Software today is all-pervasive. No matter what industry you are in, or what products or services you buy and sell, a high proportion of contracts will have some sort of clause related to embedded or related software. And of course, along with that software come a range of contract clauses relating to IP ownership, rights of use and associated indemnities. Many products or services today are of no practical use without the associated software, which has made this a highly contentious field, especially since the legislation on which software patents are based is mostly around 6o years old.
Last week, the US Supreme Court heard a case that is predicted to update the rules related to software patents. With about half of today’s patent trolls related to software, there is pressure to increase the rigor in their award. Many argue that the US Patent Office has been far too lenient in its decisions over whether something is truly new or innovative, thereby encouraging unwanted volumes of litigation and potentially frustrating competition.
Inside Counsel carried a brief article that explains the background to the Supreme Court case and what is at stake. Behind the scenes, there is plenty of lobbying, with industry giants such as IBM wanting limited change and Google advocating more fundamental liberalization of current laws. My sentiments are with those who want to see far more rigor in the definition of ‘new’. My experience is that patents today are being used to crush start-ups and competitors who cannot possibly afford the cost of litigation. Many of the ideas that achieved patent status have little merit and in many cases were filed only to prevent competition or extract licensing fees. This also carries a heavy cost for the consumer – an issue highlighted by Steve Pociask on Huffington Post last year and priced as being at least $42bn in the US alone back in 2010.
If it costs over 500 million Euros, it’s a Megaproject. An awful lot of them – some 65% – go wrong, substantially overshooting on budget or experiencing major delay. And since governments worldwide are expected to spend around 100 trillion euros on such projects over the next 15 years, their performance really matters.
Yesterday I attended a Megaproject conference where delegates – mostly academics – were pooling research aimed at understanding how success rates can be improved. The trouble is, we don’t really seem to know. And to the extent we do know, it appears better commercial management lies at the core.
Until now, the problems affecting megaproject performance have been perceived largely as issues for project management. However, the evidence – thin though it is – appears to point more towards weaknesses in stakeholder analysis, relationship definition, coordination and management. These are capabilities that should be provided through commercial skills and addressed through effective contracting structures and management.
Specifically, the major findings from research have been:
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A need for ‘special purpose entities’ (SPEs). Essentially this is about defining the best relationship model for the project and structuring the organization for its delivery. An SPE is generally a newly structured company or joint venture.
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A need for ‘modularization’. This is essentially about work breakdown and may take several forms, but is especially relevant in addressing some of the more common contract management issues, such as disagreement over scope and goals or contention over change management. Modularization could affect how and where work gets done; but it is executed through separation of contracts and might (I believe) include the type of ‘modularization’ one would see in agile contracting.
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Impact of external stakeholders. This is an area that should be very familiar to any commercial manager – the need for thorough stakeholder analysis and reconciliation of their views. Beyond that, in megaprojects, consideration of external stakeholder needs may generate creative ideas for additional value; it will certainly influence how the project is presented, its value proposition and, therefore, will potentially alter scope and goals.
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Establishing effective performance criteria and management. The business model for megaprojects varies. The criteria that need to be managed also vary – for example, the duration, the likelihood of cost overruns or delays. But in these complex environments, there need to be more measures than the traditional time, cost and quality. For example, behavioral characteristics or agile budgeting might be examples of additional areas requiring active management, as well as the characteristics identified as elements of relational contracting.
Professor Naomi Brookes provided valuable insight when she observed that the ideas being applied in the structuring and management of megaprojects are mostly decades old and never truly tested or validated; they were mostly developed for smaller projects; and they tend to be driven by the buyer or funding agency. In other words, without effective research, contract and commercial management will remain an area of guesswork and far too many projects will continue to under-deliver. That is why IACCM is so determined in pushing the research agenda and raising the skills and competencies within member organizations. It is time for the practitioner community to awaken to the scale of need and opportunity that this represents and to become far more active in support and advocacy of improved commercial and contracting standards.
There is frequent debate about who to blame for the lack of cooperation between buyers and sellers. Dealmakers and negotiators are almost universal in their theoretical support for ‘win-win’ relationships, yet in practice they are achieved far too rarely.
IACCM’s annual study on the state of negotiations consistently identifies two major causes. Top of the list is ‘resistance by the other side’, but close behind comes ‘resistance within my own organization’.
