management to decide what steps to take to address this situation.
The world of contracts has remained largely immune to the influence of data analytics. Even though there are millions of contracts available, a lack of clear structure and the diversity of wording has made data extraction difficult. But perhaps more important, we have a professional community that is resistant to change and which continues to place value on individual opinions, collective wisdom and the interpretation of precedent. That is perhaps the major reason why we now see a new field of ‘Commercial Excellence’ emerging. Organizations are determined to extract more value from their market relationships, especially on the supply-side (though it is my opinion(!) that this won’t take long to flow through into procurement as well). To achieve this, they are focusing on new approaches to market segmentation, more adaptive market offerings, differentiated sources of value through commercial terms – and to get there, they need much more integrated data collection, tools and systems to perform analysis and skilled staff to oversee these activities and apply business judgment. Right now, those being recruited into these posts are not from traditional ‘commercial’ functions.
Where does this leave today’s contracts and commercial staff, including lawyers? Perhaps rather like the macro-economists, we will find ourselves relegated to a subordinate role, still muttering our opinions even when no one is listening. Or, of course, we can ensure a very different future by grasping the need for change and becoming the owners and purveyors of facts.
A repetitive issue with commercial management teams is the imprecision over their job role.
Yesterday I was speaking with the head of commercial at a major outsourcing company about the challenge he faces with staff retention. It became clear that lack of role clarity is a significant factor. While there is heavy demand for commercial services, there is little definition of what precise activities are provided, or of what value these deliver.
My colleague observed: “It all sounds a bit like a large jelly – absorbing whatever is thrown at it”. But we concluded that actually it was more like blancmange, since jelly is transparent, yet commercial services are often opaque.
This absence of defined value is a problem, not only in offering high caliber staff a meaningful role and career path, but also because senior management shares that confusion. At a time when ‘commercial excellence’ is becoming a key issue for business, it is far from clear whether existing resources are capable of meeting the challenge.
Most people do not rate their skills or capabilities accurately. There are those who over-estimate (and therefore tend to blame others when things go wrong); and there are those who under-estimate (and therefore tend to blame themselves even when it is not their fault).
Last month, the Financial Times ran an interesting article on the impact of these tendencies in the workplace (‘Bloated and shrunken egos both prove bad for business’). It concluded that some level of misperception is normal; that over-estimating (at least among managers) is more prevalent; and that in general this is not a problem. However, understanding our tendency can be helpful – and people at the extremes can create problems for themselves and for their organization.
Those who over-estimate their ability often feel they have little to learn or to correct. Those who under-estimate are often very hard workers (compensating for their lack of self-belief), but they generally fail to take responsibility for their own development.
Experts in organizational behaviour attribute an increase in numbers over-estimating and attribute this to modern education, which tends to praise mediocre work in order to build self-esteem. The more people are encouraged to feel special, the more they develop a sense of entitlement and an exaggerated view of their skills.
It is interesting that in both cases (over-estimators and under-estimators), there tends to be a rejection of structured learning programs. Also, career success adds to the dilemma of the over-estimator, because the higher they go, they tend to be insulted from problems and bad news. They may also surround themselves with people who admire them and rarely challenge. Indeed, when challenged, the individual with inflated ego is likely to become defensive and may even exclude anyone with opposing views.
Any contracts or commercial manager needs to manage stakeholders. In order to do this, they need to understand the drivers for that stakeholder – and this analysis helps in how best to motivate and communicate with them. But a good commercial expert will also hold the mirror to themselves and challenge their own self-perceptions. Based on the skills assessments we undertake at IACCM, both categories are quickly recognizable. And we also regularly experience the resistance to learning that the experts associate with an inability to make an honest appraisal of our capabilities …. So where do you sit on the scale?
It has been some years since ISG introduced an audit service for outsourcing contracts. I recall that they estimated clients could save up to 7% of contract value through corrections of supplier over-billing.
Recently, I conducted a webinar with SC&H Group, a company that offers more holistic contract audit services. Their estimate of savings is a little more conservative, but still very significant. It seems to me the sort of service that any value-minded supply management group should be adopting – and indeed, worth considering by any supplier wanting to establish competitive advantage.
