I spent yesterday chairing a conference on Advanced Contract Risk Management.
There were some excellent presentations and much lively discussion – but many of the exchanges involved heated discussion over the organizational reporting line and whether contract managers should be lawyers.
These days, it seems many lawyers are becoming more assertive about not only the ‘right of ownership’ they have over anything contractual, but also suggesting that legal skills are somehow uniquely suited to the role.
But what role? Here is where we have the problem. Such debates between the lawyer and non-lawyer fundamentally miss the point over the role of contract managers, the purpose of a contract and the value contribution from a contracting process. These questions must be answered in advance of a decision on the necessary skills or the best organizational reporting line. What value can be achieved from contracts and what value do executives want to achieve? I find that those who claim ownership rarely have answers to these fundamental points.
For those who wish to own contract management, my question is whether they are ready to accept accountability for the quality and outcomes of the overall contracting process. If they are not, then they are not a suitable owner.
I enjoyed reading a recent paper from Horses for Sources Research, which draws on research by Proxima to highlight the fundamental shift that has occurred in business operations and the challenge this represents to organization and skills. Essentially, the study found that the average business spends some 70% of its revenues on non-labor costs and this has generated a critical dependency on services supply chains. This has generated a need to fundamentally alter the way that supply relationships are managed.
The paper by Phil Fersht reiterates the case for a value-based approach to key supplier relationships and confirms the view that traditional approaches used for direct procurement are damaging business results. Its main contribution comes from some original research suggesting many organizations are already adopting new business models; but unfortunately it does not explain in any depth what these models are or how organizations might achieve them.
The ‘Six Characteristics of Companies of the Future’ are translated into a series of Procurement competencies that are once again interesting and reflect many of the areas that IACCM has been promoting for several years. Where the paper fails is in explaining its assertion that the future will be achieved through a ‘hybrid outsourcing and shared services’ operating model and quite how this connects to future Procurement. Indeed, it seems to imply that the main change is in re-skilling and re-focusing the efforts of the traditional Procurement workforce. But is that really achievable and is it in fact adequate?
I fully agree that supplier relationships are key to business success. But so are customer relationships, because without those, there is no need for suppliers. The real issue with current business models is the continued fragmentation of how we see and manage ‘the market’. I agree with many of Phil’s assertions, but in my view the real need is for an integrated market management service that oversees the alignment of trading policies and practices for both customers and suppliers. Continued separation of those who buy things and those who sell things is one of the unresolved tensions within most businesses. They operate with fundamentally different views of the world, rather than ensuring the internal collaboration that would generate a consistent value focus.
Indeed, as I mentioned in one of my blogs last week, recent research by the Chartered Institute of Purchasing and Supply found that the most serious weakness in today’s Procurement staff is a lack of commercial awareness. That, I suggest, is because they operate in relative isolation from the core business purpose, which is to be successful at selling goods and services. By consolidating contracts and commercial resources into a single services group, skills, processes and systems could be dramatically overhauled to ensure coherent and integrated management of external trading relationships.
On the Public Spend Forum, Jonathan Messinger produced a wordcloud to identify ‘the seven most over-used words in Procurement’.
I was interested to see that ‘contract’ came top of the list. Now Jonathan, to his credit, dismissed that as an over-used term because, he said, it is ‘what we are all about’.
Spot on, Jonathan, but interesting that while the word may be so much used, it is in my experience so little understood. I would be fascinated to see how a majority in Procurement would define the word or, more important, explain the purpose of a contract. I bet most see it simply as a legally-driven document generated by the procurement ‘process’ (another term that features high on the list).
If indeed ‘contract’ is core to what Procurement does, why are so few trained in contracting? Why is the management of those contracts still so rarely a valued discipline? Why do so few Procurement professionals appreciate the impact of terms and conditions on supplier motivation, behavior and the value that is achieved?
Recent research into leading providers of outsourcing services found a significant contrast between companies that do what customers want, versus those that do what customers need. The differences were especially marked in levels of customer satisfaction and supplier profitability, with those who address ‘needs’ taking a very clear lead.
Many times we are asked at IACCM what we think of the contract management software market, what growth we anticipate, who are the leading suppliers. And a common question is “Why hasn’t the size of this market developed in accordance with analyst forecasts?”
The answer, I think, is that almost all the suppliers are catering to wants, not needs. They are being driven by a lack of imagination and understanding from both clients and industry consultants, who have failed to grasp the true business impact that automation could have on the contracting process and its business value.
“Wants” generally reflect the way that a customer’s internal stakeholders see the process. It tends to result in a narrow and non-threatening view of requirements which assumes what those stakeholders are doing today is valuable and necessary. Hence the focus for contract management has been on repositories, transactional review and compliance, auto-reminders and database search. The return on investment for this functionality is hard to define and is certainly not exciting; many implementations grind to a halt part way through because they are not seen as strategic.
“Needs” reflect what a customer really could be achieving as a result of more fundamental change, bringing innovation to their existing process and practices. In the case of contract management software, that would include realization of the fundamental insights that automation might bring to the business through more holistic data analysis – for example, consolidated data on risk probabilities and consequence, systems support that generates automatic alerts of potential problems, tools that enable shared data access and integrated supplier / customer risk registers.