If we cannot collaborate internally, it is hardly surprising that we struggle to do so externally. Indeed, those internal divisions are often only too evident. They range from disagreement between members of the negotiating team, to inability to make commitments in a timely manner, to inconsistent or withdrawn positions. Such behavior is scarcely likely to build confidence on the other side and understandably leads them to take protective measures.
By failing to address internal cooperation, businesses lose in a number of ways. Obviously they are harder to do business with and therefore lose value opportunities. But they also create a culture of adversarialism or avoidance which makes a change of style almost impossible to achieve. Rather than expanding knowledge and understanding alternative viewpoints, staff in these businesses tend to become entrenched in their position and are more inclined to blame others for their failings.
Making a start on improvement is not that difficult. It can begin within a single function. For example, the Law Department within several IACCM members has had its buy-side and sell-side attorneys ‘negotiate’ their contracts with each other. The polarity of their respective positions becomes hard to defend in such an environment and each emerges with a more enlightened view. In most cases, they finish up with revised terms and conditions that make them more attractive as a trading partner.
But going beyond this, in larger companies, the barriers between Procurement and Sales Contracting personnel are typically even higher. They rarely speak with each other and, when they do, it is often to trade insults. If only they worked together and instead traded skills and knowledge, how much more effective both could be when dealing externally. Good negotiation training does not have to be expensive; it truly can begin by practicing internally and expanding viewpoints in a safe environment.
In previous blogs, I have highlighted the challenge of managing change in today’s contracts. The frequency of change has increased, the causes of change are more varied, yet the mechanisms through which change requirements are identified and managed have failed to keep pace.
Today I read two articles that illustrate the scale of the uncertainty faced by contract and commercial managers. In Strategy+Business, Eric McNulty suggests there is no more ‘business as usual’. He cites the volatile nature of today’s society and politics, with widespread disillusionment resulting in turbulent market conditions. This, he suggests, not only makes it difficult for Corporate leadership to predict where they should invest, but it also places individual businesses at risk. Who knows what issue might inflame local opinion? Whether it is Coca-Cola and water usage or Starbucks and tax avoidance, issues can arise almost without warning and rapidly become viral.
McNulty highlights three areas for focus:
– Understanding society as a system
– Managing the tension between urban have’s and have-not’s
– Leading in an era of short supply
There are many implications for anyone negotiating or managing contracts. For example, what impact will a particular contract or project have on people’s lives and how will it be perceived or (mis)represented? What effect might this have on the structuring or performance of the agreement? What mechanisms may be used to address previously ignored stakeholders – for example, can we gain local support through creating employment opportunities or by investing in local infrastructure projects as a by-product of the contract? What supply risks must be managed in order to ensure delivery against contract commitments?
Overall, just as society is starting to operate as an interconnected system, contracts and commercial managers will need to become far more astute in anticipating and understanding interconnections in their project or markets. Buy side and sell side integration must occur within the enterprise. Commercial solutions must be more creative and more inclusive than in the past, engaging and managing complex stakeholder ecosystems. Project economics will need to evaluate the social balance sheet because this will increasingly determine the opportunities for profitable operations.
In my experience, the companies that succeed are likely to be those most adept in handling less developed international markets. It is here that commercial creativity is often most evident. Such markets demand innovative solutions such as new partnerships or channels; they also require far more adaptive systems due to their relative volatility and unpredictability.
The second article, by Richard Branson, is on the State of Government and examines the role of business in the development of democracy. It simply reinforces the points being made by Eric McNulty; we live in a time of rapid and unpredictable change, an environment which requires creative and adaptive minds and mechanisms. A time, in other words, when those with commercial skills must ensure they are taking a truly global view both to sustain their business and also to develop their personal contribution.
Over 60% of contracts are non-compliant with corporate standards.
This was one of the statistics that emerged during a webinar IACCM ran this week with Seal Software. It is based on analysis of more than 1o million contracts handled by Seal in the last 3 years. As Ulf Zetterberg, CEO of Seal Software, observed, the shocking part about this statistic is not so much that the variation rate is so large as that companies are simply unaware. In some cases, their ‘standard term’ is used far less frequently than the alternates. They spend so much time battling over individual exceptions that they lose sight of the bigger picture.
