In the publication Logistics Viewpoints, Adrian Gonzalez has written an excellent article on supply chain risk. He highlights some examples of the many and varied risks that confront today’s global business operations and calls for management to “make thinking about supply chain risk part of the corporate DNA”.
I certainly agree with Adrian that the quality of risk assessment and management needs to improve. He has identified a series of ideas and ‘best practice’ initiatives, but I think these overlook or ignore a few key points.
- Adrian correctly suggests that there should be greater financial analysis of risk and he cites the finance and insurance industry as a point of reference. I fully agree that one of the problems for business today is that functional silos have resulted in far too little overall commercial analysis. Finance is left to accountants, rather than being seen as fundamental to the operations of every business group. It is also the case that financial analysis is far too focused on individual deals or relationships and fails to look at risk portfolios. But to cite the financial services and insurance industry as one where ‘ managing risk is a core focus and discipline’ seems to me to rather ignore recent reality. Have we forgotten the financial collapse that underlies so many of today’s supply chain risks? Should we overlook the rogue traders, the weaknesses in compliance standards, the impact of ill-considered incentive schemes? And what about the constant need for regulation, including around supply risk, or the frequent headlines about regulatory breach? I think we need a rather different model on which to base the future!
- Building on the point I make about portfolio analysis, one reason that organizations are making such slow progress is because risk management is frequently positioned as n issue of resource and expertise (therefore an expense) rather than as an issue of business intelligence (and therefore an asset). Armies of risk managers scare the life out of top executives because they tend to strangle the business. Sadly, risk gurus often lack the incentive to make themselves redundant. What we really need is far better insight to the actual causes of risk, the things with a high probability that can be eliminated. Many examples of these have been highlighted in IACCM research; the real issues with supply chain management are weaknesses in defining requirements and scope, of managing change, of ensuring open and honest communications and clear allocation of responsibilities. They are also about areas such as performance management (or the lack of it) and developing contracts that share risk, rather than seek to allocate it to other parties and thereby ensure it is obscured.
- Improved supply chain performance carries a premium – and buyers are consciously choosing not to pay that premium. If they really cared about supply chain risk, the solutions are available today. They can select more reliable suppliers, they can dual source or identify alternatives, they can develop internal supply management resources to oversee outputs and outcomes, they can increase insurance. But each of these options carries a cost and there is no evidence that organizations are willing to bear those costs. Indeed, fundamental to improvement is the idea of greater collaboration, yet the actual behaviors of most Procurement organizations continue to undermine trust and place little value on cooperation.
In the end, the argument for improved supply chain risk faces a massive hurdle. Why would suppliers invest in the enhanced capabilities that Adrian identifies if the message they get from their customers is that price is the only thing that matters and loyalty is for idiots? Companies today are essentially saying they don’t want to cover the costs of largely unpredictable events – they will take the lower prices, shop around for alternatives and self-insure against the consequences.
As recently as 140 years ago, it was argued that science was not a professional field and that teaching of sciences in schools or universities would have little value. The cognoscenti of the time believed that there was no merit in learning method or techniques; the advance of science depended on enquiring minds, which would best be achieved through training in the liberal arts.
As society has emerged from that narrowness of thought – and indeed arrogance of established experts – it has increasingly recognized the merits of ‘professionalism’. That is, the value of developing levels of expertise through a combination of research, universal and established techniques and a documented and teachable body of knowledge.
There are few today who would question the need for training scientists. But as we look at the field of contract and commercial management, it is at a similar crossroads to the challenge facing scientists in the 1870s (or indeed of professional accountancy in the 1880s or project management in the 1980s). There are acknowledged experts in contract and commercial management, but they have all emerged from a background in other disciplines and many still argue that this is the route to the future – that you become expert through an enquiring mind and ‘liberal’ training, rather than through specific teaching in the commercial discipline. Some go so far as to deny that contract and commercial management can be taught. Quite recently I attended a meeting where those who should be leading professionalization were instead insisting that this is not a field for undergraduate study.
