When it comes to selecting a supplier, how important are the terms and conditions? Does it matter what approach the supplier takes to negotiation? Does ‘the contract’ really make much difference?
The answer to these questions varies. To some extent, it depends on the attitudes and policies of the customer organization. Perhaps more important is the nature of the deal or transaction. IACCM is running a number of studies that will look at questions like these from the perspective of both buyers and sellers. In addition, these studies will compare the approach of major companies within an industry, to identify the extent to which their approach may be a significant source of competitive advantage (or disadvantage).
The first study looks at major outsourcing and IT services providers. Many customers in this sector express concern over the inflexibility that suppliers show towards negotiation, with almost half frustrated by the lack of authority in the supplier’s negotiating team. In fact, it is the issue of responsiveness, closely followed by a feeling of being treated ‘as a business partner’, that customers most value when distinguishing between supplier approaches to negotiation.
When it comes to terms and conditions, data protection has risen to the top of the ‘critical’ list. Over 70% indicate that this is an are where suppliers must satisfy customer needs, with service levels taking second place among the most important terms.
The survey remains open for completion by anyone who has direct experience of negotiating with major outsourcing or IT service providers. It can be accessed here.
In an article, “Thinking Twice About Price”, The Economist suggests that very few companies have a formal pricing policy. While I disagree with this contention (I have never worked for or with a company that did not have policy in this area), my experience is that very few have a pricing policy that is effectively linked to a commercial strategy.
The Economist makes the point that there are three core ways in which companies can seek to improve. One is through increased sales; another is through cutting costs; and the third is via higher prices. They suggest this third route is frequently overlooked and proceed to offer examples of ways that pricing should be used in this ‘age of austerity’, since the other two mechanisms may no longer be effective.
However, the examples that The Economist then offers all reinforce the point that it is commercial strategy, rather than pricing policy, that is missing. For example, they highlight the sales-at-all-costs mentality that prevents companies walking away form deals; or the failure to link price with distinctive value propositions; or the ineffectiveness of market segmentation that leads to a ‘one price fits all’ mentality; and the failure to consider ‘unbundling’ so that customers can select the options that they most value.
These areas – and others – have each been discussed at some point in this blog, not in the narrow context of pricing, but rather as elements of a commercial strategy based on market understanding. To me, the problem is not lack of pricing policy; it is once again the tendency to develop ‘specialisms’ that operate independently within the business. How can a ‘pricing expert’ ensure maximum returns if they have little or no insight to broader market considerations? They are limited by their expertise, in just the same way as the lawyer, the project manager, the category manager or the myriad of other ‘specialists’ that populate business today. The real issue is the absence of the commercial oversight that should be offered through a generalist asking the right questions and challenging the narrow wisdom of ‘the expert’.
Guy Strafford has written an excellent article in the Proxima newsletter, asking whether the name ‘Procurement’ is toxic.
As Guy acknowledges, he is by no means the first to raise this question and indeed there are several articles in this blog raising similar points. A few months ago, I highlighted the issue of functional name, with the observation that efforts to shift from Purchasing to Procurement to Supply Management etc. could be seen as steady maturing of the role and skills, or an attempt to escape reality.
The fact is that executives seem unwilling to change the underlying measure (savings) which does so much to undermine the value that Procurement delivers. And perhaps this is not going to change – maybe this specialist focus is exactly what executives want.
The problem this creates is when the business – or indeed the Procurement function itself – then expects a wider role – for example as ‘commercial managers’. In order to gain real and sustained value from trading relationships, there needs to be a level of oversight, understanding and judgment that a narrowly measured function cannot provide. This is true of Finance, Legal, Risk Management and many other groups. Specialism and focus does not mean there is no value – but we have to recognize its limits.
