Winning contracts is key to almost every businesses outside the retail sector, since without them there would be no revenue. For most CEOs. sustained revenue growth is important to their performance measurements and personal job security. Therefore it is not surprising that considerable interest is shown in successfully closing revenue contracts and rather less in the case of procurement.
In general, executives look to Legal and Contract Management groups to be aware of contract risk and to assist in its containment. But given that the ultimate risk is failure to win contracts, they value people who bring solutions, not problems. That is why, in most cases, we generate a more receptive audience if we are talking about revenue enhancement through elimination of risks, rather than warning of the dangers of doing business. It is what makes IACCM’s work on risk probability and its potential bottom-line contribution so compelling.
It is clear that support organizations such as Legal, Procurement or Contract Management need to focus on the executive agenda if they want to be seen as strategically relevant. So in general this means we need to be better at promoting our value in terms of contribution to revenue and profit growth. But that is not always the case. Periodically, there are companies – or indeed entire industries – where broader risk issues become dominant. Examples were the telecoms sector in the e3arly 2000’s and more recently financial services and banking. In these cases, an entire industry went into almost unconstrained pursuit of growth. Caution was thrown to the winds. In their frenzy to maintain market share, companies were bidding for business on almost any terms. Contract management groups – if they existed – were pushed aside or integrated into Sales, in order to accelerate deals.
The consequences took some time to emerge, but when they did, they were catastrophic. Many businesses – for example, in the telecoms sector, Nortel and Marconi – went out of business. Others were forced into rapid mergers or acquisitions – AT&T, Lucent, KPN etc. The pattern in banking is very similar. And for these industries, the result has been a dramatic shift in the executive agenda and their perception of the role and value of contract management discipline. As the CPO of one large bank told me last week: “All I have to do is mention the words ‘regulatory risk’ and I am instantly on the CEO agenda”.
Many will be familiar with IACCM’s work to identify the scale of value leakage from contracts and to identify the major causes for loss. Unless you work in the Construction and Engineering sector, you may not be aware of similar work undertaken by international consultancy EC Harris.
At this week’s IACCM Asia Conference, Mike Allen (Partner and Regional Lead at EC Harris) presented ‘Global Disputes by the Numbers – and Contracting’s Role in Avoidance’. To an even greater extent than IACCM’s research, Mike’s work has pointed at weaknesses in contract management lying at the heart of most disputes – and therefore highlighting that improvements in contracting competence can potentially yield a rich return.
In concluding his presentation, Mike talked about a number of the improvements he is observing among market leaders. These reflected many of IACCM’s conclusions and I thought I would consolidate to produce a ‘Top Ten’ – steps to be taken to reduce the scale of value loss through better contract management.
- Standardize your contracts
- Simplify terminology
- Ensure rigor in review
- Capture data and knowledge
- Ensure broad availability of lessons learned and good practice
- Design a process that involves the right people at the right time
- Develop trained contract managers rewarded for discovering and using best practice techniques
- Encourage collaboration and knowledge sharing – internal and external
- Integrate ‘contract’ and ‘relationship’
- Understand your counter-party – their approach and competence at contracting
This week sees the first of a series of IACCM conferences and events in the Asia-Pacific region. These come at the end of a year which has seen steady growth in IACCM membership and activities, reflecting a growing commitment to the development of contract and commercial resources throughout Asia.
Among the major discussion points at this year’s lively and well-attended event are:
– selling the contract and commercial role – developing a compelling ROI business case
– expanding activities to provide a holistic pre- and post-award CM service
– improving understanding and adoption of technology
– raising corporate capability in post-award contract performance management
There are also many discussions on the more technical issues such as improving statements of work, SLAs and scope definitions, or producing better and more clearly expressed contracts. Participants are in many cases stretching to define and plan for ‘world class’ status, wanting to push their management with a clear vision of the steps needed and the benefits that will follow.
The extent of engagement and the enthusiasm for the challenges that lie ahead is infectious and truly confirms the extent to which contract and commercial management are ‘on the map’ here in Asia-Pacific.
Most US law schools have seen a decline in applicants of at least 25% in the last 3 years and that trend seems likely to continue. The numbers sitting the LSAT (Law School Admission Test) apparently fell by 11% in October, with the cumulative decline since 2009 being almost 45%.
