“Outsourcing is moving backwards; it is tired and outdated”.
“I see no future for the major outsource providers: they have become trapped in out-tasking.”
These are just two of the comments I have recently heard during conversations with experts in the outsourcing field. There is no doubt that many client organizations are questioning the value of outsourcing and that many providers are struggling to make a decent margin. Add to this on-going questions about the integrity of the provider community and there appears to be a volatile mix of negative sentiment.
Managing internal relationships is hard; managing external relationships is even harder. And few organizations have yet grasped what it takes to build productive and sustainable relationships with an external partner. Providers are often caught in the dilemma of customization versus standardization; the former appears responsive, but actually adds dramatically to costs and to risk of poor performance.
So is outsourcing in decline? Will its use become more selective and more limited?
I believe that outsourcing offers many potential benefits, but realising these will take a continued shift in attitudes and behaviors. A few things that need to be addressed are:
- Establishing requirements: clients must know what they want and express it clearly. This requires engagement with the market to establish and evaluate capabilities. Needs must be properly documented to avoid regular disagreements over scope and goals. Current measurement and motivation systems do not help; they should be altered to rewards based on results, not on getting a contract signed.
- Executive sponsorship: client organizations must appoint a sponsor with experience of developing or managing contracts and supplier relationships. Too often, those in charge may be technically proficient and understand the subject area, but they often fail to test the commercial issues or capabilities of either organization and thus end up with the wrong supplier, or inadequate internal competencies.
- Use of third parties: if a third party is really needed, they should be very carefully controlled. In my view, third party involvement has been one of the major causes of value erosion in outsourcing. If they act as an expert mediator or facilitator, there can be major benefit. If they act as a partisan representative, they distort negotiations and performance, often creating an adversarial environment.
- Outcomes: if the only goal is cost reduction, then out-tasking existing activities may be fine. But if the aim is continuous improvement or innovation, it will be achieved only through focus on outcomes and continued discussion as these evolve. That means the parties must focus on what is to be done, not on how to do it. If the supplier is not expert in the field, why are they being hired?
- Governance and performance management: good relationships need the right structure – and this needs to be provided through an appropriate form of contract. The adversarial, risk-consequence focus on many contracts and contracting processes means that the parties lose their fundamental business management tool. After so many years, it is remarkable that there are so few examples of good performance based / outcome based contracts which integrate ‘the contract’ with ‘the relationship’. Yet given the factors above, perhaps this is not surprising ….
So can the industry survive and prosper? This depends on significant shifts in the way that outsourcing is approached and handled. Meanwhile, Shared Services will increasingly represent a dynamic alternative.
Many contracts, procurement and legal staff want to increase their influence. Many complain about not being involved earlier, or not being part of the ‘core team’.
Research has shown that one key element of being respected and included is to bring incremental knowledge and connections that others do not have. That is one aspect of ‘professionalism’ – being connected to a professional network, having access to a respected body of knowledge.
But that is not enough. Many contract managers and lawyers are knowledgeable and well connected, yet still do not feel these attributes are fully recognized. As Cendrine Marrouat points out in a recent blog, professionalism is also about showing care and respect for your audience, especially in how you communicate. If we appear arrogant, or dismissive, if we fail to pay attention to their views, it should not surprise us that we are not included – because our behaviour is then not inclusive. Key to being wanted is the sense that we listen, ask questions, take time to appreciate the views of others and why they hold them. We need also to explain the rationale for our position based on what we know the other party’s interests to be.
For example, if we want to promote a new contract management system, our message to the CFO will most likely promote the bottom-lime impacts it can have, as well as the improvements in data flows. The General Counsel will like the idea of being able to access contracts reliably and to improve the quality of insight and governance. But these benefits are not going to have much appeal to the head of Sales. They will most likely interpret those ‘benefits’ as meaning increased control over the sales force – and greater control equals less business. So with Sales the message has to be one of more empowerment, easier access to standard forms and agreements, speeding up of cycle times.
Ultimately, our success is driven not solely by what we know, but also by how we communicate that knowledge to others. But if we don’t take time to learn, then our knowledge is also limited.