The webinar was full of data coming from both IACCM and Seal, demonstrating the power that contract analytics can deliver to the business. For example, we looked at management perceptions of the contracting process and of the functions – contract management, legal, procurement – responsible for contract production and negotiation. This identified areas for improvement, such as weaknesses in innovation or the leadership of change. Less than 50% see these functions as a source of innovative ideas and nearly 80% feel they are always or sometimes too risk averse. It found that Procurement, in particular, is frequently perceived as far too oriented towards compliance and lacking commercial judgment. It also revealed how bid-to-signature cycle times are on average lengthening, with increased review and approval the major cause.
The gap in performance between best and worst performing companies is increasing. Measures such as frequency of claims, percentage of underperforming contracts and extent of value leakage were among the indicators used to illustrate the benefits of high performing contract management. Indeed, as I reported earlier this week, an increasing number of executives are recognizing the strategic importance of contract management and in particular how past investments in Procurement have in many cases eroded the value achieved from contracts and trading relationships.
At its heart, this webinar was about data and analytics. It was illustrating how the fragmentation of the contracting process creates blindness to key insights. The consolidated performance data from this process provides a powerful source of management information – but most organizations do not even realize what they are missing. An obsession with compliance results in a measurement that is frequently meaningless and often damaging to business results.
Another blog on this topic can be accessed here. And for those who wish to view the webinar, the recording is available here.
Businesses lose millions of dollars every year because of poor contract management. Few take steps to address the problem because they do not realize it exists. Since contracting is not handled as an integrated process, there are few measurements of its performance and (apart from the work undertaken by IACCM and a several of its members) there is no publicly available consolidated data showing the scale or cause of loss.
In the public sector, the situation is different. Government expenditure is subject to relentless audit and reporting. Few will have missed the fact that those audits frequently point at weaknesses in contact management and commercial skills as primary causes of waste and poor performance.
Stung by those criticisms – and the resultant media headlines – the UK Government has been among the first to act. A series of measures have now led to the creation of the Crown Commercial Service – probably the only such body in the world. It is charged with direct responsibility for overseeing central Government procurement through a mix of centralized purchasing and coordinated policy and practices.
The choice of name is significant. This new body is not simply a consolidated Procurement function, charged with driving down acquisition costs through consolidated spend. The UK Government has recognized that delivering successful projects, achieving value for money and establishing innovative contracting models depends upon commercial excellence. Therefore they are determined to hire top talent in contracting and commercial management.
Job postings in ten categories have been announced in the last few days and can be viewed on the IACCM website. These represent exciting opportunities for professionals to be at the forefront of change in the delivery and management of public services. Changing social expectations, digital technologies, constrained budgets – these are just some of the factors driving a fundamental shift in the way that Government operates. Commercial innovation will be fundamental to enabling that shift and IACCM is delighted to see Government at the forefront in promoting the development of the commercial and contract management profession.
Many will recall the prolonged debates over whether or not Chinese technology firms Huawei and ZTE could be trusted. The US Senate blacklisted both.
Since then, it has become known that US intelligence services were all the time hacking into Huawei’s headquarter servers and monitoring communications between its executives. The US activities were, of course, undertaken with the best of intentions, whereas those alleged by Huawei (and the Chinese Government) were ‘bad’.
These events reminded me of a blog that I wrote nearly 3 years ago regarding our dual standards when dealing and contracting with China. Indeed, we run the risk on most occasions of allowing perceptions and half-truths to drive our thinking and, as a result, influence our approach to negotiation or the way we manage a relationship.
An excellent contract or commercial manager must always aim for objectivity, which means exploring and understanding stakeholder perspectives and seeking to establish truth. It is often our role to get facts on the table, to mediate between parties with opposing views, to create an environment of respect and trust. And that often demands that we look behind the headlines and the entrenched views of our particular company, industry or culture. We must be ready to ask uncomfortable questions, rather than assume our side is intrinsically ‘good’.
Partnerships, collaboration, mutual success. Increasingly these are the words used by executive management when they describe how their business will work with trading partners. Yet without fundamental change to policies and processes, these words remain little more than sentiments.
Business conditions have changed dramatically in recent years. Globalization has impacted loyalty; it has driven a ‘lowest cost’ mentality; it has resulted in trading relationships that span cultures, jurisdictions and languages. Many of those relationships are now virtual and they operate in an environment where there is constant pressure to cut costs, to innovate and to cope with heightened levels of commercial risk.
