Governments appear serious about levying more corporate taxation and this has significant implications to commercial professionals.
Since last October’s G20 meeting, there have been frequent public pronouncements by senior politicians. In the words of Jeffrey Owens, Senior Tax Policy Adviser at Ernst & Young: “Governments have given corporations attractive tax regimes – and now they want to see people complying with the rules.”
In reality, of course, they want more than compliance with the rules, since the issue appears to be related to moral judgment rather than strict legality.
On one level, this is just a traditional battle between stakeholders arguing over how the cake will be divided. But it is also part of a wider social debate over fairness and sustainability. For example, to what extent should a corporation contribute to the national economies in which it does business?
Creative tax avoidance has increased the profitability of many contracts. But now those approaches have to be measured for their possible adverse impacts on business reputation. In addition, those managing long-term contracts may face a decision to change tax assumptions during the life of the contract. For example, the royalty schemes or off-shore passing of title that minimized the tax bill may be abandoned or outlawed. What is the best negotiation strategy to deal with this uncertainty?
As emerging markets also get into the action on tax, companies will find themselves exposed to more varied and often unpredictable rules. Again, it is necessary to consider how such an environment might be tackled within the terms and conditions of contract.
At a strategic level, tax planning now has a need for much wider consideration and therefore becomes a key element of commercial thinking.
Following yesterday’s story that data security is the number one Law Department issue comes the news that it is ethics and compliance that tops the General Counsel’s list! The 2013 report by the Association of Corporate Counsel (ACC) tells us that 87% put ethics and compliance as their biggest concern, followed by regulatory and government change. Data and information security was also high on the list.
Senior legal staff find themselves expected to give increasing amounts of business and strategic advice – probably no surprise if the issues listed above are considered so important. Executives need help in navigating through the morass of regulatory and reputational risks that surround business today.
The good news for the law department is that most are gaining an increased budget,which is being spent on both more internal resource and greater use of external counsel. This finding reflects similar discoveries from a recent IACCM study of both legal and contract management groups. However, this increased focus does not always lead to greater job satisfaction – there has been a drop of 11% in those who enjoy their work. It is often demanding to find ways to reconcile the needs for improved ethics and compliance with the demands of a business that is still challenged by harsh business conditions and facing a struggle for growth.
Inside Counsel magazine recently reported that data security is the top issue cited by more than half of in-house lawyers. This was reflected in a conversation yesterday at the IACCM Board Meeting, where both lawyers and non-lawyers highlighted its growing importance.
The Inside Counsel article focuses on the need to understand the nature of the data possessed within a business and then to take steps for its protection. It concentrates largely on worries over regulatory compliance and reporting, so various forms of personal data lie at the forefront of concerns. Since some level of hacking appears inevitable, the advice relates largely to the steps needed to limit potential fines and to eliminate the need for reporting. Much of this revolves around encryption, but also the need to analyze data flows to ensure weak spots are identified.
At the IACCM meeting, perhaps because more of the companies represented are b2b, the focus was somewhat different. For them, data security was also about critical business data – product development, strategic plans, customer records. The concern is more around the exposure that arises from links with trading partners – the extent to which shared systems or information access creates a gateway to wider data loss. The implications of this force companies to consider a wider array of solutions. This includes terms and conditions that commit trading partners to appropriate steps and contain penalties for failure. It often incorporates some right of audit or validation.
But ultimately, terms and conditions are a relatively weak form of protection because the most likely reasons for data security breach are either because a trading partner lacks size and sophistication, or because it lacks integrity. And these issues will typically be fixed only one of two ways – that is, do the work in-house or select top quality partners who cannot afford reputational damage.
This week, IACCM‘s expert interview will be with Ben Kent, CEO of Meridian West. The topic is ‘Effective adviser-client relationships’ and discussion will be based on research Ben undertook, in conjunction with the Financial Times.
Although Ben’s research focused on the challenges facing professional advisers (law firms, accountants, consultants), IACCM recognized that these were often mirrored in the pressures facing in-house support groups such as legal, procurement and commercial / contract management. The demands for greater value, for better alignment with the business and key strategies are commonly felt.
Among the many areas of interest in the findings is the recurrent issue of ‘greater commercialism’. Executive management confirms its frustration with continuous messages related to risk, without practical solutions. They need advisers with a wider view, who do not simply instruct on the many things that carry substantial risk, but instead look more holistically across the various issues and compose a workable answer.
