Today’s networked computing offers much faster and more extensive access to data, but does this have practical application, especially in a field like contract management?
Many believe the answer is yes, but to date the evidence of effective application is limited. There has been some improvement in risk assessment and benchmarking, but this is not yet pervasive. A few legal and contracts organizations are starting to collect data and undertake analysis in areas such as timing of engagement and cycle times, or causes of claim and dispute. These retroactive analyses are proving useful in the delivery of value and the data certainly raises the profile of the function, because it contributes to policy and process rather than simply reacting to the frustrations of others.
How much further could we go? This week’s Economist magazine offers some insights. In ‘Micro Stars, Macro Effects’, it highlights the growing influence of economists on the way business decisions are made and markets work. It offers examples such as managing internal use of internet bandwidth as a means to contain costs and optimize market prices. Another relates to research on how honest we should be with potential customers about possible flaws in our products or services (for those who wonder, the answer is that greater honesty raises the probability of a sale and an increase in the price realized).
Both of these examples have very clear application to the world of contracts and commercial management. They demonstrate the importance of starting to ask new questions, to challenge old theories and practices. But going a step further, what information is hidden within the contract or contracting process that could assist improved business and market management?
In a third example, the Economist article cites the extent to which policymakers are always reacting to events. Data such as GDP growth, unemployment and inflation rates are typically lagging reality by weeks, if not months. Economists suggest that this is simply because we are failing to change the way we record the indicators. At Google, they have initiated real-time monitors on key words such as ‘job’, ‘benefits’ and ‘solitaire’ and have discovered there is almost complete alignment with the (eventual) unemployment data published by the relevant ministries.
So how might real-time monitoring of contracts change our insights? I think the impact could be considerable. For example, analysis of key words or demands in bid requests or capture of trends in negotiation (rigidity on price, growing concern over specific terms and conditions) will often indicate broader market sentiment – are customers tightening belts or pushing towards growth? Are there specific risk concerns rising to the surface? Are changes in competitive offerings impacting expectations? We know from IACCM’s annual (retroactive) study of the top negotiated terms that such trends exist, so why not capture them in real time and start to review internal policy, practice or offering capability as a proactive measure? Now, that would be revolutionary.
A quick look at the Appointments pages, or a glance at salary surveys, would seem to provide a rapid answer to this question. Being a practicing lawyer is clearly a far better career choice than contract or commercial management. Right?
Not according to two senior in-house counsel that I interviewed yesterday. Both come from large international corporations that employ several hundred legal and contract management professionals. And both – one a General Counsel, the other a VP of Legal – told me that they believe the contract management role is steadily becoming far more important than that of the lawyer.
Of course, neither was suggesting that the law profession is about to go into massive retreat. And both see contract management as a future direction for many qualified lawyers. But their observation of business needs and trends has led them to conclude that Contract Management will be a critical function for 21st century business, ensuring not just the integrity of pre-award processes, but ensuring the delivery of commercial benefits.
But if you are a contract manager, don’t start celebrating yet. You can’t simply sit back and wait for that promotion or increased recognition. The role that is being described is broad in its skill requirements and demands a role and contribution that only a few would match today. Legal understanding is certainly part of it; but as was demonstrated in IACCM’s recent ‘Future of Contracting’ study, the role must encompass solid financial and risk awareness, a grasp of project management disciplines, market and business intelligence as well as softer skills such as communications, analytical, problem solving and negotiation. It demands true ‘solution providers’ who are not focused on transactional ‘fixes’, but are bringing sustainable improvement to business performance and competitiveness.
Both of the organizations that I interviewed are investing heavily in building and developing these capabilities. They see an urgent need for greater engagement by the university sector, so that contract and commercial management are seen as viable career paths by the school leaver and the graduate.
With so many lawyers now entering the market, a growing number are converting to contract and commercial management roles. But in future, I believe we can expect a real choice, where individuals train to become contracts or commercial professionals, rather than falling into the role from another business discipline.
There are times when my conversations yield recurrent themes and during the last few days, performance management has been a recurrent topic.
It began with a study I was asked to review, which yielded insight to the current state of contract performance oversight by Procurement. The results confimed that for a majority of organizations, performance management is more about conducting a post-mortem than it is about generating better results. While some large corporations may have invested in a more pro-active approach, they appear to be the exception. In most cases, Procurement is not even involved in performance oversight unless they are called in or unless it is part of a contract close-out process. In both cases, interest only seems to arise when things are badly wrong and someone needs to be blamed.
