Sometimes it can be so simple to achieve change.
Last week, I was talking with John, an IACCM member, about contract drafting and its impact on business results. We started also to discuss contract structure and its effect on ease of use – and at that point he came up with an interesting story.
John’s company undertakes a variety of complex services. He explained that the definitions section of their agreements is typically quite long and was regularly taking up to one and a half days to negotiate. This cut into the time available on the more substantive areas of the contract and regularly resulted in important issues being rushed.
Then, someone suggested moving the definitions to an appendix at the back of the agreement, rather than as part of the introduction. And sure enough, it worked. By the time the parties reached ‘Definitions’, they were already comfortable with the substance of the agreement and had a shared context for the definitions. So effort was saved and substantive issues were resolved.
Some of the most effective changes are also the simplest. Its just a matter of watching out for examples of inefficiency or ineffectiveness and then trying to identify a different approach. Contracts are especially in need of some innovative challenges.
The quality and integrity of procurement is a big subject for many organizations right now. They are struggling to strike a balance between a rigid, savings-focused process, versus the need to have managers who use discretion and make good judgments.
Nowhere is this dilemma more pronounced than in Government. Public procurement rules mandate standards of fairness and objectivity that enshrine the right for protest – and the fear of protest often drives the use of narrow assessment criteria that result in a loss of possible value and, on occasion, the selection of the wrong supplier.
Just how prevalent are protests and to what extent do they have merit? I met last week with Nate Nash, CEO at GovTribe, Inc. Nate and his team collect data and provide analysis – offering some great insights to the world of public procurement. A recent report covered the subject of protests against US Federal contract awards.
Overall, I was surprised to see how few complaints are actually made. Most are in the defense sector. But perhaps even more surprising is the extent to which a few companies seem to monopolize the process – there are some serial protesters. Their success rate is generally not high. In fact, only one company stands out as having a significant rate of sustainment and that is Alvedra, a small, minority owned business providing food and medical supplies. Otherwise, less than 2% of protests are successful. Indeed, in some cases it may be they are driven more by ill-will than merit. It is worth remembering that in the US, anyone can protest an award; it is not limited to unsuccessful bidders.
Beyond the obvious costs of investigation, the impact of protest on the average citizen is potentially significant. Not only does a protest delay contract performance, but of far more importance is the effect it has on overall contract and procurement standards. The fear of protest has contributed to a narrow focus on process and avoiding criteria for supplier selection that might be challenged. This often results in the absence of qualitative criteria and consequent loss of discretion or judgment. Hence it is quite possible that the performance or capability of the winning supplier may leave much to be desired.
It is right that there is openness and transparency in the use of public money; but does this current right of protest serve us well? It appears to have a cost that outweighs its value. Surely the process of audit should be sufficient to monitor the integrity of public sector acquisition.
Purchasing was a largely administrative discipline that ensured orders were placed and goods were received. In the last 30 years, it has changed its name, matured, specialized and become inextricably linked with the concept of ‘savings’.
At the beginning, that journey made perfect sense. Fragmented buying authority meant that there was little control over prices paid or sources of supply. The opportunities to consolidate and to root out inappropriate – even corrupt – relationships were obvious. But once control was established, the on-going ability to eke out continued ‘savings’ becomes rather more debatable. Certainly there are some opportunities – for example, through innovation or revised procedures, even sometimes through dramatic new sources of supply.
But it may be that institutionalized procurement based on negotiated savings is actually costing money because it is now focused on the wrong thing.
In indirect procurement (the acquisition of services, solutions) and major capital projects, the evidence increasingly points to the fact that organizations often end up buying or commissioning the wrong thing. The negotiation is a battle over the wrong costs and the wrong terms. ‘Savings’ in this case are more a measure of reduced waste than true value.
And then we move to the post-award phase, where control and performance management frequently move back to the business unit or project team. This is when negotiated savings are often eroded or disappear. Many factors contribute – poor control over invoicing or deliveries, weak change procedures, failure to adequately test, missed opportunities for alternative or lower cost supply etc.