The fact that they increasingly expect this from external sources does not bode well for internal groups, unless they start to expand their awareness of broader market trends and competitive initiatives or weaknesses. Commerciality is on many executive lips – which is great news so long as groups such as legal, procurement and contract management focus on how they will respond.
Personally, I have always been fascinated by international trade. it has so many more nuances than domestic relationships, especially when it comes to the commercial and contractual implications.
Some in the IACCM community share this passion, but not a majority. However, I am seeing more and more signs of a shift in interest and sentiment – and the reasons for this are spelt out in a recent article in The Economist, “Gold Hunting in a Frugal Age.”
The article observes that ‘the age of austerity shows no signs of waning’. An obvious consequence of the crisis in the major traditional economies has been a growing focus on expansion into new markets. But that is often not a simple proposition. There are fundamental differences, for example in the level of infrastructure, in business practices, in social structure, in sources of funding and disposable income. So the underlying business offering and commercial terms may need major adjustment, as do the approaches to questions such as distribution methods, the nature of commitments and the management of risks.
Working through these factors to develop appropriate commercial practices and contracting models is itself demanding for the contracts community. But there is another angle that lies at the heart of IACCM’s ethos and which at the core of The Economist article. That is the need to look at emerging markets as a source of inspiration and new ideas. Established Western companies have to adjust to a world where growth may be tipped on its head; where customers are in a permanent state of cut-back; where traditional funding is no longer readily available. By looking at the challenges of achieving sales in markets where relative poverty is the norm, companies devise new offerings and approaches. They also learn to think differently about market segmentation and in ways to use technology to support innovative offerings or expand sales.
One key area for consideration is related to competition. Companies that are based in these emerging markets already understand how to deal with many of the complexities associated with ‘frugality’. In some cases, this will equip them in their emergence onto the global stage – so be ready to face new, low-cost competitors about whom you have never previously heard and know nothing.
Contract and commercial managers really do have an urgent need to develop their global understanding.
There are always so many interesting items in the news that are relevant to the world of contracts and commercial. I thought for today’s blog I would share just three that I spotted this morning.
First, The Economist highlights the growing squeeze on bribery and corruption. It hails the progress being made by the G20 group of countries and, while there are still wide disparities in enforcement, there are definite steps in the right direction. It goes wider than Government; consumer groups are increasingly vocal in exposing corruption around the world, with active web sites in countries such as Uganda, India, Liberia and Indonesia. Investors are also more inclined to scrutinize companies for anti-corruption compliance and the US FCPA and UK Bribery Act hold out the potential for large penalties. Industry networks, such as the Extractive Industries Transparency Initiative (with 70 members) are joining the push-back.
Second, there is the continued anger of citizens in a growing number of countries over corporate tax avoidance. The days of off-shore havens and preferential tax rates may be numbered, limiting the value of complex arrangements around cross-border management fees and royalties. These arrangements have also caused significant inflexibility in the way many contracts are structured, so these shifts could have real impact on how we do business.
Third, Europe has at last made some progress to simplify its patent system. Gaining an EU wide patent has until now been an expensive and time-consuming exercise, with the need to register in each country with a local language application. Registering a patent in Europe cost on average nearly $50,000, against less than $2,000 in the US. It still costs close to $6,000, but that is at least more realistic. Meanwhile, China overtook the US last year to become the country where the greatest number of patents was filed during 2012. The IP battle shows no signs of lessening….
Yesterday’s blog focused on process and suggested a number of questions we should be asking about its structure and effectiveness.
For many reasons – mostly political – we are all much more interested in organization than we are in process, yet defining process is a critical pre-cursor to establishing organization. Developing a high-performing process demands that we define roles (not jobs) and the skills required to perform those roles. Based on this analysis, we can start to define the optimum model for organization and the quantity and quality of resources needed for its performance.
Another key influence on organization is the business priorities and goals. These have significant effect on contracts and commercial groups, especially in where they find themselves reporting. So here are a few questions that may be interesting for you to consider:
- How well aligned is our organization with our process?
- Does our reporting line correspond with the goals of the business; are we able to perform in accordance with executive strategy?
- Have we effectively analyzed the balance between full-time contracts experts versus knowledgeable and empowered people within the business?
- Who should ‘own’ contract management as a function – where should it report?
- How should the contracts organization be measured?
- One or many? Is contract management an integrated capability? Should it cover both buy and sell within a single group?
Of course, IACCM has data (and opinions!) related to all these questions, but I would welcome your thoughts.