This experience led me to pay added attention when people started talking about ‘obligation management tools’. Strangely enough, this term occured several times this week during meetings in Germany and Switzerland. As complexity grows, as the frequency of change increases, and as long-term outcomes become a point of greater focus, the importance of capturing, monitoring and amending ‘obligations’ becomes ever-more significant. In addition, effective obligation management requires clarity over roles and responsibilities; it isn’t enough just to know what needs to be done, it is also critical to know who is responsible for doing it – and that is one of the key weaknesses that emerged in the performance management report I mentioned earlier. Far too often, the allocation of tasks is far from clear – convenient when it comes to handing out blame, but not good if you actually want to succeed.
Of course, if we have reliable obligation management systems, we can be more effective in overseeing performance. So this has set me onto a search for effective obligation management tools or systems and I will comment on those in a future blog. But another link in the chain of obligations and performance is the corollary of poor management – claims and disputes. And this was another topic that kept arising. In several presentations I attended, there was emphasis on the growing importance of good claim and dispute procedures. In these hard economic times, it seems that companies are paying increased attention to their contractual rights and obligations, at least when it comes to making money or cutting costs. So they have become more robust in their readiness to issue or fight claims. Of course, one might argue that it would be smarter (and long term more cost effective) to invest in improved obligation and performance management rather than engaging in battles over what went wrong.
Today I am chairing a CFO conference in Geneva. My interest in doing this (apart from my own background in Finance) is to continue efforts in raising CFO awareness of the important contribution that improved contract and commercial management can bring to bottom line results.
In listening to the various presentations and discussion forums, I am struck by the similarity of many of the lead topics with those at contract management events. For example, one head of Audit and Risk highlighted the need for Finance to look beyond cost and budget, to focus instead on value. He gave an excellent example, where a project came in on budget, yet was delayed by 3 days at a cost to the business of $1 million. Another conversation revolved around the importance of considering risk holistically; it revolved around the point that a concentration on risk mitigation tends to undermine potential results, especially when driven by specialists who may be unable to see the wider chances for off-sets or alternatives.
Another topical theme is that of cost reduction. Finance is also under scrutiny and needing to find ways to reduce its cost of operations. Within this, it must determine how to deliver the right balance of operational activity, reporting and strategic support. The challenge is familiar and indeed the approach to analysis is similar to that which should be going on within any contracts / commercial / legal function. However, in listening to presentations, it strikes me that many of these functions are far behind Finance in their reengineering efforts and their understanding of value delivery. Often, we appear stuck in the low-value operational mode and have yet to grasp the importance of turning transactional data into substantive management reporting and ultimately a strategic contribution. Finance is one of the leading functions when it comes to the outsourcing of its work, or creation of shared service units. Now they are focused on ‘Finance Competency Centers’. No wonder there is growing impatience on the part of many CFOs about the unreformed nature of the contracting process and resources.
So while I believe there is an important message that we can deliver to CFOs, I also appreciate that we must learn from them when it comes to putting our organizational house in order. Perhaps they would be more inclined to hear our calls for greater commercial awareness if they felt we had grasped the principles of added value in our own service delivery.
I will expand on this topic in a future blog where I lay out some of the analysis used by Finance which I think those in contract management could be using in our own organizational and process design.
The Contracts and Commercial Mission
Good contracting starts with defining the best form of relationship to achieve the desired business results. Since ‘the relationship’ will often continue well beyond contract signature, it is essential that the parties include governance principles. Negotiators should think in three phases – first, relationship models; second, contracting models; and third, communication models. Traditional Procurement and sourcing processes focus on price, rather than value. They are built on assumptions that ‘suppliers take advantage of us’. Many suppliers, on the other hand, feel that customers are ‘confused about what they really want’. This stand-off frequently results in poorly established relationships and a failure to focus on ’value extraction’.
In the future, contract and commercial management will be measured on its ability to deliver growth and value. That demands involvement throughout the contract life-cycle. Since resources must be contained, this enhanced role will be enabled through extensive automation and outsourcing of transactional management; commercial resources (buy-side and sell-side) will provide an integrated overview of market conditions and trading relationship performance. They will identify business inhibitors and propose the changes to policy, practice, procedures and terms that enable competitive advantage and financial performance.