Interestingly, the decline is greatest among the high-performers on the LSAT – in other words, the number of low-scoring test applicants has remained relatively static, leading to suggestions that the smartest students are now being attracted to other career paths.
The legal profession is certainly undergoing change and fee / salary levels remain under pressure. But the issue does not appear to be due to a decline in demand for legal services; it has more to do with pressure on price. Where and how work is done is transforming, primarily due to technology. On one level, technology is enabling greater efficiency. On another, it allows work to be undertaken remotely, supporting use of resources in low-cost locations. It is also permitting greater sharing and replication, which may reduce the level of experience needed.
What does this mean for future employment prospects? Interestingly, it is hard to discern precise patterns. In general, law firms seem to be under the greatest pressure – though some are reporting record revenues and profits. However, these are assisted by judicious use of technology, offshoring of work and (at least in some locations) hiring of lower-cost staff. In the UK, for example, the use of para-legals is reported to be on the rise – although in the US, the trend is apparently the opposite. Most in-house legal groups have seen strong growth of workload and many responded by moving work offshore, either through captive or outsourced centers. However, many seem to be re-thinking this strategy and there is a growing trend to bring work back on-shore, but to cheaper locations.
One trend that does seem fairly universal is the pressure for lawyers to become more business-aware. There is greater demand for them to take a more holistic view of risk and opportunity and consequently to offer advice or support that reflects a broader understanding of process, context and environment. But for that to happen, the law schools will need to re-think the nature of the training and courseware that they offer ….
My post earlier this week – “Should you be licensed to practice?” – generated many comments, most of which were emailed direct to me. The discussion was inspired by an article from the Chartered Institute of Purchasing and Supply proposing that procurement professionals should become licensed, in order to raise standards and ensure a more consistent response to today’s supply chain risks.
The reactions that I received were universally negative and raised some interesting points; I share a sample of these inputs below. Clearly, no one suggests that standards of knowledge and competence are not important, but they feel that a licensing system is inappropriate to achieving those goals and is counter to the trends and needs of today’s business environment.
Here are the comments:
“In the consumer scenario, licensing seems to add some value to the consumer who is otherwise ill-equipped to run their own due diligence – how does one know a doctor, lawyer or accountant is qualified? Prior to web based searching as an option, the licensing option seemed to serve some purpose for consumers. However, with commercial customers the ability to conduct due diligence is at a fully different level – does a corporation really need a third-party license mechanism to assist in the vetting and selection of procurement staff? Perhaps CIPS is envisaging a new niche with consumer clients who need a licensed buyer to help with the purchase of a home or auto?”
“I saw this idea backfire when a dog died at the hands of a groomer and the state wanted to impose licenses for all groomers. The community railed against the license and intrusion of the government into their work. The measure was never advanced to a vote.
It was pointed out during the debate that just having a license doesn’t mean that you are any good. Also depending how it’s written, the liability may return to the licensing body for mistakes. So not sure if CIPS has thought this through… If some licensed buyer screws up a deal for millions, will CIPS be willing to pay?
Doctors are forced to have malpractice, Public Accountants and lawyers are forced to buy error and omissions coverage, will companies pay for their Procurement employees to have insurance?”
“This kind of statement is a fairly regular occurrence from long-established professional bodies. The first thing to understand is that it’s almost always a defensive manoeuvre; people talk about it when they’re worried about something such as declining membership or influence. It’s an attempt to pull the drawbridge up behind them to prevent erosion.
Some key, common themes in predicted future developments within Procurement that perhaps challenge future volumes or drive a very different role:
- Outsourcing to third parties
- Automation having an impact on the number of purchasing specialists
- Integrated business processes
- E-commerce
- Globalisation
- Changing identity, structure and process of purchasing and supply within organizations, from a broad business perspective.
- Major corporate outsourcing decisions from which purchasing specialists are excluded
- Relative loss of influence, if specialists from other functions take a leading role in the supply chain management business process.
All this represents an uncertain business environment with some significant threats and a number of long-term strategic challenges in just how they’re going to adapt to a changing world, exacerbated by the fact that purchasing in many organisations is the responsibility of Finance and if I know the Finance people, they’ll fight tooth and claw to keep it that way. There are plenty of CEOs who were previously the CFO… I bet there’s not a one in a global corporation who was previously the CPO.
