“Contract management will be writ large in terms of where we put our focus in the public sector”.
These are the words of Sally Collier, Deputy CPO for the UK Government, when she spoke at the Scottish Government Procurement Conference last week. Sally was one of many speakers who highlighted the increasing role of contract and commercial management in ensuring delivery of value and successful policy objectives.
As this blog has highlighted on many occasions, this growing focus is not unique to the public sector. Organizations generally are grasping the need to improve alignment on scope, to ensure that governance and performance criteria are effective and to select trading partners who can support successful outcomes. This is achieved through contract and commercial disciplines.
Recent publicity over contract management practices has probably accelerated interest in improvements. Next month, the CEOs of three large companies – Serco, Capita and G4S – will appear before the UK Public Accounts Select Committee to explain charges of large-scale over-charging on Government contracts. The incidents have already led to two high profile resignations, plus extensive internal re-organizations (see here and here). But I am sure Government ministers also recognize that failures are to some extent due to poor contracts and weak governance procedures with the public sector.
IACCM research shows that similar problems apply across most industries. Commercial and contracting skills and capabilities have largely been ignored in recent years, even though business complexity has steadily increased. Now they are very much on the agenda – but, as one delegate in Scotland opined, “Can we have any confidence that the skills we need to change this situation are actually available?”
I recently commented on a ‘spoof’ version of the Apple terms and conditions supplied to consumers. The economist John Kay picked up on this theme in an article “Why I ignore Apple’s silly reams of terms and conditions“.
Mr Kay’s article is a rejoinder to all the experts who castigate people that fail to read contracts. He suggests that, far from being stupid or ignorant, people who do not spend their time perusing terms and conditions are in fact wise. This is based on several factors:
1) Major providers rely on their market reputation and therefore cannot afford to mistreat customers;
2) The key decision made by a buyer is whether or not they want the product or service; the ability to negotiate terms with major suppliers is largely non-existent;
3) Many of the terms and conditions are simply industry posturing – for example, to safeguard against major court battles over IP rights.
He observes that the real problem with ‘unreasonable’ terms and lengthy contracts is because of weaknesses in public policy, which assumes that agreements are negotiated “between informed and consenting parties, and enforced through adherence to the contract provisions, if necessary through the courts”. As the article goes on to say, these assumptions are illusory – “The reality is that the terms of exchange in a market economy are defined by social expectations and enforced by the mutual need of the parties to go on doing business”.
So does this imply that contracts are in many ways an irrelevance, or that smaller parties should simply sign and move on? Are they essentially just a way for large corporations and public sector bodies to protect their selfish interests? I think we all know there is a degree to which that is true, but it is not the only consideration. While Mr Kay’s observations are applicable to global brands such as Apple, they are not valid in situations where there is greater balance in the power of the parties and where public interest considerations are unlikely to protect the disadvantaged party. And in fact, even powerful entities need to have evidence that their contracting process had integrity, or they are increasingly liable for substantial fines and possible compensation (for example, the big banks and mis-selling of insurance products). In addition, as one respondent to John Kay’s article points out, if you do not read the contract you may miss important options or areas where you may wish to mitigate your risks.
In the end, I think the issue is one of balance. I agree with John Kay’s observations and reasons for suggesting contracts are not always worth reading – but we have to consider the nature of the supplier, the nature of the product or service and the extent to which these shift the balance of risk.
For those who are unfamiliar with large international projects or investments, the terms ‘counter-trade’ or ‘off-set’ may be unfamiliar. But in industries such as aerospace and defense, oil and gas or mining, they are a fact of life – and fundamental to winning contracts.
A recent headline in the Financial Times reads: “Defence company sweeteners hit $75bn”. It went on to list some of the major commitments that leading defense contractors have entered into – for example, providing help to Omani fishermen and financing a beachfront metropolis in the UAE. In other cases, especially within oil, gas and mining, the obligation is to procure major project elements from local suppliers.
In concept, these conditions of contract are designed to boost the local economy and raise capabilities. In practice, there are questions over how effective they are, whether this is an efficient way to achieve these laudable goals, and the extent to which such programs are open to abuse. A powerful group of bodies that include the US government, the EU, and the WTO oppose these arrangements, questioning the extent to which they distort the market. Transparency International believes they also create a greater likelihood of corruption.
Once again, this topic represents one of the issues of integrity that contract negotiators often face. It is quite clear that winning many projects or deals depends on such arrangements. But they are typically kept hidden, there is little reporting on which of them go ahead or what benefits they actually bring, and hence no meaningful evaluation of ‘good practice’.
Just 5 years ago, legal and procurement had little respect for each other – at least, according to an IACCM survey conducted at that time. Today, they express a growing sense of interdependence. What has changed and how will their relationship develop over the coming years?
In the Fall of 2013, IACCM assembled a group of leaders from Procurement and Legal, representing an array of large international corporations. Our purpose was to explore the growing interest shown by both functions in contract management and to test whether their approaches have synergies, or are creating conflict.