I thought I would share extracts from an internal company report that I just read. I think it will resonate with many.
“Contract Management and negotiation skills and knowledge are increasingly important. Our need to be more flexible in the market, to accept and manage higher risks, to build new solutions and commitment capabilities, is resulting in many groups within the Corporation developing or negotiating contracts.
We have identified approximately 800 people in more than 20 organizational groups whose primary role is contract development or negotiation. There has been no consistent training to help them perform their task. In addition, there are many more employees with either contract or negotiation skills defined as a component of their job and skill requirements (e.g. Project Managers, Procurement, Sales).
Currently, each group develops its own training materials (if any), typically without reference to any other group. Not only is this inefficient (high cost, limited re-use, frequent redundancy), it also creates process inconsistency and organizational conflict. Groups define overlapping roles, they are unaware of tools or databases developed or used by others, they consider aspects of Corporate practice or policy to be optional. To date, we have identified more than 40 different training programs, delivered by a similar number of providers.
This confusion inevitably spreads to the market, where customers and suppliers suffer from inconsistent approaches to the way our contracts are delivered and negotiated, often encountering more than one group involved in the same bid. This is especially the case in more complex, high value business, which typically requires our organization to provide integrated projects or solutions.
Moving forward, the roll-out of consistent education and training modules will be critical to competitiveness and customer satisfaction. To ensure simplification and to maintain consistency, these modules must be available to all relevant groups, irrespective of geography or function.”
The report goes on to describe the steps needed to undertake development and ensure adoption ….
All of this may sound very familiar to many of today’s contract and commercial practitioners, who face similar fragmentation in their procedures and authorities.
This report was written 20 years ago, within a Corporation that was a leader in global reengineering of its contracting process. The improvements supported a major turn-round in its market performance, transforming contracts from a liability into an asset, especially in its growing services and solutions business.
Twenty years on, is your organization still struggling to make these changes?
A key reason for IACCM’s existence is to offer this consistency of organizational training, skills development and certification. Visit www.iaccm.com for details.
An IACCM member asked me for a view on lean contracting – what is it, what impact does it have?
My thoughts on this relate to ‘lean’ in the context of quality – and therefore overall efficiency through error-free activity. To me, that means we can think of ‘lean’ in a number of contexts when it comes to contracts: I believe those responsible for contracts and contracting should be asking these questions:
- Are individual contracts produced and managed in an efficient manner?
- Is the overall contracting process operating efficiently and tackling repetitive quality issues / defects?
- Is the contracting process being used effectively to test the quality of broader business capabilities and their alignment with business or market needs?
For item 1), the parameters may be quite narrow, in the sense of measuring cycle time or compliance. In that regard, something could be ‘lean’, but not necessarily high quality (‘lean’ does not automatically translate to ‘fit for purpose’ – my terms and conditions may be losing me business, but the process through which the contract is created and delivered might be very efficient).
Item 2) should begin to offer more tangible ‘quality’ indicators, because it would start to look at portfolio performance and should include deeper analysis of the effectiveness of contracts. For example, this analysis might reveal you are handling a lot of claims or disputes or a high volume of invoicing errors. The process through which these are resolved could be very effective and the contracts team may consider they are doing a good job – but that is because they do not look at the business consequence of their ‘lean contract’. So item 2) presumes that there is greater consideration of the effect of the contract on the business.
Item 3) almost turns this on its head. It sees contracts as a reflection of business policy, process and practices and uses the contract to test whether business capabilities reflect market needs and values. For example, the market might want truly global commitments, but the internal measurement and management system might frustrate that commitment. This is immediately visible in the nature of the contracts that are offered to the market. The contract becomes a tension point and can be used to highlight such issues to management. In that sense, the contract is a source of lean thinking and tackles the frustrations that otherwise people spend time trying to work around.
What are your experiences of lean in the context of contracts?