Factors in the macro environment common to all membership organisations.
- The trend away from allowing monopolies. For example, in the UK, the Regulatory Review of Legal Services in 2004 took away the Law Society’s long-standing right to be the sole body issuing a licence to practice to UK solicitors. The purpose of the review was to “consider what regulatory framework would best promote competition, innovation and the public and consumer interest in an efficient, effective and independent legal sector.” This wording would provide an excellent template for any objections to a ‘professional’ body attempting to become the licensing body. The key concerns are the impact on innovation, competition and the promotion and protection of vested interests by the professional body.
- The lack of relevance of old style professional bodies in the 21stCentury. Most of the old chartered bodies are relics of a bygone age. Whilst they once represented a fixed point of knowledge, expertise and excellence and provided a community and social environment for the practice of the trade or profession they were set up to serve, the modern world presents numerous ways for individuals to form new communities on an ever-evolving and frequently ad hoc basis. The laws of evolution apply rigidly to these new social groups: if they have something to offer the community they survive and evolve – if they don’t they die. The laws of evolution also apply to the old dinosaurs…it’s unlikely there’ll be a cosmic event to finish them off but over time they are becoming less relevant with declining numbers of members, declining relevance as education providers, declining importance as training providers. The success of modern style membership communities such as EConsultancy demonstrates that what people want above all else nowadays is content, not status. Timely, accessible, relevant and current. Old style bodies are locked in by their historic structures – they aren’t nimble enough to react to the new world order. We want it and we want it NOW!
- Competition in the traditional markets of education and training is now fierce. Lots of competition at all levels and this has really happened only over the last twenty years. An explosion in the number of universities offering vocational degrees that equip students for work without needing an additional professional qualification. To some extent the professional bodies have tried to mitigate the damage this causes by offering dual badging or exemptions but increasingly their qualifications are no longer the cash cows they were.
- There isn’t a massive groundswell of support from the professionals themselves for a licence to practice. Not in marketing, not in finance, not in IT services management, not in purchasing and supply. If the members wanted it – and made it clear they wanted it – it would have more chance of happening and the professional bodies could claim rightly that they are representing the views of their members. A bottom-up approach is the only justification. A top-down approach where the impetus comes from the organisation itself lays them open to the charge of self-interest.
- The minute one of the bodies went for licencing body status they’d bring down a storm of protest from any other organisation involved in the sector plus all the non-affiliated individuals. I suspect now that the courts would view such measures as not in the public interest and probably an unlawful restraint of trade. With the spectre of the European Court of Human Rights waiting in the wings to test any case I couldn’t see it happening in a million years.
- Technology has increased the pace of organisational evolution and the answer is not a retreat into Victorian times. It’s to reinvent the traditional professional body in a guise that appeals to this fast-evolving, collaborative and open world of ours.
In general, my experience suggests that organisations push this agenda when they are facing declining member revenues, declining training revenues and declining education revenues. They are effectively in the squeezed middle. Everything they offer (even membership of a community) can be offered more cost-effectively and conveniently by someone else. A push for licensing or privileged status is often a transparent attempt to delay decline. The political climate in the UK has never been more against self-serving moves by bodies claiming to represent workers and professionals. With the recent precedent of the removal of the ability to issue licences to practice from the Law Society, the likelihood of anything happening in the reverse direction has to be considered slim to say the least. In Associations where I have worked, we only ever had this conversation at as a matter of self-interest…not for the good of the professionals.”
CIPS (the Chartered Institute of Purchasing & Supply) is pushing for procurement to become a licensed profession, similar to accountancy or the law. They suggest that the growth of supply chain risk makes it more desirable to have the rigorous standards that licensing implies.
it is an interesting proposal and merits debate. A few of the observations that come to my mind are:
- is this push for licensed professionals anything but self-serving? To what extent does licensing actually improve quality of decision-making? So far as I know, the accounting institutes were relatively silent in the wake of the banking and financial collapse, but what were their ‘skilled and qualified’ members doing throughout the period of uncontrolled risk-taking? And what about the medical profession? Yes, they perhaps restrain or act on some of the most obvious abuses, but do they not also tend to ‘protect their own’?