It quickly became evident that the antipathy between these functions is rapidly diminishing. Faced by a growing concern over supply risk and regulation, they are increasingly compelled to work together. But confidence is in short supply. As one Deputy General Counsel expressed it: “We have to be unreasonable in our terms and conditions because we have so little confidence in our internal processes”.
However, such a view is not sustainable and I am in process of writing a paper to examine how the relationship between Legal and Procurement is developing, especially with regard to the way they handle contract management. For it is contract management that lies at the heart of their historic stand-off and which today is bringing them together.
Your input and experiences will be welcomed!
Is part of the challenge facing business today that it has become more inward-looking?
Over the last 20 years, the use of technology has mushroomed, dramatically reducing the need for people to fulfill many of the basic tasks within business. ERP systems especially created an underpin of standardization that decimated administrative functions. One of the next big trends was compliance – software that would steadily come to eliminate unapproved actions or variations. Initially driven by a desire to cut costs or maintain margins, compliance took on a new life with the surge in regulation, forcing ever-greater oversight of actions and decisions.
It seems to me that two characteristics have been the primary victims of these changes: one is breadth of vision and the other is judgment.
The environment I am describing is resulting in the steady growth of specialists – people and functions with a deep understanding of a specific issue or topic, but a limited sense of overall context. As a result, the challenge of ‘functional stove pipes’ continues to get worse.
At the same time, compliance has eliminated the potential for individual judgment. It has become much harder for anyone to do the right thing – for example with regard to customer service – because the rules and the process prevent them. In such an environment, there really isn’t much point in thinking ‘outside the box’.
Overall, it seems to me, businesses have become far more introverted and less capable of seeing or caring about other perspectives. They care and respond to the outside world only if data from ‘the system’ tells them they should. Human dynamics and relationships play an ever smaller part in all this.
If I am right, then it should be no surprise that failure to properly understand and respond to requirements is becoming more of an issue and a growing source of claims and disputes. Today’s inward-looking business desperately needs more people who can bring intelligence and judgment to interactions with the outside world – to customers and suppliers. This means it is important for those in contract and commercial groups to resist the temptation to be yet another compliance expert and to focus instead on developing breadth of vision and the ability to apply judgment in the advice they give and the commitments they endorse.
Earlier this week, I wrote about the cost of errors in drafting. But those who regularly negotiate are also well aware of the need for clarity in communication. Especially when dealing internationally, there are many opportunities for misunderstanding.
This was one element of a conversation I had this week in a webinar with Dr Karen Walch, a professor from Thunderbird School of Global Management. We were reviewing recent IACCM research on cross-culture and international negotiations. This highlighted the many areas in which there can be unintentional but substantial misunderstanding, if we are not aware of cultural norms or expressions. (Karen and I will both be speaking at the up-coming Global Summit on Negotiation and Trust, to be held November 8th – 10th in Phoenix and featuring many world-leaders from the field of negotiation – see http://globalsummitonnegotiation.com/).
Much of this has an inevitable impact on trust. Whole nations can become castigated for their lack of openness or honesty, when perhaps the issue is due to a fundamental mismatch in norms of expression and behaviour. Of course, added to this there are major variations in values and standards which can be related to issues such as status, or to historic perceptions of value and ownership in areas such as intellectual property rights.
Often, negotiators can be lulled into a false sense of security when they are dealing in their own language. Somehow this leads us to believe that there must also be common understanding. Yet that is frequently not the case because each of us uses words and expressions in our own cultural context – even when the national language is apparently the same. An interesting example of this appeared recently in the UK’s Daily Telegraph, which picked up a list of common British expressions circulating via social media and highlighted how those who use the same language (in this case Americans) can still understand something quite different. On one level, this reflects the British cultural norm of self-deprecation; on another it helps explain the age-old view of ‘perfidious Albion’; on a third, it highlights the importance of testing understanding. And at its simplest, it offers a source of amusement!
Jason Lemkin drew my attention to an amusing article from Business Insider, on the ‘worst typos in history’.
The article highlights the impacts that misplaced commas, hyphens or misspellings can have. It mostly draws on examples from the world of programming, but I am sure similar disasters arise from mistakes in contracting. One recent example was the famous ‘battle of the comma’ in Canada (where drafting expert Ken Adams was called as an expert witness). Another instance I recall was down to grammatical use. A US corporation offered special discounts on its products when sold to academia. The US team sent out instructions worldwide which included the words ‘25% off of the standard purchase price’. In the UK, ‘off of’ is not good English – and this was translated as meaning ‘25% of the purchase price’. An expensive error.