Some organizations have grasped the need to build ownership and quality into the entire make-or-buy acquisition process, but many have not. They have instead institutionalized Procurement around a rigid process designed to deliver theoretical savings, which actually far too often ends up costing the business money. It is time to break free from this trap and to focus activity on optimizing the right requirements and ensuring the right outputs and outcomes.
When it comes to job meaning, satisfaction and stress, it seems there are many better choices than working as a lawyer or contracts professional. In fact, mail clerks feel as good about the value they deliver and there are some 300 job groups that yield greater satisfaction. The statistics suggest that being a Funeral Director is about twice as good as being a lawyer.
Job meaning, according to Payscale.com, is directly related to the extent to which a job is felt to ‘make the world a better place’. It is therefore not surprising that the roles occupying the top spots are typically linked to social and human benefit – healthcare, education, social service. Business activities feature far less well. For example, being a Chief Executive comes in at number 105 on the list, out of 454. In terms of ‘meaning’, it scores 74%, in terms of satisfaction it achieves 89% and stress level is 81%.
Obviously, satisfaction is not always related to salary level. The Clergy come top of the list, earning only about 12% of the wages of the third-placed surgeon. Clearly a sense of purpose and mission is key to the overall sense of job meaning and professionalism alone does not appear to be enough. Hence lawyers and accountants are well down in the list. Procurement managers fare slightly better that either of these roles, with statistics of 43% for meaning, 63% for satisfaction and 60% for stress.
Beyond a general sense of interest, is there anything we should take from these statistics? I think they illustrate the importance of leadership and that to have a motivated and enthusiastic workforce we must instill a sense of mission and purpose. Beyond that, we must also generate meaningful measures of contribution – not some vague or meaningless numbers, but actually related to human benefit. That is perhaps why we need to feel ownership of a process and to link the results from that process to social progress. And for those engaged in contracting, I believe that is possible. Trade lies at the root of social progress; without trade, we would not have the wealth needed to deliver all those healthcare, education and social services. Contracts – and their successful delivery – underpin prosperity. So we should recognize that our job has tremendous potential for social meaning; now we just have to work harder at developing the skills, methods and knowledge to ensure the way we work actually translates to the benefits that can be achieved.
Next year, perhaps we can have climbed up that ladder of job meaning – and in the meantime, we can at least be grateful that we are not the bottom-placed fast-food cooks!
For thousands of years, humans believed that their fate lay in the hands of the gods. Health, justice, social position – all were determined by the will of whatever deity they happened to espouse.
Yet steadily, individuals started to question this fatalistic view of life. Initially, the fields of law and medicine were seen as closely linked to religion, as were other areas of expertise such as architecture or engineering. But over time these developed as distinct branches of study and practice, setting the framework for professionalism.
Professionals ask questions because they believe in continuous improvement. They build knowledge; they challenge accepted wisdom; they reject ignorance. So when it comes to expertise in contract and commercial management, how well are we doing? There are many questions we can pose, but I selected these six for a presentation at the recent IACCM Europe conference because they reflect recent conversations with senior managers and politicians.
- What percentage of our contracts under-perform – and why?
- What is the economic impact of different contract models or terms?
- What are the relative probabilities of the risks we seek to mitigate through our contracts?
- To what extent can high failure rates in major projects be reduced through improved contracting practices?
- What are the best models for performance-based contracts?
- How does contracting performance at your organization compare with competitors?
One response to these questions is to say that the answer lies in the hands of the gods. Another, more common, is to say that it is someone else’s responsibility (and therefore, by implication, suggest that contract and commercial management are simply short-term administrative tasks, generated by the errors or ignorance of others). A growing number – and I put myself among these – are determined to find answers, publish them and build the body of knowledge that elevates the discipline of contract and commercial management.
So how well do you score on the questions above; and what would you add to the list of things that we should know?
The concept of more collaborative relationships is certainly not new. Throughout my career, I have encountered many initiatives to agree a more balanced approach. Sometimes these are under the cover of an alliance or a partnership, or some other fine words that imply we are truly in this together.
And then the majority of those collaborative ventures fail. In many cases, they produce precisely zero benefit to either party.