So to Guy’s point, I think perhaps the advocates of Procurement are creating false expectations regarding what they can deliver. It is this disappointment that then makes the role ‘toxic’. Rather than claiming a capability they do not have, many Procurement groups may be smarter to get on with doing what they do well, and pointing out to management that if they need business coordinators, people with balanced commercial judgment, then they do indeed need to develop a new group or function. Maybe it should be called Commercial Management or even Trading Relationship Management; and in my opinion, its mission should be to enable success across all trading relationships, buy and sell.
Henrik Lando, a professor at Copenhagen Business School, recently sent me an article ‘The Cost of High-Powered Incentives: Employee Gaming in Software Sales’.
The paper is written by Ian Larkin of Harvard Business School, to be published in the Journal of Labor Economics. In his introduction, Assistant Professor Larkin explains the goal of his research: “It is well-known that employees “game” incentive systems by taking actions that increase their pay but hurt the objectives of their employer…… This “timing gaming” can affect business outcomes by changing revenue flow, pricing, or other key variables in ways beneficial to the employee but detrimental to the firm.While the prevalence of “timing gaming” is well-known, little is known about the scope or cost of this gaming to employers”.
This hypothesis in – in my experience – certainly correct. Any one involve din contracting – buy-side or sell-side – is well aware of the quarter-end banana curve and the year -end flurry in sales, driven by bonus schemes and incentives. Indeed, many buyers quite deliberately defer purchases and ensure that they sign only at the last minute, to extract maximum savings.
So what is the scale of the distortions that are created by today’s sales incentive schemes? Professor Larkin discovered that “salespeople agree to significantly lower pricing in quarters where they have a financial incentive to close a deal, resulting in mispricing that costs the vendor 6-8% of revenue”. He concludes that “salespeople with strong financial incentives to close a deal in a given quarter appear to grant discounts that are larger than necessary to win the deal in order to guarantee that the deal closes on the salesperson’s preferred timeline”. Indeed, I would suggest that this finding significantly understates the full cost. From IACCM research, we know that the weighting of business to quarter end creates massive inefficiencies in workload and puts tremendous stress upon processes and other areas of compliance and contract quality. I suspect that if we looked at downstream error rates, claims or disputes, many would tie back to the non-standard agreements and panic deals that are struck in those final few days of the quarter.
This topic certainly merits further investigation. What is unclear to me is whether businesses can really extract themselves from this game. Their customers now expect it. And indeed, I suspect that senior management in the supplier community is well aware of what is happening – so perhaps they have already elevated prices to take account of this perverse approach.
In a world where discounts and savings seem so fundamental to perceptions of value, ‘gaming’ of this sort is in many ways just a sort of bluff and double-bluff. But Professor Larkin’s work should cause any commercial expert to pause for thought and ask ‘Is there a better way?’
A current survey being conducted by IACCM reveals that contract and procurement specialists find China one of the hardest countries to deal with. It scores especially low on the topics of ethics and business culture and local laws and regulations.
This will come as no surprise to the management of GlaxoSmithKline, currently embroiled in corruption charges by the Chinese government. As this week’s Economist points out, it is almost impossible to do business in China without some level of ‘enabling gifts’ and it is often equally difficult to know when these are deemed to cross a line into actions that the authorities might deem corrupt. Indeed, some may wonder whether the tortuous thinking of the political elite may in part encourage such behaviour because of the control it gives them. By turning a selective blind eye to bribery and corruption, those in power not only gain personal benefit, but they also have a stick with which they can selectively beat anyone when the moment is opportune.
Do the authorities actually care about the actions of GSK (and other Western firms they are now investigating)? Or is their action prompted by a wish to boost local competitors, or perhaps to send a wider message of fear to non-Chinese corporations? Certainly there will be many wondering whether they are next in line.
Ultimately, the size of the Chinese market makes it difficult for companies to ignore. But the difficulties of controlling local employees, the unpredictability of local laws, the challenges of understanding and the arbitrary behaviour of officialdom certainly represent high levels of risk – not to mention the traditional concerns over intellectual property. At what point will inward investment seem too unpredictable?