- As guardians of a standard, doesn’t licensing constrain innovation? Every professional body I can think of struggles to adapt to changing market and business needs. It is slow to respond and faces inevitable push-back from established practitioners who face a need for dramatic re-learning and should be required to re-certify.
- Is this really any different from the old closed-shop mentality of the craft guilds and trades unions, both of which led to terrible abuses of power?
- Why Procurement? Why not instead move to licensing suppliers based on their visible achievement of standards. This would be far more efficient than having thousands of buyers all doing the same tests to validate the supply network.
- Isn’t this positioning by a procurement association rather opportunistic? For years, the procurement associations have been claiming that their members are professionals and they have been beating the drum over commoditization, cost reduction and squeezing suppliers through unrelenting competitive bidding. Many outsiders have long pointed out that Procurement practises such as these damage quality and undermine supplier integrity – in other words, the very things that this call for licensing says it now wants to guard us against!
Why is it that contracts are often so fragmented, so difficult to understand? Why is it that assembling a contract is often so contentious? Why is it that no one really provides holistic training on contracts and their management?
The answer, of course, is because the contract document is influenced by many different stakeholders and its assembly relies on co-operation between these stakeholders. For many reasons, that co-operation is often lacking. Nowhere is this more apparent than in academia, where contracts feature in many classes, but are not addressed holistically in any of them. Programs in law, finance, marketing, supply chain, operations, project management and many others will each touch on contract-related topics, but none result in expertise. All of them (in my experience) teach a narrow perspective based on a functional or specialist view.
This has been a subject for recent debate between IACCM and a number of academics in both the United States and Europe. A number of factors are coming together to cause a re-think in the approach to contract and commercial management:
1) There is no question that this field is rising in importance on the executive agenda. Just the number of bid requests we are receiving at IACCM for training in fields like ‘commercial skills’ or ‘commercial competence’ is clear evidence of that. I am sure business schools are observing some of that pressure.
2) There has been an increase in academic research and a growing appreciation that contracts can be a dependency item for certain functions to optimize their value; this is awakening academics to the need for more research, but to be meaningful it must often be cross-departmental.
3) At a more cynical level, many universities and business schools are wrestling with how they maintain student numbers and revenue streams. This is causing them to be more adaptive and more open to addressing business needs. Hence they see contract and commercial management as an opportunity.
The form of the debate is therefore interesting. In many cases, individual institutions are developing contract or commercial management as a bolt-on for existing classes – for example, modules within a law or project management program. While this is a welcome trend, it is questionable to what extent it adds to the understanding or capabilities of the student. A few academics are pushing further and suggesting that universities must themselves adjust to the demands of this cross-functional discipline by developing an approach to inter-disciplinary collaboration. In other words, classes in the field of contract and commercial management would actually bring together the various academic disciplines that represent a holistic view of the stakeholder community.
A few businesses have succeeded in establishing this formula of shared and collaborative responsibility, but it remains the exception – perhaps in part because our academic institutions themselves encourage specialism and discourage cross-departmental sharing. It seems to me that we must start to train specialists that their knowledge is not useful when it is simply stored in their own mind; knowledge and expertise should be put to use by a focus on enabling others to make better and more informed decisions. A true expert does not hoard knowledge; they disseminate it in ways that those less expert can understand it and put it to practical use.
Last week I attended a small meeting to discuss Building Information Modelling or ‘BIM’. It is not an area where I had prior familiarity and you may be wondering why it is relevant to contracts – so read on!
The construction industry has traditionally suffered from relatively high levels of claim and dispute, reflected in a history of major delay, sizeable cost overruns and concerns about quality. Many of the problems arise from poorly defined scope and lack of clear requirements. Technology has made the situation worse, due to the extent to which it has reduced the social interaction between the client and the supply chain (email was highlighted as the culprit; I would add ERP and globalization to the factors that have damaged inter-party communication). As a result, contracting parties have tended to battle over risk allocation, in spite of efforts to develop more collaborative forms of contract (for example, NEC contracts and some versions of FIDIC).
This story is probably starting to sound familiar to many who are not involved in the construction sector and where similar issues are prevalent. So the real interest in hearing about this meeting is to understand what remedies and improvements are taking place. And this is where we come to BIM.
