Last week I was talking with an attorney at one of the top London law firms. He made the observation that ‘data centers lie at the heart of the new economy’.
it strikes me that the corollary of this is that those who own or manage those data centers – and consciously work on disseminating data that is of value to users – will be the beneficiaries of that economy.
Contracts – and the contracting process – offer a wealth of data, yet today it is typically not consolidated, let alone mined. There is a remarkable opening for those with the imagination to support data consolidation and mining, who commit to enabling others rather than acting purely as a point of control.
This is a far cry from where most contracts and commercial groups stand today. For example, in a recent roundtable discussion on ‘big data’, most of the contracts and legal executives protested that they are still too busy building systems to capture all their contracts; until then, they cannot focus on these grand ideas of analytics and using contracts as a driver for business performance.
I believe this is entirely the wrong focus. if they set the vision of contracting as a value-add data center, then issues such as compliance will become obvious imperatives. And the contracts function will be positioned to deliver real and sustainable business value as the driver of commercial competence.
In a blog on Successful Workplace, Chris Taylor asks the question ‘Just who owns the customer, anyway?’
Chris goes on to observe the growing influence of technology in data gathering and assessment and how this is transforming the way that relationships are evaluated and managed. No longer do they depend on the appointment of a dedicated account manager or account team to operate as internal analysts and champions. Increasingly, the business has objective data, auto alerts and mechanized segmentation to assist its decisions about the value of any trading relationship.
This enables the customer interface to be far more fluid, based more on the nature of the topic. It reduces the need for a dedicated intermediary, whose role was in part to build ‘the relationship’, but in reality most time was spent researching opportunities, making connections and facilitating the right discussions. Automation eliminates the need for much of this activity – and is far more thorough and accurate in its targeting.
Certainly we should not discount the importance of the relational element. This can make a big difference to loyalty and trust. But some companies have already decided to dispense with this – for example, RBS (a large international bank) recently announced the elimination of its relationship managers for corporate clients.
For those in contracts or commercial management, this trend means that the old days of subservience to the account team may be drawing to a close. Already, many post-award contract managers find that they are often a key interface to the customer organization. Increasingly, there will be a need for practitioners to take a lead role both pre and post-award, depending on the nature of the issues and the specific customer interface.
The same factors actually apply with regard to supply-side relationships. Old assumptions that ‘the business’ owns the interface to its suppliers similarly make little sense. With the erosion of relationship management in general, those who anticipate an army of ‘Supplier Relationship Managers’ may be very wide of the mark. Account management is increasingly a discipline that focuses on data and analytics, rather than a job title.
Last week I was asked to present on the topic of ‘Contract compliance as a core competence’.
Compliance is not a new issue. It lies at the heart of all successful business because it relates to meeting commitments. So why has it become such a major item on the corporate agenda?
I believe the answer is because of trust – or in reality, the erosion of trust. This has been documented by a variety of researchers and it appears to be accelerating, especially with regard to the public view of corporations and politicians.
Some of this erosion is probably justified. Certainly modern societies have witnessed an erosion of loyalty and a growth in transparency, revealing many previously hidden secrets. Behind this lies the networked world, which has severed long-standing relationships and driven a culture of low-cost acquisition. Globalization has introduced many challenges regarding controls, ethical standards, effective jurisdiction – the list goes on.
In their eagerness to redeem their own reputation and to ensure some continued relevance, politicians have added to the confusion and mistrust by rushing to introduce or threaten new regulation, helping to create a compliance nightmare. Indeed, Stephen Covey estimates the cost to US business associated with this ‘lack of trust’ is $1.1 trillion annually – and that estimate was made in 2004!
Other research has found that the biggest single factor in engendering trust is a visible commitment to ethical business practices – though sadly it often seems that ‘success’ and ‘ethics’ become confused, when you consider how many highly admired companies have fallen from grace when the source of their success unravels.
An article in Psychology Today seemed to capture the essence of what a compliance system should be trying to achieve when it observed that “Trust is based on the perception that efforts between parties will be reciprocated, reactions will be predictable and produce a sense of security for the parties”.
So what part does the contract and contracting process play in creating this trust environment? Today, I would suggest it is frequently very little. In fact, the terms of most contracts and the way they are negotiated tends rather to reinforce the absence of trust through its tendency to be adversarial in style and focused on the terms and conditions that essentially say ‘I don’t trust you’.
It seems to me that our contracting process has to become far more expansive in its thinking. As a start, it might seek to better understand the likely causes of failure (non-compliance) and seek to address their root cause, both internally and externally. As a simple example, failure to achieve committed outcomes could be a result of lack of integrity or could be attributable to lack of competence. But since we tend not to distinguish these characteristics, we do nothing specific to guard against them. When it comes to business exposure, I would deem absence of integrity to be in general far more serious than lack of competence. Competence I can correct or make up for; integrity I cannot.
Best practice compliance systems are those which are capable of distinguishing the types and severity of non-compliance and far more adaptive in their means of addressing lapses. In the end, we come back to the point that corporations have inflicted severe costs and damage on themselves by dismissing the value of long-term relationships built on trust and founded on integrity.