The Economist also ran an interesting analysis of whether major corporations benefit from exposure to the Chinese market. This year, the stock price of those with significant investment and sales in China has substantially under-performed. So perhaps the combination of factors will be causing many to reduce their exposure to this difficult market.
To participate in IACCM’s survey on ‘Doing Business Internationally’, visit https://www.surveymonkey.com/s/intcontracting2013
Yesterday I was reading some articles that I started and never quite completed. One of them contained this summary of a conversation I had at a meeting of the International Centre for Complex Project Management (ICCPM) in 2012.
Professor Mike Jackson had made the introductory presentation in which he emphasized the need for project management to embrace ‘holism’ and to “Escape reductionist thinking”. As he spoke, I was struck by the similarities to contracting and commercial management – and also the interdependencies between our disciplines.
‘Holism’ is based around systems thinking and the need to synthesize, rather than analyze. It therefore seeks to avoid focus on component parts and to concentrate on the interactions needed to secure the overall desired outcome. Such an approach would – for example – place far more emphasis on the importance of sustained leadership, communication, commitment and planning to project success, and less on requirement management and individual components.
As I thought about this in the context of contracts, a number of points struck me. First, a ‘holistic’ contract is made up from many clauses and terms which exist individually, but impact outcomes cumulatively. Second, the input to contracts comes from many and varied sources, each of which may have a distinctive view of what it considers ‘success’. Third, projects (and therefore the contracts that underpin them) are ‘incomplete’ until they are finished and therefore require continuous oversight and revision to maintain ’holism’ or integrity.
The meeting discussed the challenges faced by Project Managers. Some of these related to a lack of the skills and knowledge needed to undertake ‘holistic’ management. Others involved issues such as the timing of engagement and failure to focus on critical dependencies, such as leadership risk or cultural risk.
Listening to the problems caused me to reflect on similar issues in contract and commercial management – in particular, the question of’ ‘excellence’. It struck me that an excellent contract or commercial manager is someone who engages in holistic thinking. They see the big picture and the interdependencies. They do not allow themselves to be side-tracked into excessive debate on individual clauses and functional position, but see their role as communicating, leading, planning and gaining commitment. To do this, they must understand individual ‘reductionist’ stakeholder views and find ways to reconcile these with the broader needs of the project. They emerge with a balanced contract, designed to cope with change.
Of course, this excellence is far from universal and many contracts groups remain tied to specific interests (for example, legal or finance) and lack the vision to expand from a focus on ‘requirements’ to a focus on ‘outcomes’. Often, there is no synthesis of the entire contract; different groups produce different parts and ‘quality’ means that it has been checked for inconsistencies, not that it is truly ‘fit for purpose’. As a result, project teams are given contract forms and standards that provide poor and inadequate tools for on-going management.
How might we improve? One approach will be to focus on continuing improvement in the standards of contract and commercial managers. In this regard, the growing adoption of a common perception of the role and a consistent body of knowledge is a major step. But it strikes me that a second critical aspect is the creation of collaborative relationships with others within our ‘reductionist’ universe. Functional specialism is by its nature ‘reductionist’. What all of us must do is to understand better how we fit our specialism into a holistic frame. And it may well be that commercial managers and project managers are key to creating this synergy, since each of them may have the role of harmonizing across specialist groups to ensure that a level of reconciliation is achieved and maintained, to allow desired outcomes to be achieved.
Today, the UK Government issued a report by the Public Administration Select Committee on Government Procurement.
It highlights weaknesses in commercial understanding and contract capabilities, in particular a failure to learn from past mistakes. “The Committee is concerned that the EU Directives which govern procurement in the UK reinforce a process-oriented, risk-averse culture in procurement, which in the UK results in delay, increased cost and a failure to focus on outcome”, states the report.
