“It’s difficult with big end-to-end processes to have a tribe that has ownership of the overall goal and a process owner who is also the tribal leader.”
This comment comes from an excellent blog by Brad Power, in which he explains why it is so difficult for organizations to drive sustained improvement in end-to-end business processes. He observes: “In the absence of a significant disruptive event, or obvious proof that the world is changing, the gravitational forces in organizations pull strongly towards the performance engine: functional, hierarchical, command-and-control, rigid”. And this means that traditional forces provide powerful resistance to any cross-functional initiative for change.
Indeed, in many cases that resistance may mean that certain activities have no defined process at all. This is often the case for contracting. As an activity, it spans multiple stakeholders and functional groups. The quality of output depends very much on the extent of cooperation and a shared view of the goal. Efforts at improvement tend to be driven by a sense of crisis or some ‘disruptive event’ because there is no acknowledged leader or owner of contracting. Process updates or re-design are therefore periodic, often painful, and typically short-lived in their effectiveness.
Occasionally, organizations grasp the importance of integrated contract management capabilities. A leader may step forward or be appointed to ensure cross-functional integration, but their efforts struggle to survive. In case after case, I have seen the traditional functional or geographic silos steadily undermine the central effort, especially when the original architect or leader has moved on.
Unfortunately, there are too few champions of integrated contracting process. Most practitioners are far too tactical or operational in outlook. They are happy fixing problems rather than eliminating them. It takes real vision and personality to be a tribal leader. With the importance that contracting has today to overall business performance, we must hope that a new breed of tribal leader soon starts to emerge.
In general, the quality of commercial risk assessment and management is poor.
While most major organizations have developed sophisticated risk management systems, the extent of value leakage from their contracts is just one piece of evidence that they are lacking in effectiveness. My observation is that significant causes of risk are quite simply overlooked; and risk management is too strongly focused on dealing with risk consequence, rather than reducing probability.
This topic will be a major theme for IACCM in 2014. For now, as evidence, I will offer a couple of examples based on conversations I had last week.
The first was with the European General Counsel of a major international software and services company. He shared with me the approach his organization has taken in developing project lifecycle managers with a strong commercial and contracts background. In itself, this is not of course unique, but he highlighted the fact that it was driven by an understanding of how poorly a traditional functional business structure actually understood or mitigated risks. As an example, he pointed t0 the Legal department and its traditional fixation on securing terms that protect in the event of litigation. “When we did an analysis of actual risks, we realised that litigation comes close to the bottom of the list”.
The second conversation was with a group of credit managers, all from large corporations. We were discussing the role of contracts and negotiations in handling issues around payment. This led to a list of ‘desired terms’ – not just the payment provisions themselves, but mechanisms such as the right to impose interest, delay delivery or terminate the contract. In most situations, such terms are unrealistic – and arguably, they are often irrelevant. But what became apparent in the conversation was that there is a woeful lack of data to support intelligent management of risk. Specifically, there is a disconnect between risk probability assessment and the terms to manage risk consequence. As a result, contract and negotiation strategies frequently miss the key point about risk.
In the end, risk management should be attempting to reduce the probability of risks occurring, yet a lack of consolidated data regarding the frequency or possibility of risks means that instead there is focus on dealing with consequences. Often those efforts result in real risk issues being ignored (e.g. poor communications, wrong focus for reporting, absence of right level sponsors), or of key issues simply being pushed aside in the urgency to ‘win the deal’.
Today’s technology means that there is an opportunity to massively improve the management of commercial risks. A few organizations are grasping this. Most are not.
When we are working within an organization, the years often blend. They move so fast that we may remember isolated events, but rarely spot broader trends.
That is where the overview at an organization like IACCM gives a wider perspective. Working as we do with those responsible for contract and commercial management at thousands of companies and public sector bodies, we gain insights that go beyond the specific strategies, offerings or process changes of a single entity.
Has it been a good year for contract and commercial management? Overall, from the perspective of opportunity, I must say yes. But has the overall community benefited? There, my answer would have to be rather more guarded – it depends.
Much of that dependency is down to the people within the function itself. Some have been leaders in understanding and addressing the changes that their business confronts. Others have at least been responsive when called upon by management. But there are also those who are seen as unresponsive, or of limited value, and these have suffered from the added focus on contracting. since they are deemed irrelevant or an obstacle.
The pace of change affecting both buy and sell-side contract and commercial management continues to pick up. Change always brings winners and losers. For those who want to be among the winners, IACCM will be offering a webinar on January 2nd (live and recorded versions available) in which the senior staff of the Association will be sharing their insights to the major trends and outlining responses to them.
So whether you are in a dedicated contracts or commercial function, within Procurement or within Legal or Operations, if you have responsibility for contract or commercial management, this is a program you should not miss. You can register now at the IACCM website.
Last week I commented on a series of recent public sector contract failures (see Government Procurement in a Mess).
John Smit posted a reply, in which he correctly highlights the problem of inappropriate contract design. He observes a fundamental difference between traditional acquisition contracts and those for services – and that is the need to design for on-going oversight and management. In John’s experience, many Procurement organizations continue to use contracts that were designed for product acquisitions where significant on-going management is unnecessary. They than hand this off to a business unit which now has an inappropriate form of contract, as well as lacking skills or experience in contract management.