In this environment, IACCM research has found that on average, 35% of contracts significantly underperform. This represents a massive impact on bottom-line results – or alternatively, a massive opportunity for improvement. Surely, this must create conditions in which sophisticated vendor or supplier relationship management (SRM) can flourish? Yet in general, it does not, because management is reluctant to make the necessary investments.
Where it has taken root, the evidence suggests that ‘good’ supplier relationship management generates incremental savings of between 5 – 9%. However, sophisticated organizations understand that SRM is about far more than savings; an ‘excellent’ program delivers revenue improvements through innovation, enhanced supplier performance, accelerated deliverables …. These programs focus on quality, continuous improvement and innovation; cost reduction is a consequence. However, this approach often results in conflict with traditional Procurement practices and measurements and in particular, disagreement over the best supplier or the appropriate contract terms.
Another point of contention is the extent to which ‘the contract’ and ‘the relationship’ need to be aligned. Many immature organizations continue to believe that the key to good performance is strong personal relationships. They point to specific examples to illustrate their point. Yet at the same time, they ignore the many examples of failure or sub-optimized performance. In today’s global business environment, success cannot be left to the vagaries of human relationships, it must also be linked to organizational compatibility and alignment.
And this is where SRM has its greatest role and value. It ensures there are processes, systems, skills and methods in place to drive sustainable mutual success. By supporting performance in this way, it enhances supplier selection and also encourages supplier investment in the relationship. In many organizations, SRM or vendor management groups remain an overlay, seeing their role primarily as a point of coordination or oversight. In the best organizations, they are at the forefront of driving internal change and tackling issues that have substantial impact on business results.
Service Level Agreements have become a sacrosanct element of today’s contracting practices. They provide the basis for defining and measuring performance and therefore also for judging failure and associated financial penalties.
However, SLAs have their critics. They are too complex; they often result in a ‘green’ dashboard when service users are complaining about quality; they fail to adjust to shifting needs; they result in an environment of blame and recrimination …. the list goes on.
Today I was reviewing a dynamic on-line performance management system, capable of capturing and reporting on numerous criteria. It is therefore flexible to business needs and priorities, which inevitably change over time and also vary by functional group. With a system like this, do we really need the complexity of the SLA, or can we return to the simplicity of a much smaller number of key performance indicators (KPIs)?
Research suggests that there should be no more than 5 KPIs and ideally less. These are the critical success criteria. But rather than drive performance via these fundamental measures, we decide to introduce dozens (on average more than 20) additional ‘service level criteria’, which introduce confusion and complexity.
With on-demand metrics, the parties could instead have contract terms that specify the mechanisms to review and address problems. “Penalties’ would be based not on specific service levels that might have little or no real value, but instead focus exclusively on the achievement of the KPIs.
Many non-lawyers chuckle when ‘innovation’ and ‘lawyer’ are mentioned in the same sentence. The legal profession is not renowned for being at the forefront of change.
Yet the Innovative Lawyer Awards, featured each year in the Financial Times, demonstrate that there are in fact many in-house counsel and law firms anxious to dispel this image. And at the first Innovative General Counsel Congress, held in Rome last week, more than 60 top executives came together to share ideas and experiences.
My role at the Congress was to present on the topic of contract management – seen by many as an area that demands greater attention from the law profession. Indeed, it was positioned as a major source of value-add that can substantially increase the role and relevance of the law department.
I drew on four recent examples where IACCM is working with in-house counsel to tackle broad business issues that extend beyond the function’s typical role.
- Industry standard contracts: several instances where large corporations are grouping together to eliminate low-value negotiation and shift focus to governance and performance terms that reduce the chances of the deal going wrong.
- Relational contracts: contract models that support more collaborative relationships and make an organization easier to do business with.
- Economic impact: analysis of the effect of different terms and conditions, and alternates to them, on bottom-line performance.
- Revenue improvement: provide business management methods and tools that address the complexity of today’s trading environment and support the introduction of specific revenue improvement targets.
These examples are certainly not the norm; but that is why they are innovative. There are certainly many opportunities for lawyers to move to the forefront of the change agenda – though to succeed, they may need to team more effectively with others from the business. As one delegate pointed out, the world appears divided between ‘lawyers’ and ‘non-lawyers’. “There is no other profession that thinks this way,” he observed. “Have you ever heard of non-doctors, non-accountants or non-engineers?”
Commitment Matters 