Suppliers who address needs are thought-leaders, taking their customers to places they did not even realize they could go. I simply do not see many instances of this happening in the contract management software market.
In defense of the suppliers, the challenge they face has been especially significant because contracting is generally such a fragmented activity with no clear internal owner or champion. Therefore it has been very difficult to gain attention or establish a senior sponsor for anything that is truly innovative. But now, with the sort of data that IACCM is generating related to the potential return on investment, there is no longer a good excuse. It is time for customers to wake up to this potential and for those suppliers who want to lead this market to re-think their offerings and their marketing and to become purveyors of needs, not wants.
Yesterday someone sent me Rule #2466 of Relationship Management. It seemed a perfectly good rule – but it made me wonder what the 2465 before it had to say and just how many more come after it?
The Christian religion was founded on ten core rules, or commandments. Whether or not we believe in the religion, i am sure everyone would acknowledge its influence. Much of the early appeal was its simplicity – and this is true of all great movements. Once ‘the regulators’ or rule-makers (the priesthood) move in and make it a full-time profession, many adherents are alienated.
We face this dilemma in the creation and management of trade and trading relationships. The underlying principles are actually very simple. The relationship must offer sustainable benefit to both parties; they must not operate to the unfair disadvantage or detriment of others; they must have some equitable basis for termination.
When the rules multiply, they represent a growth of complexity that ultimately makes the model unsustainable. The cost burden of administrative overhead becomes untenable and we lose the ability to comply, simply because there are too many rules to understand and follow.
At the macro level, the continued growth of regulation should cause all of us to question whether current approaches to trade will soon be subject to revolutionary change. But more immediately, at the micro level, we must focus on how we can issue simple, easily understood operating rules and principles in our internal and external business relationships. Specifically, are the rules through which your contracts are designed, drafted, approved, negotiated and implemented readily intelligible to others? Are they designed to facilitate use and compliance, or are they designed to ensure continued employment for an ever-growing priesthood?
Expectations of business integrity are increasing. Society is becoming more aware of the costs associated with dishonest or immoral behavior. This goes beyond overt corruption; it relates to the much broader issues of honesty and sustainability in the commitments we make.
We all understand how bribery can distort the public interest. It affects quality, value and the underlying fabric of trust. But business integrity is about much more than this. It recognizes the very real cost that accompanies deliberate over-statements of capability, or failure to properly validate supplier competence. It translates into goods or services that simply are not fit for purpose; it results in cost overruns, or major delays. The social cost of these ‘over-optimistic commitments’ (or misrepresentations, some might say) is enormous.
Increased transparency is making this endemic behavior more and more evident. The media is highlighting many of these ‘contract failures’, especially those in the public sector. Senates, Parliaments and audit bodies are demanding improved controls, better skills.
Most of those in the world of contract negotiation or procurement view this with a certain amount of cynicism. We all know that senior management tends to be over-optimistic. We all know that business decisions frequently lack rigor. We all know that business measurements and incentive systems (especially sales commissions) encourage corner-cutting, exaggeration, poor judgment. And we do our best to mitigate the risks through traditional contracts that apply ‘penalties’ in the event of extreme failure.
Is this any longer enough? As social expectations change, as regulation tightens and as reputation risk continues to grow, how will the role of the contracts, procurement and legal communities alter? Already we see some signs of fundamental change. One may be a shift in internal measurement and reward systems. Another is in the executive interest in raising commercial and contract awareness across their organization. A third is the extent to which demonstrable contract management competence is becoming a source of competitive edge – indeed, in some cases it is an absolute requirement for winning business.
As we enter a new year, I believe this is an area of fundamental importance for the contracting community to consider and it is an area of focus for IACCM. How will your business adapt to the shifting business environment and to what extent will you facilitate and influence that debate?
Yesterday I challenged the contracts and legal community to ask whether they are truly doing a good job. From the responses I received, I know that some are quick to recognize that we need to do more, that we are performing a good tactical job. but we are not using the overall process to develop strategic insights.
There are many questions that I could pose to illustrate this point, but I assembled several as examples. If we are really able to claim we are providing a high value service to the business, then these are the sorts of questions to which we must have answers. And of course, it is not just having answers that matters, it is interpreting those answers to advocate change and improvement. Ultimately, contracts drive business value. Are you confident that you are extracting all possible value from them?
Here are a few questions. I’d love to hear whether your business can answer them:
What percentage of your contracts deliver the expected financial results? What percentage over-perform and what percentage under-perform?
What are the reasons for over or under-performance and in what ways were these results impacted by contracting policies, processes or skills?
What are the most frequent causes of claims and disputes related to your contracts and what steps should be taken to reduce them?
What criteria would you use to determine whether a specific contract should focus more on dealing with risk consequence or with reducing risk probability?
How do your contract terms and contracting processes compare with those of your competitors? What have you done / could you do that would represent a source of competitive advantage?