Many organizations claim to have a process for contract management, yet this claim often does not stand up to scrutiny. This becomes evident as soon as anyone starts to ask questions about process efficiency or effectiveness; quite simply, there is no data because ‘the process’ lacks an owner and is typically quite fragmented in its operation and oversight.
This issue is becoming more evident as executives awaken to the importance that contract management has in the delivery of business results. As they ask more questions, it is rapidly obvious that no one has answers and no one actually feels accountable (or capable) of providing them. Examples range from wanting to know how effective the contracting process is in handling business risks; what types of contract should be deployed to optimize business results; how the contracts and contracting process compare with those of competitors …. the list goes on and right now, very few organizations have answers.
Of course, some turn to IACCM and we are able to assist with broad industry information. In a growing number of cases, we are asked to conduct specific research or to advise on the best way to improve the process. But in many cases, the challenge is much bigger. Executives are calling for ‘increased competence’ in contracting or commercial management – and that is a relatively undefined concept. When responsibilities are fragmented and business units see the process as somewhat optional, when process steps lack definitive guidance on timing and when there is little data flowing on actual operation, it is very hard for anyone to step forward and take accountability.
Major improvements depend upon ownership. And that ownership has to be at a sufficiently senior level that the broader organization takes notice. This does not imply that any specific individual or function has unilateral decision rights – there are many stakeholders involved in contracting (and this is a key reason for the problems). However, it does mean that there is a focal point for the efficiency and effectiveness of the contract management lifecycle. With that ownership comes a more holistic view that starts to yield meaningful data on performance and a focal point for driving continuous update and improvement.
A process that lacks data is not really a process at all. It is a set of loosely connected activities that may or may not operate in the organizational interest. Today, contract management far too often falls into the latter category.
As buyers, we probably all wish that suppliers were more accountable for their sales practices and commitments. Whether it is the promises made when we buy a new car or the cost and timing of a house extension, most of us have suffered from the frustration of dealing with sales people who seem somewhat untroubled by truth or accuracy.
In the world of business, buyers often try to drive performance through onerous risk terms, ranging from liabilities, to liquidated damages, to rights of termination. But in general, this approach does not work well. So now we appear to be moving to a new era of control, requiring suppliers to sign up to even more specific undertakings of integrity.
As in the past, Government seems to be the driver of change. Exasperated by repeated performance exposures, several Governments are exploring the idea of forcing senior management in key suppliers to confirm that their internal processes have included thorough validation of contract commitments and their capability to perform.
In theory, this capability assurance is a role that should be performed by Contract or Commercial Managers. In practice, it often is not. Commercial staff may be involved too late; they may lack the skills or authority to mount effective challenge; their concerns are ignored or overridden. But soon that may be changing, with the creation of an integrated ‘Capability Assessment function’. Quite where that leaves the contracts or commercial manager remains to be seen. Some may be at the forefront, identifying and leading the necessary changes within the business. Others may simply be swept aside or absorbed by this new assessment and sign-off group.
The world is changing and the days of the commission-based sales organization are numbered. Business integrity will continue to advance and steadily will become a pre-requisite for winning significant contracts.
“What should I read into the trend from customers to specify that they want an outcome-based contract. Is this just another way they want to load more risk onto the supplier?”
That was the question I faced when meeting with the Commercial Director for a large, international service provider this week. His experience of ‘outcome-based’ has not been good. He cited examples where the customer has been quite specific about the work they want done, but then added a clause that essentially offers them carte-blanche to enforce on-going rework at no cost. They specify requirements, but essentially say that if the outcome they achieve is not in line with whatever they may then need, the supplier must undertake work to deliver that outcome.
Clearly, this is indeed an unacceptable burden of risk. Essentially it abdicating responsibility for defining business needs and saying “I don’t really know what I want, but give me xyz and if I then decide I really wanted abc, you will do the conversion work for free”.
Given the speed of change in today’s markets and technologies, it is quite understandable that customers will struggle to define precise or static requirements. Indeed, in many cases, a key requirement is flexibility and change. It is not reasonable to expect that a supplier can absorb the consequence of that uncertainty. This situation demands a different approach to contracting and contract management.
