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between members of the negotiating team, to inability to make commitments in a timely manner, to inconsistent or withdrawn positions.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?”
In the last week, I have met with the General Counsels from three large, international corporations. Each of them is challenged by questions over the future role of the law department and its delivery of business value.
One consistent theme has been that the business increasingly demands facts, not opinions. Another is the pressure to cut costs, increase efficiency and relate legal services to economic value and ‘ease of doing business’.
For most law departments, these demands are challenging. The law is rarely precise – it is based on matters of judgment. Lawyers look for precedent, but they tend to view each case on its merits. They do not think in terms of packages or portfolios or processes. ‘Big data’ and analytics are not familiar concepts. Yet it is precisely these things that are now fundamental to business success and which must therefore be added to legal capabilities.
One area where this becomes especially evident is that of contracting. Historically, lawyers develop contract models; they draft terms and conditions; they review and approve exceptions. Many times, they either support or engage in negotiations. But rarely have they been challenged to explain or justify the business impact of their decisions. It has been enough that they protect the business from harm and get deals done; no one has asked whether those terms or contracts could have been better designed, whether there were opportunities to drive improved bottom-line results.
As IACCM research continues to reveal, the answer to these questions is that contracts do make a real and measurable difference, especially if they are placed in the context of a holistic contracting process. Then, the question becomes who should take ownership of that process, who should gather all the fragmented strands, who should push for appropriate automation, skills, people? Historically, General Counsels have mostly shied away from the challenge such a role represents. Today, that is changing; for many, contracting and contract management are being seen as increasingly relevant to their future as a high-value business function.
Smart organizations exploit uncertainty to create value. They do this by implementing approaches that allow them to manage uncertainty and – as Ian Heptinstall commented in response to my last blog – this is not achieved simply by shifting risk to the other party.
In last week’s webinar with David Hillson, we discussed the growing challenges of ‘uncertainty’, which result from a variety of factors – volatility, complexity, ambiguity being prime amongst them. David commented that there is a difference between precision and accuracy and that contracts cannot anticipate every eventuality. Therefore in dealing with uncertainty we must think about a range of contract and relationship models.
If substantial change is likely, the contract needs to embed terms that allow active scope management rather than seeking to nail it down and place onerous performance responsibilities onto the supplier.
Selection criteria should be adjusted to reduce the risk of conflict or non-performance. In other words, select a supplier that exhibits the experience, culture and appetite to handle uncertainty. This is unlikely to be the low price bidder, but may well turn out to be the low cost bidder.
A recording of the webinar with Dr David Hillson is available in the IACCM Member Library
Commitment Matters 