Within this blog, I have consistently illustrated the case for improved contract and commercial management. As with science, a growing body of research increasingly points to the value that professional standards could deliver. A growing number of senior executives have grasped this point and they are frustrated by the the low quality of practice within their organizations.
The years ahead offer a time of great opportunity to the contracts and commercial community and in particular to those individuals who grasp the chance for professional leadership. For some, that may mean increased commitment to volunteering their time and effort in raising the profile of the community as a whole. For most others, the start point will be a resolution to raise their personal standards by gaining certification and operating in accordance with the methods, techniques and body of knowledge critical to any high-status profession.
“The question of incentives is fundamental to economics.”
This statement comes from a working paper published by Harvard Business School “When Good Incentives Lead to Bad Decisions“. As any mature contracts or commercial professional knows, incentives play a major part in shaping the way that bids and negotiations are managed. When pitched wrongly, they frequently lead to delayed involvement, withheld information and poor judgment. This observation is reinforced by the working paper, which reports on research findings that were based on loan decisions using three distinct incentive models.
Not surprisingly, incentives that were based entirely on contract closure led to a much higher level of accepted risk, with a 5% detriment to overall business profitability. Rewards that included consequences for actual performance led to a more conservative approach – and a 3% improvement in profits. These findings are unlikely to surprise many contracts professionals (who would point out that it is both Sales and Procurement incentives that currently distort behavior). But there are some other interesting points that emerged:
1) The scale of the incremental reward / claw-back for performance has to be quite large before it has a strongly beneficial effect.
2) The timing of payment is also key. Significant delay in granting the incentive reduces the impact and the quality of personnel.
3) The incentives appear to have a direct impact on judgment, more than on moraility. In other words, people did not make bad decisions just because they wanted to gain immediate reward; an incentive scheme that provided immediate reward instead leads them to believe that things are less risky than they truly are.
A problem with changing the system is that, while the effct on profits muight be positive, the impact on revenue would most likely be negative. Also, in circumstances where one company changed to a more balanced risk – reward system while its competitors did not, it might lose many of its most talented dealmakers, who would be incented to move to a less risky sales environment.
IACCM surveys have revealed growing stress on the part of many contracts and commercial staff.
There are a number of factors contributing to this situation and they vary somewhat between organizations. For example:
1) The general economic uncertainty affects many, but not all, member companies. Some are struggling to maintain revenues and in many there is unrelenting pressure to cut costs.
2) The struggle to retain market share while at the same time cutting costs can bear heavily on contract and commercial groups, since they are under pressure to find ways to support new business while at the same time performing with no addditional resource. Across the board, most legal, commercial and contract management teams indicate steady increases in workload.
3) As at any time of pressure, management is unrelenting in its questions over value and its expectations of ‘doing more with less’. For some groups this has led to major changes in role, status or process. They feel threatened and insecure.
4) An on-going problem is the feeling in many practitioners that they lack strong functional leadership. Many heads of function appear to have reached their position because they were excellent dealmakers or practitioners; that does not necessarily equip them well for the politics of senior management. A large proportion of staff feel their leaders lack the strategic insight and networking skills to keep them safe.
These concerns are by no means limited to the contracts and commercial community. Studies related to most business functions reveal similar insecurities about the future. Many argue that we are on the brink of fundamental realignments in business organization and that these stresses are inevitable.
Should the contracting community be especially nervous? I think that they are right to worry about their strategic positioning and the understanding by senior management of their value. But I think they should be optimistic about the future, so long as they grasp the importance of developing a clear vision and message associated with the delivery of that value. Right now, there is too little commitment to raising professional standards or doing the things that ensure the function’s competitiveness in such a dynamic business environment.