So today, when I see all the collaborative models on display, I must admit to a certain skepticism. I don’t believe most of them will work. A few will – and these represent the anecdotes that keep the myth alive.
What is wrong? Quite simply, it is very hard for the leopard to change its spots. If an organization does not have collaboration in its DNA, it cannot sustain repetitive partnering. The underlying culture of adversarialism, lack of trust, protection of interests will generally dominate behavior. As the title says, if your counter-party has no history of being friendly, don’t think you are going to be the exception. Look elsewhere for that collaborative relationship.
This was the term used by a far-sighted participant at the recent IACCM Europe Conference. He was emphasizing the point that the influence of contract managers and lawyers depends increasingly on delivering facts, not mere opinions.
‘Beyond anecdotal’ means we must stop relying on fear tactics based on worst-case scenarios, and instead offer more objective advice anchored in research and analysis. This requires a robust view of probabilities, which can only come from holistic analysis of many contracts and market experiences, rather than selection of worst-case examples. It also demands that we become better at saying what will work, rather than focusing on problems.
Past reliance on worst-case scenarios and the things that might go wrong has constrained the value of contract management. ‘Beyond anecdotal’ is a term we should all adopt to ensure our advice is balanced, relevant and respected. It also forces us to answer some tough questions – for example, how do we explain why Limits of Liability is top of our list of ‘most negotiated terms’ when the probability of litigation is 0.007% and the probability of a disagreement over scope is 38%?
Big contracts or small contracts? Large corporations or SMEs? Centralized functions or decentralized? The debate over big versus small does not go away. While the strength of this debate is currently most visible in the public sector, similar undercurrents are also evident in private business.
For a time, it seemed like globalization would confirm the advantages of consolidation and scale. Business was pre-occupied by reducing the size of the supply base, centralizing relationships and decisions, driving price and discounts through consolidated spend. Big suppliers overwhelmed smaller, local competition, leveraging their scale to provide goods and services at much lower cost.
But steadily, questions start emerging. The world is not flat or uniform in its needs; global suppliers owe no real loyalty to anyone; large industrial empires do not necessarily prove reliable in performance; multi-nationals may destroy local jobs and enterprise. The list goes on. And so public policy – and to some extent the public itself – starts to fight back and question the extent to which ‘big’ is beneficial. Most Governments now have policies directed at increased business for small enterprises. In some cases, there are also specific requirements for big business to include small local suppliers in their contracts. Governments are sometimes steering away from large mega-contracts and dividing them into smaller bundles.
Commercial sector management is asking similar questions. The vogue for highly centralized functions has given way increasingly to center-led models, where control is achieved through technology, not through reporting lines. Global standard contracts are becoming far more nuanced, with increased local discretion over business terms. Boards are having to show much more sensitivity to wider issues of ethics and judgment, for example with regard to tax policies and supplier selection.
Yet as soon as use of smaller companies increases, we see complaints about their inability to perform or their commercial naivete. We hear that it is too expensive to oversee their performance. And in public sector, this debate can quickly degenerate into a party political issue, with one claiming that big is good and the other espousing small and neither having much clue what they are talking about.
Perhaps the major issue here is that everyone prefers to find a ‘one size fits all ‘ model. It makes choice and management so much easier. That is why there was such enthusiasm for books like Tom Friedman’s rather simplistic ‘The World Is Flat’. It encouraged the view that complexity was going away, when in fact it has steadily increased. The arguments over big, small, consolidated, decentralized are similar – unfortunately there is no right or wrong. The answer is that we need a mix and managing that mix demands different approaches, skills and knowledge. Trying to fit diversity into a uniform set of processes and practices simply will not work.
The answer to this question is, of course, yes. Any step that reduces control always has the potential for undesirable results. But this is not unique to outsourcing. There are plenty of recent examples of ethical lapse in business that have nothing to do with external service providers.
The question was raised recently by an independent watchdog appointed by the UK Government. While their observations related specifically to public sector outsourcing, the principle is universal. In a report, they draw particular attention to the importance of contract management. According to the Financial Times: “The report comes amid wider concerns over the ability of civil servants to manage contracts as Whitehall moves from being a provider to a commissioner of services. In an inside account of the way that officials supervise providers, it said “there appeared to be limited on-going monitoring of contracts”. The committee said data collection could be poor, there was “a lack of visibility of complex supply chains” and “contract managers were nervous of challenging the service delivery of big providers and lacked the confidence and training to do so”.
