Yesterday I met with Mike Vernon, a partner in Consulting People. We were discussing approaches to risk identification and management.
Both of us have observed growing complexity in commercial relationships. Businesses are looking for faster, cheaper delivery systems. They are coordinating large, interdependent value networks. They are coping with fast-changing technologies that increase capabilities, yet demand rare skills. Overall, the environment is generating a wide array of risks, some of which are missed or not adequately understood. Others tend to be dismissed as things that will somehow get fixed during execution.
In practice, business executives will continue to jump into opportunities and relationships without full consideration of the dangers. That is inevitable and it is probably right – because the alternative would often be to have no business. But some of the risks can be far better anticipated and managed, while others are created by the current way in which risks are handled. Mike made a comment that I thought especially helpful – “Start with the end in mind”.
Risk assessment in most organizations relies heavily on the combined efforts of specialist groups and functions. The problem that this creates is that each group tends to see risk in a narrow context – which may even be highly individual. For example, some will focus on protecting assets, others may want to be sure that they would win in a court of law or can extract penalties. The risk driver for those in Procurement may be the need to demonstrate savings, or for Sales to get maximum commission. And many business unit executives care about winning the deal and meeting targets. Each of these is a valid risk issue and it has been generated through a management system designed to create counter-views and motivate varied aspects of performance. The problem is, how effective can such a system be at times of rapid change and in view of the unexpected complexity of today’s business conditions?
It seems to me that the traditional approach to review and approval is no longer effective for a significant portion of today’s more risky business dealings. It is not sufficiently adaptive and depends on historic knowledge and perspectives rather than forward-looking anticipation of problems and issues. In part, this is perhaps because functional groups tend not to think about the bigger picture. They do not always have the end in mind when they think about the risks or about how they can best contribute to a solution. If assessments started from envisaging the goal – satisfied users, repeat business, needs met, business performance and reputation enhanced – perhaps we would be better at extrapolating the steps needed to achieve those goals and then to identify some of the barriers or obstacles that will occur along the way. Certainly this might be better than the reverse-mirror view of predicting the future based on what has happened in the past.
The legal profession faces dynamic change. Over the next few years, the role of the lawyer is going to look very different from today.
In many respects, the legal profession has managed to resist the transformation affecting other professions for a remarkably long time. The impacts of technology on fields such as medicine or engineering have been far more dramatic. Yet as I wrote in my previous blog, much of the basic work of a lawyer can now be undertaken far cheaper and on an outsourced basis. forcing a re-think of many services. Compound that with demands for increasingly global intelligence plus the general disquiet over the level of fees and salaries, and you have irresistible pressure for change.
This pressure seems to be reflected in the announcement last week by US law-firm Weil, Gotshal and Manges (one of the top 20 in the US) that it is eliminating many of its junior lawyers and support staff and cutting pay for ‘under-performing partners’.
Among the many shifts that appear to be on the cards for the legal profession is the rapid erosion of the partner-model law firm and also increased integration with other professions, such as accountants, to offer a more coherent business service. But with so many law students still pouring out of universities and law schools, other changes appear inevitable. One of these is the likely move by many trained lawyers into the field of contract and commercial management – which is for many businesses a growing area of recruitment.
Today, legal training does not equip lawyers for this role, though of course their knowledge has some direct application. And since few universities produce qualified contract or commercial graduates, it is a natural home for a lawyer. Indeed, with contract management increasingly reporting to the in-house law department, there is a natural tendency to recruit qualified lawyers to the role.
In addition, law schools are waking up to the fact that they must expand their body of training and equip graduates to enter the world of business. With entry level jobs disappearing at an alarming rate, the need for action is urgent.
For IACCM, a consequence has been rapid growth of interest in our work from both law firms and law schools. Research, case studies and the underlying ‘body of knowledge’ that we have developed are suddenly very relevant for both new course content and new chargeable services. There is also increased uptake of our Managed Learning and certification program as lawyers seek a fast-path route to expanding their commercial competence.
Interesting trends indeed; but perhaps somewhat frightening for the largely unqualified, uncertified body of contract and commercial managers currently in business. Suddenly they face a whole new breed of competitors for their jobs.
“Chris can prepare your business/website terms and conditions for £199. In 24 hours you can have a gleaming new set of Terms and Conditions custom written for you. I just need to know your business type and anything unusual about it. I have dealt with just about every business type in my time and usually that’s all I need to get me started.”
This is an offer that arrived in my email today from a company called People per Hour. They promote a tremendous array of low-cost service providers – many of which probably work extremely well (we found our outsourced book-keeper, a qualified accountant, via this source).
It seems tempting to think about contract preparation this way. Low cost, doubtless a rapid turn-round. Yes, Chris needs a briefing – I must tell him my business purpose and any critical policies, practices or constraints. But I have to do that with any lawyer, so what’s the difference?