John also confirms my original point, that these weaknesses are not unique to public sector.
It is in many ways remarkable that contracting parties continue to allow these weaknesses. Procurement often claims that it merits a seat ‘at the top table’, yet how can this be the case if the function fails even to act on the weaknesses of its own procurement tools and strategies? And providers also share the blame, for these poorly performing contracts are in no way helpful to them. it does not take much investigation to discover whether a customer has post-award management capability. If suppliers had the integrity to point out the likely consequences and helped clients to build their skills, the market would become far more healthy, sustainable and profitable.
Last week, Mary Sebelius (Secretary of State for Health & Human Services in the United States) highlighted an urgent need to improve contract management within her department. Indeed, she specifically initiated a program to introduce ‘best practices’.
This is just one of numerous examples this year where top executives or auditors have called out the need for greater competence in contracting. This will come as no surprise to many leaders in contract and commercial management, who have long realised that changing market conditons and new forms of offering demand strengthened capabilities. Whether on buy-side or sell-side, contracts today are more critical instruments in both establishing and managing the right trading relationships and outcomes.
But it would be premature to celebrate, because most existing contract management groups face two distinct challenges.
First, executives are looking to build competency – not to recruit an army of experts. Sure, there ae opportunities for those with true expertise and there is likely to be some short=term expansion of headcount. But the real point with competency is the need to spread understanding of contract management discipline and tools mroe widely across the organization. Thereofre the role for experts will increasingly be to operate as a knowledge and enabling center. Few have yet adjusted to this mission.
Second, the call is for best practices – and how many contract management groups can claim to know what those are? Since very few undertake research or benchmarking, they have no real idea how they compare or what size gap they need to fill. This means they are rarely proactive in approaching senior management with ideas or substantive investment plans. Hence the executives have limited confidence in their exisitng teams. Indeed, as they look to the future, they may see the current staff as part of the problem, not as the answer.
So as Christmas approaches, you should not expect a sudden flurry of gifts. Indeed, if you want to make it onto the list, perhaps now is the time to reach out to IACCM and gather insights on how to establish best practicve competence, maybe even to undertake a capability assessment so that you are able to advise management on the steps that are needed.
That way, you may at least be in the position ot ensure a happy and prosperous New Year!
This week, IACCM announced the results of its elections for 2014 Board of Directors. There were six seats available, with nine Board members not due for re-election this year.
With 22 candidates standing, members had a wide choice. The candidates represented 12 different industries and ten nationalities. It was a close-run race, and the new Board of Directors is as follows (with newly elected / re-elected members highlighted in bold):
Margaret Smith – Chair Executive Director- Contract Management and Director of Operations-Legal – Accenture
KB Monu Iyappa – Independent Consultant
Gianmaria Riccardi – Director, Commercial Business Management Europe – Cisco System Italia Srl
Coen Wilms – Group Contracting Discipline Manager – Royal Dutch Shell
Lucy Bassli – Assistant General Counsel – GCO Manager – Microsoft
Jerry Jacobson – Global Process Advisor – Contracting – Chevron
Arne Byberg – Associate General Counsel – Hewlett-Packard Co.
Barbara Chomicka – Senior Project Manager – EC Harris LLP
Kai Jacob – Process Manager and Head of Global Contract Management Services, Legal Department Manager – SAP
Andy Kerstan – Global Contracts Manager – Rio Tinto
Dan Mahlebashian – Chief Contracting Officer – General Motors
M.C. McBain – Vice President Global Business Development – IBM
Timothy McCarthy – Director, Contracts & Pricing – Rockwell Automation
Nick Nayak – CPO – Department of Homeland Security
Alan Schenk – Vice President for Common Process, Contracting and Compliance for Exploration and Production – BP
Peter Woon VP, Procurement and Supply Chain – Marina Bay Sands:
Is it just a coincidence that major problems seem to be popping up on a regular basis (e.g, in recent weeks, Obamacare, Queensland outsourcing, UK justice contracts and now the abandonment of outsourcing defense procurement), or is there a pattern that would imply something more fundamental is wrong?
First, I think there is a pattern. And second, I am not sure that the problem is actually procurement (at least, not from a functional perspective), but it is rather a question of organizational competence to undertake specific types of procurement. And I suggest that problem is not unique to Government or public sector.
In organizations worldwide, the pattern of trade and trading relationships has altered extensively over recent years. The proportion of direct (input based) business has fallen substantially, to be replaced by a world of outcome or output based services and solutions. This has dramatic impact on the responsibilities of the parties and places strains on their abilities to interact over much longer time-frames.
As Dalip Raheja of The Mpower Group pointed out in a recent article, this demands different approaches to supplier selection and to on-going performance management – and relatively few organizations are especially good at doing that.
The reason that Procurement (as a function) comes in for justifiable criticism is that it appears not only to have failed to spot the need for a new approach, but has actually invested in systems and skills development that are making things worse. However, to be fair, who is ultimately responsible for defining required organizational capability – individual functions or senior management?