So for a New Year resolution, I would be determiend to invest in my own future (i.e. become certified, participate in working groups, expand my network and visibility); I would be pushing functional management to develop and explain the strategy for contracts and commercial excellence; and finally, if I felt that my company simply would not progress, I would be researching those organizations where the role is understood and valued. There are plenty of them – and stress is not inevitable!
Earlier this week I attended an excellent seminar on Innovation in Thought Leadership, conducted by Meridian West, a company that focuses on professional services (and advises many leading law firms on their marketing and value-add).
Among the many interesting items that were covered, there was a section that highlighted eight ways to grab management attention through thought leadership offerings and reports. Many of these have great relevance to business functions (Legal, Procurement, Contract or Commercial Management). Of course, i reviewed them in the context of how well IACCM is doing in addressing the topics – so I have illustrated the different areas with examples of IACCM reports.
1. Future gazing (eg Future of Contracting)
2. League tables (eg Most Admired Companies for Contract Management, Most Admired for Negotiation)
3. Gap analysis (e.g. team and individual skills assessments; process maturity assessments)
4. Individual function / job role (with so much change there is universal uncertainty so predictions of how things will look are of great interest)
5. Business sentiment (infographics – our State of the Global Economy reports did this)
6. Benchmarks of performance (eg maturity assessment, IACCM benchmark reports)
7. How to …. (reports that tackle things like ‘How to do business in Russia’ or ‘Best practice in cloud computing’)
8. Breakthrough models (eg Relational contracting study and implementation guide)
Another key aspect of the message is that simply relaying high value data is not enough; attention spans today demand that there is direct interpretation into specific ‘calls to action’.
The session will change some of our approaches at IACCM. But I believe it contains some key messages and tools for functional leaders everywhere, as they vie to deliver value and raise management appreciation of their team’s contribution. As a result, I plan to work with Meridian West to deliver some executive roundtables, in which we can share ideas and inspire our community to action.
The sad consequences of the recent hoax call to King Edward’s Hospital in London have featured on world media and inevitably led to widespread discussion. Something that has struck me in the course of my conversations is the extent to which cultural background appears to affect opinions.
As someone raised in a society that finds pranks amusing, I see the actions of the Australian DJs as perhaps misjudged, but certainly not malign. Indeed, if anyone is to be blamed, it is surely the executive managers of the radio station who appear to have approved such behavior. But this type of hoax is by no means unusual in countries such as the UK, US and Australia and had it not been for the subsequent death of the nurse who took the initial call, the event would already have been forgotten.
In my conversations with friends from around the world, I have come to realize that the concept of such hoaxes is simply alien to their culture. They cannot understand why anyone would want to play a trick of this sort and see it as cruel, not funny. As a result, if they were themselves victim of such a call, they would feel a terrible burden of responsibility for having trusted the hoaxer.
As I think about this in the context of global communications and negotiations, it makes me realize just how little many of us understand about the way that the nuances of language and behavior may be perceived by those outside our culture. Indeed, it also leads me to wonder how often I may be misinterpreting the intent of others.
This week I am in India, where we are running an IACCM workshop on Contracting Excellence.
Yesterday we reviewed a number of recent newspaper headlines that illustrated the costs associated with poor contracting. Workshop participants explored the underlying causes and the role that contracts / legal professionals should be taking to reduce or eliminate them.
As if wanting to illustrate the importance of this workshop, ‘The Times of India’ has featured contract issues on its front page twice this week. The first related to action by the Government of the Maldives, revoking a $500 million contract with GMR to build a new airport. Today, the headline relates to a hospital and its gas pipeline system. Apparently there was a failure in oxygen supply which has resulted in the death of four patients.
The article carries a sub-section entitled ‘Blame Game’ – a term familiar to any contract manager. The supply and maintenance of the hospital’s gas pipeline had been contracted to an outside supplier since 1998 – but according to that supplier the operational contract expired in October 2011 and the maintenance contract in October 2012. As a result, they had started to reduce the number of staff deployed at the hospital and were threatening to withdraw all personnel. The hospital claims that it had given verbal assurances of extension and that necessary funding was sanctioned 3 weeks ago.