Billing accuracy is important. At one, extreme level, there is a risk of outright fraud, which every organization must be anxious to avoid. At another level, there is error. And somewhere in between is complexity – the growing volume of services contracts that are based on complicated algorithms or precise volumes of activities delivered, often utilizing personnel with varying hourly rates.
The concept of audit is obviously not new and it is used quite extensively in some industries. But in many, especially where Procurement focus has historically been on direct purchasing, there is little attention paid to contract outcomes. As indirect procurement has grown as a proportion of spend, the chances of waste and overpayment have increased.
One option for tackling this problem is to deploy internal resources to check and validate supplier invoices. However, in addition to asking whether this is an area for internal core competency, there is the drawback that such reviews may prove adversarial and damage the wider customer – supplier relationship. Using a third party can bring a degree of independence and objectivity, reducing the chance of confrontation.
For suppliers, there is growing demand for greater integrity in business dealings and key to achieving this is increased transparency and openness. It seems to me that a source of competitive advantage in the next few years will be proactive efforts to embed transparency within contract relationships. The accuracy of billing and charging practices is an area of major concern for customers. What better way to demonstrate not only honesty, but also confidence in process quality, than to establish third party audit as a contract term?
Yesterday I was involved with a briefing call for the IACCM Advisory Council. We discussed a number of emerging trends – including those which I outlined in my blog ‘A new year makes no difference’.
Several additional items arose during the conversation, illustrating the tremendous diversity of challenges facing the commercial community.
1. In a number of industries, some large suppliers exhibit almost monopolistic or oligopolistic behaviors, evident in their ‘take it or leave it’ terms and conditions and some of their business practices. I find this interesting and I suspect many on the supply side, rather than sympathizing with customers, would say ‘it serves them right’. Years of aggressive procurement practices, forcing ever lower prices and ever greater risk onto their suppliers, has certainly not created a sympathetic environment. It has also forced industry consolidation and driven competition out of the market. The ‘oligopolistic behavior’ is in part also a result of more frequent teaming between a small group of large suppliers. Yet even now, customer organizations seem slow to learn that they need to alter their approach to the supply base. In most cases, procurement has not altered its unrelenting focus on lower prices and a heavy burden of risk.
2. There is growing protectionism and this distorts markets. It is certainly true that demanding economic conditions and broader social unrest are leading to market distortions. These include preference to local suppliers or more onerous demands for counter-trade and local content. Rather than protest, I think commercial teams need to adjust to these realities. Politicians will respond to the concerns and pressures within their jurisdiction. Suppliers must become smarter at anticipating and enabling these needs. Commercial managers need to establish proactive capabilities in raising local content or developing local skills and make this a key part of their value offering.
3. We need to invest more in supplier development. The issue here is the lack of availability of skills. Despite high levels of unemployment, many countries lack the skilled labor needed by today’s business. This ties to the point on protectionism, where free flows of labor are also now being constrained. However, the answer may also be the same: smart suppliers (and buyers) need to look at how they build competitive advantage through programs and offerings that alleviate skill shortages. This is a commercial challenge to be fixed, not an insoluble problem.
4. It is getting harder to get paid. I found this an interesting comment and not one I have heard elsewhere. Certainly payment terms have lengthened – I have written on that topic several times in the last year. And the volume of debt written off is truly remarkable. But this comment was made especially in the context of Europe and the fact that companies there are lengthening payment periods and then often failing to pay even when due. I would be interested to know if others are experiencing this challenge. I certainly know that factoring is growing fast in Europe and perhaps that will provide a solution.
Interesting topics and just more evidence of the scope of the challenges facing commercial professionals. Perhaps a key point is that individually and on a deal-by-deal basis we cannot find answers. The real value of commercial management can be realized only when the community starts to combine and develop campaigns or design solutions that address these issues more holistically.
Those who follow the work of IACCM will be familiar with our assertions that commercial competence is becoming a major topic for business leaders. Faced by the growing complexity and competitiveness of a networked world, the ability to make better commercial judgments and to act fast upon them is a critical source of differentiation. Businesses are moving from a focus on efficiency in managing the internal enterprise to effectiveness in managing external markets.