Efforts to improve are under way and in particular, the Civil Service is focusing on steps to improve commercial awareness. Before those in the private sector shake their heads and dismiss this as a purely public sector issue, I must point out that these weaknesses are in common with a growing number of large, private-sector organizations, struggling to improve cycle-times and to raise the quality of decision-making. IACCM, through its research, advisory and training support, is at the heart of many improvement efforts.
However, in this age of growing specialism and more rigorous performance metrics, it is hard to achieve commercial balance. The ‘generalists’ who provided breadth of view have either been side-lined or eliminated. Because they could not describe precise value-add and were not mandated as a result of external regulation, the ‘commercial expert’ who offered connectivity between functions and experts was seen as superfluous to requirements. Yet in truth, they were often the ‘cross-functional glue’ that enabled faster response times and balanced business judgment.
Today’s Legal, Finance and Supply Management groups do not offer an effective replacement for the role that traditional contract or commercial management teams were (at their best) able to provide. Whether and how quickly we can replace those skills with a more generic approach to ‘commercial awareness’ remains to be seen. I think that the top performing companies are already working to have their contracts and commercial groups operate as ‘knowledge centers’, overseeing increased quality of commercial process, tools and information flows. But in the end, unless performance measures are altered to reflect commercial values, I am not sure much will change.
Today I turn once again to Logistics Viewpoints as the inspiration for my comments. Adrian Gonzalez has been exploring the impact of social networking on the management of supply chains. In summary, he makes the following points:
* Social networking is not about socializing, but about facilitating people-to-people communication and collaboration, which is at the heart of managing and executing supply chain processes.
* Social networking goes well beyond Facebook, LinkedIn, and Twitter-it includes virtually all of the leading software vendors that companies currently use to manage their business processes.
* We’re seeing the rise of Supply Chain Operating Networks -the business equivalents of Facebook and LinkedIn, which are enabling communities of trading partners to communicate, collaborate, and execute business processes in more efficient, scalable, and innovative ways.
* If deployed and used correctly, social networking will result in less work, not more for business professionals.
I am not sure that I agree with the final point. It seems to me that increased connectivity has actually led to mushrooming of work volume, not a reduction. But there is no doubt that networking tools allow us to do things quite differently, much faster and in many ways better than in the past. And regardless of how we feel about them, they are certainly on their way.
Practitioners in contract and commercial management are right at the heart of supply chains. It is therefore critical that we understand how these networking technologies can affect us. We have not been amongst the early adopters of business software, preferring to believe that ‘automation’ does not apply to knowledge workers. Indeed, when we think of social networking tools, I bet many of us are considering the risks and dangers associated with their use, rather than the business benefits that could flow.
Increasingly, failure to adopt and adjust to technology makes any group appear out of touch and disconnected from the reality of the business world. So grasping the initiative on how we might make use of emerging network tools is not only useful, but perhaps fundamental to our continued relevance. Among the more obvious areas that strike me are:
– how should social networking affect the timing of involvement? For example, can we use such tools to be far more engaged with our counter-parts in customers or suppliers at an earlier phase, or indeed as a part of the on-going relationship?
– how should social networking tools affect some of our traditional contracting practices and terms, for example anything to do with notices, or change management, or performance reviews?
– how should social networking impact performance management and the creation of common repositories and versions of the truth? How can it bring immediacy to reporting and problem solving, rather that relying on periodic data that may be irrelevant by the time it is available?
To what extent are you actively exploring this area and its potential for competitive advantage? And what other aspects of social networking should we be considering as we prepare for the future?
Improving our use and understanding of technology is one of the topics that will be addressed at the next IACCM Americas conference – see http://www.iaccm.com/amer13/ for details
When I was a very young child, I remember my father used to drive me crazy by asking me “How long is a piece of string?” I was sure that I would eventually guess the right answer.
I was reminded of this by a note from an IACCM member who asked me ‘How much do contract managers in Europe get paid?’ While the answers are not as variable or indeterminate as the question about string, they are certainly very broad.