The precise truth of the matter will doubtless emerge over time, but the story clearly indicates the importance of contract management discipline and the potentially fatal consequences when it is lacking.
Earlier this week, I was reminded of a survey that IACCM undertook a few years ago exploring member attitudes to negotiation style. One of the key discoveries was that almost half were not even aware of the ‘positional’ and ‘principled’ terms that were used in the seminal work on negotiation, ‘Getting to Yes’.
The reason I re-discovered the study was because of a question from three MBA students at the Norwegian School of Entrepreneurship, who are studying what frameworks business managers and negotiators use when planning or conducting negotiations.
On reflection, I had to admit that I don’t spend much time thinking about these questions of style, because I believe most b2b negotiations tend to be a hybrid. Also, a discussion of preferred style seems to imply far more planning by the average negotiator than is really the case. In my experience, they are more often driven by the broader policies and practices of the organization than by any personal propensity for negotiating style. So, for example, if the company operates with strong ‘powers reserved’ by specific functions, the style is largely one of stone-walling.
Many large businesses appear driven more by concepts such as avoidance, assertion or compromise. Value trading tends to be eliminated because of management and measurement systems.
Also, we have to bear in mind the fundamental shifts that there have been in business operations in the last 15 years, none of which are adequately reflected in current literature. Specifically, the globalization of trading relationships and the intervention of networked technologies have fundamentally changed the framework for negotiation. Things like e-auctions have altered the playing field for negotiability; communication technologies and distance have made most negotiations virtual; the growth of specialisms has rendered negotiation far more defensive and iterative (rather than holistic); and procurement practices have eroded trust and loyalty between trading partners. In addition, ERP systems have created a set of enterprise standards that create complexity for one or both sides – the challenge of ‘what happens when ERP meets ERP’.
Overall, the nature and scale of complexity that faces negotiators today means that the rationality implied by concepts such as ‘positional and principled’ just doesn’t exist. Even if I want to be collaborative and open, the barriers to achieving it are often simply too great. In either preparing for, or observing during, a business-to-business negotiation, I have to understand not only the personal character of the various negotiators, but also the measurements that motivate them and the ‘organizational culture’ that will eventually affect not only this negotiation, but also the subsequent performance of the contract. It is a complicated mix – and rather defies the theories of specific style.
“The function must re-invent itself or it will not survive”.
That was the view of one supply chain academic at an executive forum i attended last night in Germany. The audience – primarily current or former Chief Procurement Officers – appeared to agree. Indeed, one made an analogy with the Pony Express, put out of existence almost overnight by the final link being made in a new technology, the telegraph.
It was in this context that the forum was wrestling to address questions over the future role and purpose of the Procurement function. They did not doubt the need to buy things; they simply wondered what need there would be for ‘a profession’ to oversee the process.
While it is certainly possible to redefine and extend the role that today’s Procurement practitioners could play, there are at least two major challenges. One, of course, is the nature of the skills or knowledge required, relative to those held by the incumbent community. The other is the openness of others in the business to the expanded or altered role that is envisaged. In this context, the issue is not only whether they feel the activities need to be undertaken, but also whether they view Procurement as the right place for them to be done. Given that many other functional groups are also busily redefining their future role, there is potentially a lot of competition.
The organizers of the forum had undertaken considerable research – and it did not appear to offer a comforting message. Specifically, even in those areas where Procurement executives believe there is potential for the function to expand, there appeared little receptivity by other parts of the business to allowing them to do so. Indeed, the best hope was in shifting to a more holistic role in determining total business cost associated with purchasing decisions, yet even here there was resistance by the Finance executives.
So in the face of the dramatic shifts in technology, where exactly will Procurement find itself over the next few years? Will the function indeed suffer the fate of the Pony Express?
Commitment Matters 