How do your contracts and contracting processes contribute to the strategic goals and priorities of the business? As those goals or priorities change, what is the process through which contracts and their terms are updated?
From a contracting / commercial perspective, what is the relative riskiness of different customers / suppliers? What is the contract risk profile for different segments of the business (for example, industries, product or service divisions, countries)?
How frequently is contract data analysis used to inform business management about the potential benefits of changes to commercial policies or contracting capabilities? Or do you only meet with senior management when there is an escalation or something has gone badly wrong?
On the Successful Workplace blog, Chris Taylor has asked ‘Why are marketers still awful at what they do?’
I could almost replicate Chris’s blog word for word, to ask the same about contract managers and lawyers. The point Chris is making is that, in spite of all the data and analytical tools now at our disposal, many marketers continue to operate blindly, firing out campaigns and offerings with no real idea of their impact or suitability to the target audience.
How true this is of most contracts, and the terms and practices that underpin them. How many contract managers or lawyers can actually explain the effect of specific terms or commercial policies on the market? Do they know how a particular approach to liabilities, liquidated damages, termination or price reduction will impact the behavior of their customers or suppliers – and consequently affect performance? Have they a sense of approaches that encourage and support loyalty, or those that destroy it?
Questions like this are just the tip of the iceberg, yet such information and insight is fundamental to competing in today’s environment. Trust and loyalty are valuable, yet they are eroding. Contract and relationship terms are fundamental ingredients in the mix of elements that generate trust and loyalty. Drawing from Chris Taylor’s blog: “Why isn’t Big Data changing our world in more visible ways? Why aren’t analytics being used to target the right messages to the right people?”
And adapting a little another of his comments, is this not true of the contracts and legal community? “Most contract managers and lawyers still haven’t figured out how to take advantage of data, technology and techniques that are readily available. For a variety of reasons, including investment in obsolete contracting models and platforms, poor understanding of analytics and Big Data, and overall inertia, contract managers and lawyers are struggling to catch up to the needs of the business or to understand what drives or motivates their customers or suppliers.”
A process and approach that is dominated by the narrow interests of several functional stakeholders will never grasp the wider needs of the market and will therefore not contribute to value, indeed may even undermine it. I will return to this theme with more specific ideas for improvement, but If Big Data is not on your strategic agenda, it really should be – unless you are happy to wait until senior managements starts to ask ‘Why are our contract managers and lawyers so awful at what they do?’
Last week I commented on a series of recent public sector contract failures (see Government Procurement in a Mess).
John Smit posted a reply, in which he correctly highlights the problem of inappropriate contract design. He observes a fundamental difference between traditional acquisition contracts and those for services – and that is the need to design for on-going oversight and management. In John’s experience, many Procurement organizations continue to use contracts that were designed for product acquisitions where significant on-going management is unnecessary. They than hand this off to a business unit which now has an inappropriate form of contract, as well as lacking skills or experience in contract management.
John also confirms my original point, that these weaknesses are not unique to public sector.
It is in many ways remarkable that contracting parties continue to allow these weaknesses. Procurement often claims that it merits a seat ‘at the top table’, yet how can this be the case if the function fails even to act on the weaknesses of its own procurement tools and strategies? And providers also share the blame, for these poorly performing contracts are in no way helpful to them. it does not take much investigation to discover whether a customer has post-award management capability. If suppliers had the integrity to point out the likely consequences and helped clients to build their skills, the market would become far more healthy, sustainable and profitable.
Last week, Mary Sebelius (Secretary of State for Health & Human Services in the United States) highlighted an urgent need to improve contract management within her department. Indeed, she specifically initiated a program to introduce ‘best practices’.
This is just one of numerous examples this year where top executives or auditors have called out the need for greater competence in contracting. This will come as no surprise to many leaders in contract and commercial management, who have long realised that changing market conditons and new forms of offering demand strengthened capabilities. Whether on buy-side or sell-side, contracts today are more critical instruments in both establishing and managing the right trading relationships and outcomes.
But it would be premature to celebrate, because most existing contract management groups face two distinct challenges.
First, executives are looking to build competency – not to recruit an army of experts. Sure, there ae opportunities for those with true expertise and there is likely to be some short=term expansion of headcount. But the real point with competency is the need to spread understanding of contract management discipline and tools mroe widely across the organization. Thereofre the role for experts will increasingly be to operate as a knowledge and enabling center. Few have yet adjusted to this mission.
Second, the call is for best practices – and how many contract management groups can claim to know what those are? Since very few undertake research or benchmarking, they have no real idea how they compare or what size gap they need to fill. This means they are rarely proactive in approaching senior management with ideas or substantive investment plans. Hence the executives have limited confidence in their exisitng teams. Indeed, as they look to the future, they may see the current staff as part of the problem, not as the answer.
So as Christmas approaches, you should not expect a sudden flurry of gifts. Indeed, if you want to make it onto the list, perhaps now is the time to reach out to IACCM and gather insights on how to establish best practicve competence, maybe even to undertake a capability assessment so that you are able to advise management on the steps that are needed.
That way, you may at least be in the position ot ensure a happy and prosperous New Year!
Commitment Matters 