Well, of course I do not know the scope of Chris’s expertise. For example, what familiarity does he have with industry regulations? Does he know anything about international trade or foreign jurisdictions? How smart is he when it comes to topics such as intellectual property? But I could discover his competence levels with a few simple questions – and if all I really want is contract drafting, a fee of less than $300 for the finished product sounds rather tempting.
IACCM and its members have recently undertaken ground-breaking work in establishing the returns that can be achieved from improved contract management. Gone are the days when we have to rest our case on risk avoidance; the data clearly shows the scale of the impact on the bottom line – the real costs and revenue losses that occur when you don’t adequately manage your contracting process.
For organizations that are leading the way on raising contracting competence, clear targets are emerging – often running to benefits of several hundred million dollars. How they get there is quite simple. They start to look at contracts as a portfolio and identify the frequent sources of value leakage, the extent of the financial impact and then they take steps to plug the holes.
Since this work is still in process of gaining broad industry recognition, it is always helpful to discover other sources of data that confirm the original IACCM research. One of those is a recent report from EC Harris, a global consultancy in the building and construction sector. Their Contract Solutions and Construction Claims team has published the 3rd Annual Report on construction disputes and, I quote :
“All of the top five causes of construction dispute revolve around a mistake or failure, which makes them all avoidable to varying degrees. More specifically it is interesting to note that the causes are all directly related to contract administration”.
There are many features in common with IACCM research findings, though also some interesting industry or regional variations. I will expand on these in future blogs, as well as webinars in which we can discuss these findings and ways they can be avoided.
The real point is that research should be empowering contracts and legal groups to shift discussion in their business. It reveals quite clearly that today’s contracting practices are not an effective way to manage risk – they are actually a major source of risk.
With so much written about relationship management, you might think there is little more to say or discuss. Yet the body of underlying research is relatively sparse – and that is why I support some of the surveys that are undertaken to generate greater insight. (A current example is the annual State of Flux survey on Supplier Relationship Management – see more below).
Yesterday I was at IMD, Europe’s top business school, teaching on a program with James Henderson. Our topic was ‘Strategic Partnerships for Competitive Advantage’ and the audience was a large group of executives drawn from many world-leading corporations. As the title implies, this group buys in to the idea that ‘partnering’ matters; and implicit to partnering is some sort of ‘relationship’.
The class started by looking at collective experience that compared good, high-performing partnerships and those that had failed, or delivered disappointing results. The distinguishing characteristics were clear – clarity over mutually beneficial objectives, transparency between the parties, commitment that is sustained over time, common values and common view of the future, clarity over roles and responsibilities and mechanisms for update and change, breadth of organizational understanding and buy-in ….
Underlying these factors, many felt that there must be trust. Yet on examination, they realized that trust can be a fallacy in the business world. It requires levels of relational commitment, openness and absence of control that simply don’t occur. So while a level of trust is probably important, the real driver is economic interest. Factors such as mutual dependency, mutual profitability, complementary skills, relative competitive advantage emerge as critical to maintaining the relationship.
So what does this tell us about relationship management – and in particular, about supplier relationship management? It seems to me that many SRM programs fail at the first hurdle – they lack clarity of objectives. And if they are managed and controlled by Procurement or Supply Management, they often suffer from too narrow a perspective, an absence of transparency, limited commitment to the longer term. Yet executive sponsorship can also be a dangerous route, because it easily translates to ‘favoritism’ and has no evident basis in true competitive advantage or long-term mutual interest.
As with any successful program, relationship management depends on coherence in its purpose and its methods. We probably know what needs to be done to make it work; the question is, are we willing to do those things? And that brings us back to the survey I mentioned at the beginning. We work with State of Flux because they share the IACCM interest in a balanced view and, like last year, seek to gather perspectives from both the buy-side and the supply -side. Also, their subsequent reports and discussion groups offer great value to participants. So take some time to provide your input. If you are a buyer, then your survey is at http://srm.stateofflux.co.uk/2013-srm-survey-buy-side and if you are a seller it is http://srm.stateofflux.co.uk/2013-srm-survey-sell-side.
Will you earn your pay today? That is a question that Paul Matthews of People Alchemy poses in his ‘Weekly Tip’. He makes the comment: “Don’t confuse effort with results. Just because someone’s car is in the car park the longest does not mean they are producing the best results”.
There is always a risk that many of the things we are doing should not be done, or should be done differently. That becomes even more likely in times of rapid change or volatility. New offerings are introduced, exceptions are agreed, processes are altered without full assessment of their overall impact. This drives growing workload and everyone is simply too busy to step back and ask: “Should we be spending our time on this?”
IACCM’s member research shows a steady and sustained increase in workload for contracts, legal and procurement staff. But the data also points to longer cycle times and more frequent claims and disputes. So the implication is that both efficiency and effectiveness may be declining.