In IACCM’s view, the first requirement is to undertake an honest and thorough analysis of the potential sources of uncertainty and to assess their severity and impact. We have developed a standard questionnaire to assist in this. Based on those findings, the parties need to review the right contract model – for example, the blending of performance-based, outcome-based or agile. This also predicts the level of collaboration and shared responsibility that will be appropriate.
However, suppliers are not absolved from responsibility in addressing today’s business environment. Few have worked on developing appropriate contract models or assessing the shift in internal competencies needed to negotiate or manage such agreements. Equally, they are reluctant to address the internal measurement and motivation systems that incentivize acceptance of unrealistic commitments and unaffordable risks.
In addition to the questionnaire, IACCM has developed new approaches to negotiation and guidance on producing relational contracts through either internal or multi-party workshops.
Without decisive action, suppliers are indeed right to fear many outcome-based contracts and the risks associated with them. But the answer is to help educate and develop the market because the forces that are driving this need for change will not go away. Ignoring them is an even bigger risk that responding with the wrong solution.
We spend many hours worrying about the integrity and enforceability of our contracts and agreements. This leads almost 60% of organizations to still operate with physical signatures and physical mailing, with just 18% regularly using e-signatures. Others most commonly use a signature image which they insert on a pdf document.
Of course, many organizations have attempted to streamline contracting through reducing the need for signing. For example, many Master Agreements include terms that establish future orders and amendments will be unsigned. However, in this case, proof of delivery can be critical and this leads 38% to use courier or mail receipts. Surprisingly, 46% are happy to send important documents by standard email, even though this offers no security when it comes to proof of delivery. (When I say ‘important documents’, there are defined as those documents “When there is consequence if receipt is later denied or there is a dispute about original content“.
These were the findings of a survey that IACCM undertook on behalf of secure mail provider RPost during a recent webinar. These results – and the webinar itself – offer a fascinating insight to the risky approach adopted by many corporations and public agencies, as well as the inefficiency of others. The program (available on the IACCM website) provides excellent insight to the options available and suggests ‘best practices’.
My interest in this topic is because I cannot understand why the traction of secure email has not been faster and more pervasive. IACCM has explored this subject for about 10 years. Indeed, a 2005 conference featured a mock trial, at which an early version of secure mail was tested by a senior group of attorneys and found to meet legal needs in the US. I am led to believe that similar conclusions would be reached in other jurisdictions.
As trading relationships grow in significance, many organizations are recognizing that the integrity and reliability of their communications with their contracted partners is essential. This is not only about enforceability (litigation is, after all, extremely rare), but about ensuring common understanding and operation of requirements and obligations. Given the low cost of a system, it puzzles me that contracts and legal groups would not be at the forefront in advocating a system of Registered Email, which not only streamlines correspondence but makes it secure and reliable. I would be interested in hearing from anyone who can explain!
Last week, just over 100 delegates assembled for IACCM’s Australia conference, hosted by National Australia Bank in Melbourne. The most common question I had from participants was “This is so valuable – why aren’t more people here?”
In the early years of IACCM, I used to worry about the volume of people attending events. But after visiting a number of other professional association conferences, I realized that it isn’t numbers that count: it is the quality of who is there and what the event achieves.
Some conventions are very much about reinforcing the current role and skills of their community. It seems to me that delegates attend primarily to be reassured of their value and relevance, even if it isn’t true. They are comforted by being told that their job is essential and it is only a matter of time before they are recognized as key contributors to their business.
IACCM has always been about leadership and change. It tackles the challenges of the volatile economic conditions that truly are making contract and commercial management critical competencies. In addressing those issues, it confronts its members with the need for leadership and it equips them with the facts and the data they need to drive executive action and support.
As a result, IACCM events appeal to those who aspire to be leaders and change agents. And that is not a role for the majority, who prefer a more comfortable life and to be reassured that they do not need to do anything, the future will come to them. However, with more than 2,500 participants attending IACCM conferences and workshops this year, that groundswell of leadership and change has become quite significant.
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Commitment Matters 