In an interesting example of the growing use of gainshare arrangements, the US courts have given clearance to an initiative covering more than 100 hospitals in New York.
The legal review was based on concerns that the proposed gainshare program might prove anti-competitive and to address these there is a high level of transparency in the overall process. The gainshare applies to physicians and awards will be based on their efficiency and effectiveness in the use of resources, both relative to others and to their own performance over time.
I find the program interesting because it demonstrates the power of technology in allowing us to think in new ways about undertaking benchmarks and measuring performance. As companies seek better ways to determine the relative value being provided by their internal and external providers, i believe we will see increased use of programs like this. An interesting question is who will sit behind their development – for example, industry bodies or associations, software companies, analysts, major consultancies, or a new breed of service providers focused on supplying the information that drives continuous improvement?
And for suppliers, what exactly does this trend mean in terms not only of rewards, but also with regard to their performance obligations and the customer’s termination rights?
With all the focus these days on compliance, it is probably no great surprise that there is growing interest in review and approval processes. Certainly it is a topic about which an increasing number of IACCM members are asking.
With today’s automation, you would think that it’s become easier to route bids or contracts for review. And on one level, you would be right. But of course, effective review depends on effective analysis of who must be involved. Before that can happen, there needs to be a thorough understanding of the possible risks to be considered and questions to be answered.
Executives are often frustrated by the lack of ‘commercialism’ within their organizations. On one level, this is about creativity and new ideas; on another it is about general business awareness and the ability to think laterally. It is in this latter context especially that many review processes are lacking. They fail to consider the wider array of possible interests and issues – and in consequence do not ask the right questions.
At IACCM, we advocate an approach that is based on stakeholder analysis. It certainly helps if you have a list of possible stakeholders because there really are potentially many of them – internal and external. For example, many contracts staff tend to think only in terms of the ‘core’ reviewers from groups such as legal or finance. They may recognize others – sales, product management, operations. But often they will overlook the many groups that could have an interest in the contract or relationship they are forming – shareholders, regulators, other customers, competitors, suppliers, distributors etc.
Other groups or professions that have coordinating responsibilities face a similar challenge. Project Management is one of these and we found this useful summary of their thoughts on stakeholder identification in a blog on Prince2.com. Here is an extract that offers some useful examples of the questions needed to support review and approval.
What are the top tips for identifying stakeholders?
Questions can help direct and prompt ideas in the brainstorming process. Here are a few: who is affected positively or negatively by the project; who gains and who loses from it; who wants it to succeed and who wants it to fail; who has the power to make the project succeed or fail; who makes the money decisions; who are the positive and negative opinion leaders; who exercises influence over other stakeholders; who could solve particular problems; who controls or provides or procures resources or facilities; who has the special skills needed by the project?
How should you classify your collection?
You can categorize stakeholders in different groups, such as users and beneficiaries or governance and regulators. A stakeholder map can be an invaluable way to record who they are and their interest in the project. It’s also worth working out which are the key and which the minor stakeholders remembering that, as always, things can change – and that they usually will!
The reason that automation has not completely answered the need for review and approval is that an effective process demands active thought and intelligence. While rules and principles can be automated and routing can certainly be made far more efficient, there is also a need for analysis to ensure the specific opportunity has resulted in proper consideration of the potential commercial implications. It is a talent that any proficient contracts or commercial professional must have.
In a lead article, The Economist recently highlighted the Nordic countries and suggested they may be ‘the next supermodel’. Its Special Report then goes on to expand on the reasons for this focus. I was struck by the report because in my view, the Nordics are also leading-edge when it comes to contract and commercial practices.
The Nordic countries had their financial collapse some years before other Western economies. Their collapse came mostly in the 1990s, when the levels of taxation and public expenditure became unsustainable. Having gone through harsh reform in order to recover, they were left relatively unscathed by the financial crisis of 2008.
The Economist outlines many aspects of the social and economic reforms since that time and describes the egalitarian, consensual society that supports high levels of employment and a readiness to embrace change and innovation. The article concludes “The world will be studying the Nordic model for years to come”.
IACCM has strong membership within the Nordic countries and links to a number of universities and business schools (including some that come in for special mention in the Economist article). This is because the Nordics are also a center for innovation in contract management and a leading force behind ‘proactive law’. In line with their generally collaborative spirit, the Nordic countries have grasped that contracts are important and that, in general, they need to be balanced and fair – a framework that assists in building trust and governance. In addition, Scandinavia is leading in work on ‘visualization in contracts’ – that is, making it easier for users to understand them.
So if the Nordics truly do represent the shape of things to come in aspects of social and business organization, it is good to see that they take contract management so seriously and appreciate its contribution to improved success in the global market. It renews my confidence that the IACCM global community is on the right track!
Of all the many topics contained in the IACCM on-line learning program, there is one that stands out for student comment. Indeed, it arouses strong emotions – and almost always negative.