I recall also an instance of omission. A large corporation commissioned a supplier to undertake a major product development. Within the contract, there was a right to suspend or terminate work, which then proceeded to explain the compensation that would be made to the supplier in that event. However, the contract said ‘Customer may suspend or terminate work on written notice to the supplier. In the event of such termination, customer will etc etc’ (the agreement went on to define the compensation and how it would be calculated. You have probably spotted the problem; that is, the customer decided to terminate the program, but rather than announcing termination, it instead announced suspension – and claimed that this did not invoke the compensation clause.
What examples do you have regarding costly errors in drafting?
Most of those in the business world speak of growing complexity. The speed of change, pressures to customize, increased competition, regulation, global operations, new technologies … there are multiple issues that we confront and must master.
Because complexity drives a need for change, many people view it negatively. It demands new skills, new knowledge, new processes and methods. Failure to respond is inevitably threatening, either personally, or to our organization, or both.
But complexity also represents opportunity. If we can master it better than others, we have discovered a source of competitive advantage. And this prospect should be a source of excitement for those in the world of commercial management because our discipline lies right at the heart of managing complexity.
Consider for a moment what it is that makes things complex. Essentially, it revolves around the number of moving parts and the interconnections between them. Success depends on successful coordination across ‘the system’. it is about coordinating, controlling and maintaining alignment – in fact, precisely the role that a good commercial manager plays in formulating, negotiating and managing a contract.
Complexity demands an adaptive system, ready to adjust to change. It requires people who can work across and reconcile the perspectives of ‘hard disciplines’ such as law, finance or engineering. This means we must often challenge the rigidity that is inherent to many specialist views. For example, complex environments will not be managed through threats of unpleasant consequences from onerous terms and conditions. Nor will they be handled through attempts to impose rigid definitions of scope or performance criteria.
However, this need for flexibility does not mean that there should be a reduction of discipline. On the contrary, it is just the nature of the discipline that changes. First, there must be increased rigor in selecting the right trading partner; we must share objectives and commitment, we must operate in harmony. Second, contracts and their negotiation are therefore far more focused on governance – how will we work together, how will we manage change, what will we do when circumstances alter. Sometimes this means we need to challenge the extent of early commitment, question the traditional methods and measurements employed to run our business. That is a tough task, not always popular, but it lies at the heart of commercial management.
For the talented commercial professional, complexity is a great opportunity – in fact, it is arguably why we exist.
Inside Counsel reports that jobs for para-legals are on the decline. Indeed, without meaning to be humorous, it comments that many lawyers have now become so technically proficient that ‘they write their own e-mails’.
With such dramatic advances in the legal industry, it seems that support positions are under threat. In that sense, law firms are following a similar cycle to that which has been evident in the corporate world for many years. When cuts begin, the first to go are the lower paid and the non-qualified. In days past, this included not only secretaries and para-legals, but any other group (like contract managers) who reported into Legal.
Overall, the report suggests a long-term decline in the scale of opportunities for qualified lawyers, at least in the US, and there are predictions that far fewer students will enter college to study law. Part of this is seen also as an affordability issue, the cost of getting a law degree in the US is outpacing the ability of many graduates to earn a decent living. Hence there are proposals such as reducing the duration of the course.
Amongst all this change, the position for those in contract management appears quite healthy. Perhaps in part because they are far less costly to hire, companies have been investing in their contract and commercial groups. The importance of adequate controls, both pre and post-award, is becoming far better understood by top management. This is not only about compliance and risk, it is also about achieving improved bottom-line performance. The strength of demand for good quality contract managers has also been boosted by a surge in the numbers working in Procurement. Historically, the Procurement Contract Manager was a relatively rare beast, but today, with ever-greater focus on achieving outputs and outcomes, the need for this oversight has become essential.
So if you are a para-legal, don’t despair, simply re-train as a contract manager!
We often hear about the problems dealing with overseas markets. China has come in for extensive criticism regarding its business practices, especially with regard to intellectual property, but also in terms of the overall respect for ‘the rule of law’.
But as this case study shows, it may not all be one-way traffic when it comes to issues of ethics and trust. This example is a situation that was referred to us at IACCM by a member. What would you do in these circumstances?
Pressure to terminate the contract without cause Your purchasing department is under constant pressure to deliver savings. Over recent years, more and more business has been sourced to low-cost countries. Several months ago, you awarded a large supply contract to a manufacturer in a remote region of China. It resulted in substantial savings and included a minimum monthly call-off and a committed two-year term. You have been told that this contract was a major boost to the local community and resulted in significant hiring by your supplier.
However, due to a temporary drop in demand, your monthly shipments have actually been lower than forecast and you know the supplier has a stock build-up. Now, the category director tells you she has received a lower price offer from another Chinese supplier and she wants to terminate the original contract. When you explain there is no cause for termination, she simply demands that you switch supplier since the chances of the original contractor taking legal action against you are almost nil. You agree with this risk assessment, not least because this action will probably put your current supplier out of business and they are unlikely to have the funds to pursue an action.
In the ‘real life’ situation, the contract manager accepted the business pressure for savings and switched to a new supplier.
What would you do?
Commitment Matters 