The point is that Procurement and senior management between them have often turned a demanding challenge in organizational capability into a crisis of competence. The focus on control, compliance and input cost savings has lulled everyone into a belief that acquisition management was in good hands. In reality, Procurement has maintained its narrow view of the acquisition process and the associated measurements of success. It is very rare for Procurement to have insight to, or responsibility for, the overall performance of the supply relationships they put in place – and that is the fault of management and policy makers, not the function.
It is now 10 years since IACCM started writing and presenting on this developing problem – the fact that Procurement measurement regularly leads to either the wrong supplier being selected, or drives the wrong supplier behavior. Narrow selection criteria, unbalanced risk allocations and the absence of competent post-award management add up to an environment that is unsuited to achieving good outputs or outcomes, Yet throughout this period, not only have the measurements and skills remained largely untouched, but Procurement has often spent millions of dollars, pounds or whatever currency in reinforcing capabilities relevant to the past, Many consultants, analysts and professional associations have continued their drumbeat around driving out cost rather than tackling the real question, which is how to generate value from trading relationships. Even now, many of them appear reluctant to acknowledge just how deficient their advice or training has been.
This is not specifically a public sector issue. Similar failures are endemic to a world in which acquisition strategies and capabilities simply have not kept pace with business models. To be fair, the UK Government seems to be among the first to have grasped at least part of this dilemma and is driving the development of ‘commercial skills’, to surround the procurement process with improved front-end selection skills and post-award governance and delivery capabilities. This will certainly do much to prevent the continued headlines – but will it be enough? There appear to be at least two other critical questions to answer. One is ‘What are the right measurements of Procurement success?’ and the other is ‘To what extent is the procurement function the best place for embedding commercial and contract skills?’ But before those can be answered, it seems to me that organizations must tackle the fundamental issue of re-designing their acquisition processes to reflect the lifecycle of today’s supply relationships; it is the fragmented nature of these processes and the poor definition of stakeholder engagement and skills that ultimately sits at the root of these crises.
In a workshop held in Adelaide today, participants were asked to identify the factors that, in their experience, contributed to successful trading relationships. Here is what they came up with:
- Develop mutual obligations that recognize interdependency
- Ensure clarity
- Open and honest communication
- Show respect
- Develop shared terminology
- Build shared or aligned competence
- Ensure a shared sense of risk, including understanding the other party’s risk
- Agree behaviors
- Develop incentives that promote a sense of fairness
- Create aligned personalities
Once again, surveys show that trust is declining. The latest AP-GFK poll reveals that only one third of Americans feel that most people can be trusted, down from half who felt that way 30 years ago. The report summarized why this matters by giving examples of the pressures that result.
“Social trust results in a society where it’s easier to compromise or make a deal. Where people are willing to work with those who are different from them for the common good. Where trust appears to promote economic growth.
Distrust, on the other hand, seems to encourage corruption. At the least, it diverts energy to counting change, drawing up 100-page legal contracts and building gated communities.”
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So if contracts are one consequence of low levels of trust, might we force new and more trusting approaches by scrapping them?
Certainly adversarial contracting built on classical legal theories of risk allocation reinforces the absence of trust. It assumes there is a probability of poor or dishonest performance which may lead to a need for retribution or recompense. This approach is also endemic to the United States and has been transported to many other parts of the world by global corporations. It is sustained by a growing number of lawyers because it is what they are taught to do in law school.
We know from annual IACCM surveys that it is these risk-related terms that dominate much negotiation (indemnities, liabilities, liquidated damages, IP rights etc.). Therefore I would contend that contract and negotiation practices as pursued by many companies and law firms are indeed contributing to the erosion of trust and we might well be better off if they were banned.
But what would we lose if we had no contracts? Let’s say for a moment that we restricted the use of contracts to those who had at some point been shown untrustworthy. This would have the benefit of punishing dishonest or manipulative behavior, marking out such companies and increasing their cost of doing business. But would everything then work out well?
Our research suggests that it is not contracts that are the problem; it is traditional, legally-dominated contracts. In today’s more complex, outcome-based world, organizations need a disciplined way to ensure mutual understanding. Whether they trust or not, they are often dealing with complicated issues with many possible interpretations. They are also often dealing across cultures and languages. Opportunities for honest misunderstandings abound.
And that is why IACCM promotes a new perspective on contracting – as a mechanism to build confidence and trust, rather than to undermine it. Such an approach drives very different conversations and also very different contract design. Contracts become management tools, providing a clear baseline, being used for communication throughout the organization. They are most likely electronic and may never be printed. They are regularly referenced to establish how conditions or needs have altered and how the baseline needs to be adjusted.
A few weeks ago, I wrote about the use of virtual reality in building design – a highly disciplined approach that forces the parties to be precise about their goals and needs. This is not driven by a lack of trust, but rather to establish mutual agreement and confidence, resulting in lower costs, more timely delivery and higher quality. I suggested then that we need to think similarly about creating ‘virtual reality contracts’, where the parties convert their discussions into the opportunity for a ‘walk-through’ of the contract, such that it builds accord and true cooperation.
Commitment Matters 