The section in question relates to a discussion of the options when negotiators find themselves at an impasse. Everything is resolved – except one item on which they just cannot agree. And one of the suggestions offered is ‘flip a coin’.
On the surface I can see why students may be upset by this idea (even though it is one of several suggestions). They feel it trivializes the negotiation process; they cannot see how they could possibly justify such action within their organization (except, perhaps, if they won) and they suggest it is simply a ridiculous idea that no negotiator would ever accept – so it should be eliminated from the training materials.
While understanding the reaction, the very fact that this idea generates so much heated debate is itself useful. I suspect if suggested in practice, it might assist the two sides sometimes to step back from their entrenched positions and reconsider the importance of the item on which they are stuck. After all, the suggestion here is not that we are talking issues of monumental principle – if that were the case, the negotiations would have broken down.
Given the reactions we have observed, I was very interested to see that the issue of tossing coin to reach resolution has been raised by the author of Freakonomics – indeed, research is now being conducted to validate the fact that this is often the best way forward when a decision can’t be made.
http://successfulworkplace.com/2013/02/01/tough-decision-flip-a-coin/
When it comes specifically to use during a negotiation, it seems to me that it would be validated in situations where:
a) The parties are agreed that there are two options, but neither is sure which would be better
b) The parties have distinctly different views on an issue that is significant, but both agree it should not be a deal-stopper and that they need to move on.
Would a sales representative ever try to mislead a customer? Yes, according to ICN. In an enjoyable article, they discuss the ploy beloved of technology companies “I’d love to say yes (to your negotiation request), but it would not be fair to other customers to set a precedent”.
I recall this approach from my days at IBM. It was used on pretty much every occasion, with the 1970’s anti-trust suit and settlement used as an excuse. And, the sales rep woould point out, “If I give this away, you are bound to wonder what other customers are getting, so actually my refusal to negotiate saves us both a lot of time and angst”. There was usually a comforting follow-on. “In any case, don’t worry what the contract says – we always do much more than the contract promises”.
It is in some ways surprising if technology sales people are still using this tired excuse to avoid responding to their customers. Though I must say that some buyers are no better (and this is a point ICN do not mention in their article). Many Procurement staff also lack negotiating authority and increasingly it is the buyer’s paper that forms the basis for discussion. So what do you do with a buyer who denies the ability to alter terms and then says: “This will have to go to Legal and that takes at least 6 weeks to turn around”? Of course, no sales person wants to face that delay so they fight tooth and nail to get their company to accept the customer’s standard term, however unreasonable or inappropriate it may be.
In the end, many sales people are driven by speed. They want to close the deal – not just because they want their commission, but also because they have targets, they know that delay can cause a change of mind and until the deal is closed, they are always open to competition. It is these factors that make them averse to most meaningful negotiation, no matter what its source. They do not want to have to go back to their internal staff groups to push for a contract change. It takes control of the deal out of their hands and creates a high degree of unpredictability.
So just as buyers often fail to focus on value (because they are driven by price savings), so sales people often fail to structure the best contract. In the end, it is down to measurements and time, rather than any evil intent.
I am sure the analysis into Boeing’s problems with the Dreamliner will continue for some time. At present, there seems to be a growing consensus that ‘outsourcing’ was to blame.
My understanding is that management in the 1990’s was reluctant to commit funding to new aircraft development – especially on the scale needed for a concept such as Dreamliner. This resistance was overcome through a creative suggestion – to outsource almost 60% of the work to external parties and thereby slash the investment required from Boeing.
For the finance executives, this was an attractive solution. However, it seems that there was inadequate thought given to the implications of managing a portfolio of outsourced suppliers. This model was not the same as traditional procurement or project management. It required an organization capable of managing commercial relationships, equipped with the skills and tools to integrate across multiple stakeholders and ensure alignment of performance.
My suspicion is that Boeing did not make the investments needed to manage this complex network of relationships. It most likely relied instead on traditional skills that lacked the insights or the flexibility needed to succeed. This was probably a classic case of failed ‘commercial assurance’, driven by over-reliance on technical and financial skills, coupled with contract managers trained in standard administration procedures.
As a footnote, it is interesting that during the years in which development took place, IACCM received several approaches from teams in Boeing who wanted to join its member network. I can only assume that they were unable to generate top management support. To this day, Boeing remains the only major aerospace and defense company that has no links to the worldwide IACCM community. Of course, that may be just a coincidence, but equally it may be that Boeing management did not grasp the importance of developing process and talent that enables a new approach to trading relationships.
In the end, I doubt that outsourcing itself was the problem with Dreamliner. It is more likely that senior management simply did not grasp the organizational and operational consequences of an outsourced development model and therefore lacked the skills, tools, insights and management system needed to achieve success. If that is the case, they will certainly not be the first to learn this lesson.
So will Dreamliner kill outsourcing? I think not. There truly are economic and commercial benefits to be gained from outsourced relationships – but they can be secured only when there is organizational adjustment capable of overseeing this business model.
Commitment Matters 