Contract and relationship management must integrate in order to deal with the growing complexity of today’s trading relationships. This transition will face obstacles and challenges, among them is the need for different skills among procurement and contracts staff; another is a shift in measurements; and a third is to address the challenge of organizational models and perceptions – in particular, to determine the connection between relationship management and contract / commercial management.
This blog is based on the conclusions from an IACCM report on the State of Contract & Commercial Management. A full copy is available on request to info@iaccm.com
The Apple lawsuit complaining that the charges being levied by Google / Motorola for use of patents are ‘excessive’ has been dismissed. Meanwhile, in Germany, Apple succeeded in a lawsuit related to Google / Motorola mobile devices which led to their withdrawal from the market. In a similar multi-national battle with Samsung, Apple achieved a much-publicized victory in the US courts, winning substantial damages (though now on appeal for more); but in the UK, a different suit by Apple against Samsung was rejected and Apple has been forced to issue a public notice withdrawing its claims of infringement.
The list goes on – and it becomes hard to see who really benefits from this battle, except law firms. Behind it, there appear to be two particular strands. One relates to patents that resulted from genuine research and development; another relates more to general product characteristics – the more nebulous question of specific design. For example, one suit related to the shape of the corners.
As suit and counter-suit develop, one has to wonder to what extent this conflict is simply part of a protracted negotiation, with each party trying to establish power. For example, will Google now compromise on its pricing in return for Apple backing down in Germany?
Another noteworthy aspect is that these high-profile law suits are predominantly between major US corporations (Samsung is clearly an exception). This is interesting, given the years of publicity we have had about the patent and copyright abuses that come from the East. It seems the real enemy – at least in these technology wars – remains in our own backyard.
Two recent articles on globalization highlight important issues for contracting and commercial management.
One (http://www.strategy-business.com/article/00139) continues the assault on Thomas Friedman’s influential book, “The World is Flat”. IACCM challenged the Friedman vision from the outset, suggesting that the emerging world for business was in fact ‘spiky’. By this we meant that there was great unevenness in the process of globalization and that increased openness would also result in growing tensions between countries, trading blocs, political elites and social or religious groupings. We went on to suggest that far from creating uniformity, businesses would be forced to become more sensitive to diversity and that this would demand new forms of market segmentation.
This ‘spiky’ vision is indeed proving true and this has significant implications for how we approach commercial management and contracting. For example, it has become essential to develop a portfolio of contract models that are sensitive to different relationship needs and types. Without this, businesses are forced into long cycle times, contentious negotiations and a level of non-standard terms that generate heightened risk of non-performance and heavy cost burdens. Contract and offering design must today be multi-dimensional – global, regional, local and trans-national, to cover not only trade blocs, but also customer segments that traverse traditional boundaries.
In the early days of globalization, companies believed that they could standardize terms and processes, developing universal templates and imposing rigid compliance policies. In many ways, this was necessary to overcome the uncontrolled diversity of previous multi-national operations; but today, it has become an impediment to doing business and to remaining competitive in the face of new competition. Hence we are seeing a new and more inclusive ‘center-led’ model that ensures oversight rather than rigid control and which collects data rather than suppressing it.
These changes are reflected in an upsurge of interest in international contracting. Whether it involves dealing with local subsidiaries, agents or distributors, or direct with overseas suppliers or customers, there is a new appreciation of the need for sensitivity to local norms and customs, as well as legal requirements. As a result, there is rapid growth in the number of members using IACCM’s global resources, networks and learning materials. Once again, it confirms that contracting skills are increasingly about knowledge, judgment and the management of change, rather than the creation and imposition of inflexible rules or inefficient case-by-case negotiation.
The recognition and sophistication of contract management varies substantially around the globe. As my previous blog indicated, in some countries and industries it is still viewed very much as an administrative discipline, yet in others it has evolved to being a strategic capability.
Top companies understand that they must perform on their contracts, whether buying or selling. But they have very different approaches to their management of performance – and high on the list is the variation in how much visibility senior management actually has into its contracts. A majority only know when there is a major problem; the minor issues, the day to day erosion of value or savings, is not something they see or hear about.
Most organizations have invested substantially in the quality of their sales process and their procurement organization. Together, these yield promises of revenue or savings. Yet without a robust contracting process, companies fail to optimize both revenue and savings; and they suffer signifincant erosion in the subsequent delivery or acquisition cycle. Good contracts ensure that commitments are achievable; they also ensure that value trades are made through intelligent negotiation; and they establish a robust governance and performance framework, which includes active monitoring of the output or outcome.