The question was prompted because this manager is having to participate in a company-wide review of salaries and benefits. He is headquartered in the United States, though his staff are worldwide – and his company uses Towers Watson for data gathering. That proves a real problem, because Towers Watson have still not acknowledged the existence of contract and commercial management. The only similar category they offer is that of Contract Administrator, which they designate as a form of legal support. The role and its contribution are defined accordingly. Not surprisingly, this designation yields the type of salary and benefit levels that would attract very few contract or commercial managers.
Earlier this week, I wrote about the relative dominance of the legal profession in the US and the dangers this has for good contracting. This incident reflects the same problem – a perception that anything with the word ‘contract’ must somehow be subservient to lawyers. A review of the many job roles covered by Towers Watson places contracts personnel in the category ‘Legal Support’ and defines them in the following way: “Provides support for a variety of law-related activities that do not require a law degree, including legal or factual research, contract administration, document preparation and analysis, citation checking, and trial preparation”. The role is sandwiched between ‘Paralegal’ and ‘Legal Secretary’.
Managers of contract management groups face an increasing problem in determining appropriate compensation for their teams. The dominance of firms such as Towers Watson means that many HR departments will not accept data from any other source, yet when the data they receive is inaccurate and fails to reflect the job being benchmarked, it results in massive internal battles. Because companies only accept this ‘impartial’ data, it becomes increasingly difficult for organizations like IACCM to collect data of its own – because there is little perceived benefit for companies to participate in surveys.
It seems to me that we need a concerted push by the contracts and commercial community to demand better recognition and understanding of the job role, its contribution and the associated salary levels. Through this blog, we have already done much to define typical job roles and to motivate practitioners to think hard about their potential contribution. This work continues – indeed, we have another webinar on the topic running this week. But if we truly wish to challenge the Towers Watson data, it seems to me that functional heads need to contribute current salary information to a worldwide survey that would once and for all establish the point that Contract and Commercial Managers exist and that they are not fairly or accurately represented by a role of ‘Contract Administration’.
Only then will we be able to answer the question ‘How much is a Contract Manager worth?’
In the past, it was assumed that the Marketing department was responsible for gathering market requirements, which they would then pass to product or service development for inclusion in ‘go-to-market’ strategies.
That approach never worked well when it came to contracting. In part, that was because there was frequently a disconnect between product management and contract development (so requirements rarely got considered). But more fundamentally, Marketing never considered terms and conditions as part of their remit. If you asked a marketer whether the approach on, say, Liabilities was material to customer buying decisions, they would give you a very strange look and most likely ask ‘What are Liabilities?’
While some organizations have developed a more sophisticated and holistic approach to their contracting, many have not. And in general, I think it is true to say that Marketing still have no greater grasp of terms and conditions than they did twenty years ago. This means that there is little understanding of the impact of contract terms and we are mostly reactive to market experience.
Does it have to be that way? Clearly the answer is no. Indeed, an interesting blog in Logistics Viewpoints illustrates the value of market research. It cites a study by UPS that found the value customers place on things like the right of return, the options for shipping speed and the value of ‘free’ shipping (each of these being, in my view, a term and condition). Much of this research results in value options being provided to customers – giving them the ability to select trade-offs, typically related to price but sometimes to term alternatives.
I see no reason why similar research and ‘optioneering’ cannot be applied to most – perhaps all – terms and conditions. IACCM analysis already offers some insights to the value that organizations place on specific terms; it also confirms that we pay too little attention to some of those that really represent value and should be influencing selection decisions. But part of the problem is that term alternates are not actually presented that way. For example, if data security is important, why can’t I decide just how important it is (and how much I want to pay for it) based on several alternate positions? And the same applies to liabilities, or to payment terms, or to rights of termination.
I doubt that those in Marketing or Product Management are ever going to spend much time understanding the impact and value of terms and conditions. But surely those who are charged with their development and management should be interested in that understanding – and would have far more business influence if they did so.
Commitment Matters 