As i pointed out in a blog last week, What will I do differently?, change is hard to achieve, especially for an entrenched and experienced community. And sometimes, even if we recognize the need, we decide that being a champion of change is just too difficult. it seems far easier to wait until ‘they’ (i.e. senior management) do something.
But that is a risky strategy, because it means when senior management gets around to fixing the problem, they may decide we are part of it. As Paul Matthews suggests: “Get in the habit of noticing what you actually did today rather than how long it took; and whether what you did was important and worth doing, both for you and your employer”.
A few years ago, a Global 100 company was re-bidding more than $10bn of its outsourcing contracts. One of the major contenders evaluated the risk allocation and decided to no-bid.
Some time later, I was talking with the head of Procurement at the buying organization. He told me that if one of the other bidders had also declined, it would have led to a massive re-appraisal and would have forced the functions pushing risk allocation (Legal and Finance) to shift their position. Sadly (in his view) no-one else walked away. It took some time for this company to change its ways and build more positive relationships with its suppliers.
I was pleased to read the latest blog from Dalip Raheja of The Mpower Group, in which he describes being on the receiving end of a similarly inappropriate RFP. I have great respect for Dalip – and since most of his work is with Procurement and Supply Management groups, they should be ready to listen to his advice. He cites a case that will be only too familiar to many suppliers, of poorly defined requirements, a mismatch to performance criteria and a flawed procurement process. Dalip also decided to no-bid, but for him there was a happy outcome – he wrote to the company and someone (presumably senior) decided to listen to the reasons and changed the criteria and approach.
Sadly, this is a rare experience – and it will remain rare for so long as suppliers yield to these poorly managed procurements and contracts. Unless there is more frequent push-back, buyers will continue to operate with the myth that their processes and practices are generating savings and value – which in too many cases they clearly are not.
As a final comment, I spoke recently with the CEO of a mid-size software company. They – like Dalip – realized that the buyer was asking the wrong questions and had fundamentally misunderstood market trends and supplier capabilities. They had one of their sales team call the Procurement ‘professional’ who was handling the bid to explain the problem. The concerns were acknowledged – but with no readiness to change the RFP. The supplier asked ‘What is more important – that you follow your process or that you get the right business solution?’ You can probably guess the answer.
Organizations invest in training because they want to improve performance. Yesterday I was talking with IACCM’s head of Managed Learning about his observations on the effectiveness of training, in particular the challenge of applying knowledge to working practices.
There appears to be a big difference between basic and more advanced training. Basic programs are directed at students who have limited prior knowledge. Therefore they have not developed particular methods or approaches and are receptive to learning and its application.
Those at a more advanced – or established practitioner – level are far less receptive. They have established approaches which they need to unlearn or discard before they can adopt a new approach. Making this shift seems like hard work, because it often takes more time and demands fresh thinking. Therefore, even if we accept in principle that there may be a ‘better way’, we are often resistant to its application.
This is reflected in our experience of observing students when they participate in simulations or are asked to reflect on what they have learned. Those who are relative newcomers rapidly produce an extensive list or visibly put the methods they have been taught into practice. The established practitioners struggle to say what they will do differently and instantly revert to their tried and trusted methods, even when they acknowledge that the new method would bring better results.
In a community such as contract and commercial management, this is a problem. There are relatively few newcomers to this community. Typically it does not have openings for graduate hires. Most people have learnt ‘on the job’ because, until recently, there was no underpinning body of knowledge and even less established techniques or methods. This disparity is a source of weakness and illustrates a lack of professionalism.
So unless practitioners are open to learning – and applying that knowledge – we cannot improve our contribution and performance. And that, of course, is exactly the criticism that often comes from senior management.
International business opportunities lead a growing number of companies to develop their routes to market around the world. For many, this means forming distribution networks, often using agents and remarketers.
Many are not aware of the very different rules that apply to such relationships in overseas jurisdictions. These range from issues under competition law to more specific regulations that are designed to protect the local entity. In Europe, for example, companies encounter not only the EU laws and regulations, but also a raft of local provisions that focus especially on rights of termination.
When I met recently with lawyers from one of the top French law firms, they mentioned that disputes with a local distribution partner had become the most common area of commercial litigation in the Paris courts. Now comes an interesting example from Germany. In a case which has gone all the way to the German Supreme Court, a company based in Virginia, USA has been successfully challenged over its choice of law and jurisdiction provision. Essentially, the German courts have decided that the US court cannot be trusted to apply agency terms that are mandatory under German law and which safeguard the rights of the German sales agent. Therefore they have overturned the choice of law provision and deem the US principal to be answerable to the German court.
This determination means that a company must carefully study the local provisions relating to distribution channels and perhaps use these in determining its route to market decisions. It can no longer assume that local legal or statutory provisions can be eliminated simply by relying on an alternative jurisdiction or choice of law.
Commitment Matters 