BIM – to my limited understanding – is a process that results in animations, rather than the traditionally complex drawings that unqualified personnel cannot understand. It enables buyers and users to experience the construction and offer intelligent comment at the design phase. Level 2 of BIM (which is the current level achieved by some organizations) is typified by “models, objects and collaboration using file based collaboration and library management”.
The potential benefits to reduced capital expenditure, reduced operating costs and reduced cycle times are substantial – hence the extent of interest, especially by Governments charged with improved control over public expenditure. But right now, it is proving difficult to expand the adoption of BIM beyond individual projects and to drive the approach at a portfolio level. One reason for that seems to be the contracting process. “In one room, we define the technical needs and scope. But when these go to Procurement in the next room, something completely different seems to emerge,” commented one participant. Another factor is impatience: it takes longer up-front to develop all the information needed for accurate design and the building of the model. Traditional procurement processes are driven by speed and the demands of management to ‘get things started’.
Overall, these factors combine to encourage a contracting process that drives the very adversarialism that undermines intelligent design. In general, contracting does not lead to open sharing of commercial issues and risks and is often a game that suppresses requirements (in order to keep the price lower) and exaggerates capabilities (in order to win the bid). What I find fascinating is the idea of ‘animation’ within contracts. Just as BIM is now enabling users to walk-through a virtual building, why couldn’t CIM (contract information modelling) enable a walk-through of the contract?
Relational contracting is a step in this direction because it expands the areas of discussion and the approach to negotiation, ensuring the development of mechanisms that increase communication and cooperation. In that sense, it is almost a suitable accompaniment to BIM Level 2. But like BIM, it often struggles to replicate and the contracting community needs to explore new approaches that support the continued evolution of technical design. However, we must start somewhere – and it is for these reasons that IACCM has been developing and promoting approaches to relational contracting and recently introduced its Contract Design Award.
What a fascinating set of ideas lie ahead of us … who will be first with a fully animated, virtual contract?
An IACCM member recently told me about his company’s experience when they decided to insource a range of services which had been outsourced for more than 10 years. Despite the fact that these services had periodically been re-bid, they discovered that they are able to perform the activities internally with only half the numbers of staff and at almost 40% lower cost.
I do not know whether this experience is representative of others, but it certainly suggests a need for careful review. The problem for most companies is how to undertake such review. In this case at least, periodic competitive bidding was not effective.
In many ways, managing the level of resource at an outsourced provider is little different from controlling head count within an internal function. Periodically, most CEOs demand cuts, often demanding reductions in headcount that appear quite arbitrary. But the truth is, organizations have a way of growing and as they grow, resources remain busy, but steadily become less productive. They are also extremely talented when it comes to justifying their existence.
So I have reached the conclusion that occasional demands for sizeable cuts probably is the best way to ensure value for money. Without this, there really is no strong incentive for resources – internal or external – to become more efficient or to innovate in how their work is performed.
“Contract management will be writ large in terms of where we put our focus in the public sector”.
These are the words of Sally Collier, Deputy CPO for the UK Government, when she spoke at the Scottish Government Procurement Conference last week. Sally was one of many speakers who highlighted the increasing role of contract and commercial management in ensuring delivery of value and successful policy objectives.
As this blog has highlighted on many occasions, this growing focus is not unique to the public sector. Organizations generally are grasping the need to improve alignment on scope, to ensure that governance and performance criteria are effective and to select trading partners who can support successful outcomes. This is achieved through contract and commercial disciplines.
Recent publicity over contract management practices has probably accelerated interest in improvements. Next month, the CEOs of three large companies – Serco, Capita and G4S – will appear before the UK Public Accounts Select Committee to explain charges of large-scale over-charging on Government contracts. The incidents have already led to two high profile resignations, plus extensive internal re-organizations (see here and here). But I am sure Government ministers also recognize that failures are to some extent due to poor contracts and weak governance procedures with the public sector.
IACCM research shows that similar problems apply across most industries. Commercial and contracting skills and capabilities have largely been ignored in recent years, even though business complexity has steadily increased. Now they are very much on the agenda – but, as one delegate in Scotland opined, “Can we have any confidence that the skills we need to change this situation are actually available?”
Commitment Matters 