There is plenty of evidence that improved contracting delivers better business results. There are also strong indicators that senior management is increasingly interested in this topic and would welcome proposals for improvement. But at the practitioner level, these issues often translate into a perception that the only way to perform better is through the addition of more staff and by executive management giving the contracts or commercial function a mandate for greater power.
Neither of these things will happen – to some extent because they are unnecessary, but even more because they are not merited unless the function shows itself to have a stronger grasp of its future role and the extent of the value it can deliver.
Contracting excellence will occur only when contracts and commercial teams are ready to ask and answer some fundamental questions. In the next few blogs, I plan to suggest some of the questions we should be asking. It will not be an exhaustive list – the aim is to provoke some thoughts and get organizations started. I hope that readers will add their ideas for some of the questions we should be posing – and answering – if we truly want to secure our influence and business contribution.
I am starting with process. In my opinion, ‘contracting excellence’ demands a holistic, life-cycle approach that enables the creation, delivery and management of contracts and relationship models appropriate to the overall needs of the business. So here are some questions that seem to me worth pondering:
- Is there one process, or many, depending on the type of contract or relationship?
- What is the distinction between process ownership versus process accountability and how does this impact what you are trying to achieve?
- What is the purpose of the process; for example, is it about compliance, or commercial judgment, or controlled innovation, or all of these?
Over the next few days I will pose similar questions for other contracting topics – for example, organization, technology, change management, risk and the purpose of contracts themselves. Please add your comments!
I believe one of the key trends this year will be a growing focus on outcome-based contracting. There are already clear signs of this – for example, in the last week there was an article in the Wall Street Journal quoting the CEO of Novartis, who sees this as a key trend in the pharmaceuticals industry. In the UK, the Government has announced a new wave of outcome-based outsourcing contracts to support improvement in the criminal justice system. Across the professional services community, there is ever-increasing discussion about shifting from traditional hourly rates to payment based on outcomes.
The logic is inevitable. it is now 20 years since the big move towards ‘solution contracts’, in which suppliers started to take greater responsibility for the packaging of goods and services and entering commitments of inter-operability, even ‘fitness for purpose’. That marked a major departure from the ancient principles of ‘caveat emptor’ (Let the buyer beware).
But while such solutions represented a major step in the level of supplier responsibility, this still resulted in many acquisitions ending in disappointment. Neither side is blameless; both customers and suppliers could have taken additional steps to improve performance. However, one solution is to push even more responsibility onto the supplier and to make some or all of their compensation depend upon the output or outcome of the contract.
This has many implications and at IACCM we will be explaining these over the coming months. Among the challenges are the implications to funding and cash flow, the shift in measurement and motivation systems and the need for new systems for tracking and reporting. There will be many debates over what represents a fair price or charge relative to the increased supplier risk – and what rewards there should be for out-performing the committed targets.
Another major shift will be in operational management of the contract – the need for skilled resources, the importance of mutual tools and forums to oversee and improve performance. For the contracts and commercial community, this represents a major opportunity and it will be important that we are at the forefront in understanding such offerings and advising senior management about the implications and the steps needed to make outcome based contracts a success.
Yesterday I was talking with Barbara, an IACCM member, about her experiences climbing mountains. Having conquered Mont Blanc and Kilimanjaro, she will depart shortly to ascend Everest (at least to about 6,500 meters).
We discussed the nature of the people who undertake these feats and Barbara explained the extent to which their success depends on mental resilience and determination. She described people of advanced age, people who had limited physical strength, people who suffered badly from height sickness, yet they made it to the top. Many of the people who give up are younger, physically fit – yet ready to abandon the challenge at relatively low levels of personal discomfort. They also have some extraneous reason to account for why they gave up; it is never a simple admission of personal responsibility.
Although the physical demands of contract and commercial management have few parallels to mountain climbing, the mental demands often do, At a time of such rapid change and uncertainty, we all face tough challenges that require personal resilience and determination. These may be around tackling change within the business, or leading reform within the function, or perhaps of developing personal skills or credentials for the future. At IACCM, we see this through corporate projects, or member-led association initiatives, or individuals and teams embarking on professional certification.
As with ascending mountains, many never even reach base camp. Of those that do, a high proportion start the climb and turn back. They ascribe this to reasons such as lack of support or having too many demands on their time. Sometimes they simply dismiss the whole exercise as irrelevant or inappropriate to their needs. Whatever the excuse, the truth is that relatively few professionals have the resilience and mental stamina to pursue goals to completion unless there is someone behind them, forcing them along.
Looking at the needs of your business, your function or your personal goals in the year ahead, how many mountains will you have climbed?
Commitment Matters 