A lack of oversight and governance within any organization is likely to lead to problems. Clearly these are exacerbated when the resources providing services are part of another organization, operating with a different culture, value system and potentially conflicting performance measurements. It seems to me the problem is often far deeper, because supplier selection frequently fails to take sufficient account of these issues of cultural fit and motivation. In the public sector especially, procurement rules are seen as preventing deep questioning and research into a supplier’s ethical standards, yet these are fundamental to good service delivery. But the problem is not unique to the public sector; many private sector outsourcing arrangements have failed to live up to expected standards. Again, those undertaking the procurement may not be motivated or trained to explore the right issues. If the driver for outsourcing is low cost, then quality and integrity are often ignored or discounted as ‘unaffordable luxuries’.
It is now 20 years since outsourcing emerged on a large scale, yet still the doubts and questions remain. It is remarkable how long it takes to learn the lessons of past failure and to start acting differently. I think much of the reason is our continued inability to distinguish between price and cost. It is easy to compare prices, much harder to predict and evaluate ‘cost of ownership’ or ‘cost of performance’. And the situation is not helped by the fact that so many organizations continue to operate in silos where each division has its own drivers and motivations, with key data often hidden from them.
It is not outsourcing that in itself threatens ethical standards; it is lack of competence in selecting the right partners and then in working together to achieve mutual benefits.
There is at present lively debate within academia about the meaning of innovation and, in particular, whether ‘disruptive innovation’ really exists. As with many academic discussions, it is quite likely there will be no final resolution, but the topic is timely because it reflects similar confusion within the commercial world.
“Innovation is this year’s big thing”, according to a headline from Spend Matters. Unless my memory serves me badly, I seem to recall many others making similar assertions for at least the last 5 years. Indeed, at IACCM we have been extolling the importance of innovation in contracting and commercial practices for many years and introduced specific Innovation Awards three years ago.
But what does this actually mean? Are we talking about functions that lead innovation, or perhaps more about enabling innovation? And when we use the word ‘innovation’, what exactly qualifies – when does a ‘change’ become an ‘innovation’? One has only to look at many of the initiatives hailed as ‘innovative’ to recognize that the bar today is set pretty low. So does this confirm that ‘innovation’ is yet another meaningless fad, or that those in groups such as Procurement, Contract Management and Legal can ignore it since it simply does not apply?
Innovation applies at many levels and is often evolutionary. Mobile phones would be a good example, since mobile communications had been around for many years. Also, just because something is innovative does not mean it is beneficial or successful. Many claimed ‘innovations’ would more properly be classified as ‘imitations’ – just because it is new to me does not make it new to the world. And innovation is certainly not limited to technology. Commercial innovation can have just as much impact on the market.
So far as I can tell, innovation tends to come from a readiness to ask questions. It requires a degree of observation and a belief that things could be done differently and better. Sometimes it is a reaction to outright failure or perceived impossibility; other times it is about improvement. For example, when financial institutions sought to expand into India and Africa, it was quickly evident that traditional bricks and mortar offices were not the answer. Alliances with mobile phone providers were a good example of commercial innovation. Today, partnering between traditionally non-aligned industries is a common path to innovation.
Disruption is often a consequence of new entrants to a market, but this is not always due to innovation. Companies from China and India are now penetrating global markets at a rapid rate and proving more flexible and nimble than their long-established Western competitors. But in general, their success is driven more by their commercial flexibility. They are not inhibited by traditional views of risk, compliance and bureaucratic analysis. At some point, they may feel a need to institute stronger controls, but in the meantime their success is forcing many Western corporations to re-evaluate their processes and practices.
Overall, I would suggest that much of what we term ‘innovation’ is actually more about change or about differing perspectives. However, that does not mean the concept is unimportant. Indeed, a readiness to question, challenge and generate new approaches is fundamental to survival – whether as a business or as a function.
Commitment Matters 