Anyone who still doubts those IACCM forecasts should do a search on ‘commercial excellence’. You will find that all the major consultancies are now active in this field and that there are significant employment opportunities for ‘heads of commercial excellence’, including examples of ‘commercial excellence job families’. The internet search implies a strong focus on sales and marketing, with the role very much geared towards segmentation, analytics, portfolio management and oversight of channels. It is – quite correctly – a market management and sales enablement role, drawing widely on the development of standards and the use of technology. In most cases, the goal is quite clearly to improve sales and raise margins. Hence responsibilities frequently include contracts and pricing.
This development is increasing the gap between the more strategic role of a commercial manager, versus the more tactical and operational activities of contract management. A strong interdependency remains, but the way that ‘commercial excellence’ is evolving suggests that this will be the role to undertake detailed market research, to focus on analytics and to define commercial practices and offerings, whereas contract management will be more aligned with specific deals and negotiations.
One of the most important points is that these roles are quite clearly about generating revenue and profit. While issues of control and compliance obviously remain important, they are the backdrop, not the purpose. This shifts commercial (and in that sense contract management also) away from the Legal orientation that has been an increasingly dominant feature of the last few years.
And what about Procurement? We know that in many organizations, Procurement wants to be seen as ‘commercially competent’. As I have observed in several recent blogs, that is problematic while existing performance metrics remain in place. A focus on savings and risk allocations inevitably undermines rounded commercial judgment. It is also notable that at present Commercial Excellence is being defined in very much a sales-oriented context (which is much more in line with the traditions of this title). However, my view remains that organizations can flourish only if they align their sales and procurement activities. Over time, I believe we will see an integrated commercial function looking at markets and their management holistically. The dependence of sales on the quality of the underlying supply network is now so strong that a disconnect immediately impacts performance.
As the only professional association representing commercial management, IACCM will continue to define and report on the emergence of ‘commercial excellence’. For the last year, we have been working on new and updated training programs and expanding our research to inform and equip the market. For those with an existing commercial role or title, these changes will often be challenging because they represent a significant shift in responsibilities and skills.
It is conventional at the start of a new year to reflect on what went before and to forecast what lies ahead. In reality, the change of a digit in the date has no significance. The world of contracts and commercial management was just the same on January 1st as it had been on December 31st.
The real point of a new year is psychological. It is a time when we look back on what has been happening and pause to assess its impact and our readiness for what lies ahead. There are indeed many continuing trends that are of very real significance to those in contract and commercial management and which demand some level of preparation and action. Here are some examples, which IACCM will cover in more depth in its webinar ‘2015: What lies ahead?’ on January 20th (to register, click here).
1. As markets and supply networks fragment and diversify, contracts and contracting disciplines are becoming more important as connectors within and between businesses. This is causing executives to push for increased competence in both contract and commercial management.
2. Contracts and relationship management are merging to form ‘relational contracting’, which shifts much of the focus onto performance management and governance. This has significant impact on negotiated terms and creates increased dependence on ‘good will’.
3. The shift away from risk allocation and price towards risk sharing and value is resulting in increased use of performance and outcome based contracts. Research shows that most contracts and commercial practitioners have little knowledge or experience of these agreement types.
4. The public sector is undergoing revolutionary changes which will continue to drive commercial innovation. Governments are at the forefront when it comes to a need to redefine services and their delivery models. This imposes a need for far greater contract and commercial skills and capabilities.
5. Risk and sustainability continue to evolve as issues that demand innovative approaches. Among these, trading partners will become more integrated and selection criteria will adjust to measure integrity, agility and to ensure greater cultural fit.
6. Market volatility and technological change continue to demand greater flexibility in trading relationships. Economics, not the law, will be the key determinant of ‘good contracting’, demanding greater financial analysis and closer integration with contract terms.
7. The true potential of data and analytics arising from the field of contracting (and in consequence impacting the entire future and value of the discipline) will continue to emerge. Practitioners who utilize this data will flourish; those who ignore it will become irrelevant.
Overall, the news for contracting professionals is a mix of good and bad. But those who prepare can certainly tip the balance in their favor. Join the discussion on January 20th!
Commitment Matters 