It is encouraging to see growing understanding of the need for a contracting system that ensures enhanced performance capability. At IACCM, we witness this as a result of our worldwide operations. It is evident in growing skepticism about traditional approaches to Procurement; it is evident in growing discussion over the tools and the timing for commercial intervention in the sales process; it is evident in teh number of countries in which investment is being made to build contract management skills. A recent example is a survey of Hispanic countries undertaken by IACCM member Pablo Cilotta, which reveals a strong demand not only for increased member meetings, but also for formal training. We observe similar trends in India, Indonesia and Africa.
Management hunger for better business performance is increasingly reflected in their readiness to invest in contract management.
It is about three years now since Professor Leslie Willcocks of the London School of Economics wrote about the growing importance of contract management. He outlined the evolution of the discipline, which started with ‘contract administration’ and ended with a new era of ‘collaborative innovation’, driven by a fresh understanding of the role of contracts and the skills of commercial practitioners.
Professor Willcocks used an alternative term for contract administration; he called it ‘negativity’. That view was based on the fact that organizations which view contracts as purely administrative instruments lose the value that comes from a proactive and holistic approach.
I am writing about this today because on LinkedIn, Tony Yuan posed a question about the importance and influence of contract administrators. I suspect this was driven by a sense that the role should be gaining status, but often does not in organizations where it is seen only as a support function for the project manager.
Good contract management within a project is critical to its success. Indeed, this has been illustrated time and again in public sector audits of failed projects and in research undertaken by groups such as the International Centre for Complex Project Management, as well as the important findings of IACCM which has placed specific financial values on improvement.
A couple of the things that go wrong are:
– the absence of any over-arching contracting strategy results in tools, process and contract models that are frequently inappropriate for the nature of the project to be undertaken. That is not typically something any individual project manager can fix because it goes to the heart of corporate policy and practice.
– compounding the fact that the process and the contract often fail to offer the right framework is that many project managers lack rounded contract and commercial skills. A majority come from technical backgrounds and many have been led to believe that contracts (and those associated with them) are bureaucratic obstacles to getting the job done.
My list of issues could continue. But the truth is that many of today’s projects are far more commercially complex than technically complex. There are many situations where the project manager should in fact be providing support to the contracts or commercial expert, not vice-versa. For organization’s to flourish in today’s complex business environment, we must take note of the ideas of Professor Willcocks and others like him, who are calling for an end to ‘contract administration’ and the development of true contracting and commercial competence.
The contracts and commercial community is not good at sharing knowledge and this inhibits everyone’s performance. In spite of the tools we have available to us, most practitioners remain locked into learning either through their own experience, or from conversations with a narrow circle of current and former colleagues. Networked technologies are not a significant source of information or of testing ideas.
Th3se highly generalized observations come from my experience at IACCM, both observing utilisiation rates of message boards, learning communities etc., and based on conversations with senior management from our Corporate Members. Everyone agrees we could all be more efficient and mroe creative if only we would get better at sharing and communicating.
It is with these observations in mind that I enjoyed reading a recent blog in Logistics Viewpoints. Adrian Gonzalez described an occasion when he created a discussion forum and invited 25 supply chain managers to post their questions and to benefit from sharing ideas. Just two of them had questions to pose (he doesn’t mention how many replied). And it seems that this problem of low participation rates is endemic.
Adrian cites an article suggesting the core issue may be the inability of many people to ask questions. “Asking questions is a skill that many people lack”. I think this may be part of the explanation. Certainly some people are reluctant to admit ignorance or seek opinions or directions from others. But it does not account for why so few read the questions or provide feedback. The problem seems to be more about a general lack of participation than a lack of intelligent questions.
I have also observed cultural and (not surprisingly) generational differences. Younger people, raised in the networked age, are more likely to use technology to pose questions – though I suspect even they tend to do it within confined networks. Across cultures, the IACCM data suggests that countries where functional and professional expertise is still emerging are far more likely to use electronic methods of outreach and learning. India is perhaps the most obvious example, being a culture that also has the benefit of good English skills that facilitate engagement on international forums.
I would like to ask your opinion about why participation levels in knowledge generation are not higher – but of course you would not be a representative audience, since you are reading this electronic medium in the first place!
Commitment Matters 