I very much enjoyed an article on Logistics Viewpoints that outlined Apple’s approach to its supply chain. Author Steve Banker sought to answer the question of whether Apples\’s approach is ‘the best in the world’. He concluded that the answer is no (though following his interesting and impressive analysis, I was not sure quite why he had reached that conclusion).
However, his final comment was: “Apple’s new CEO, Tim Cook, is a supply chain guy with a strong reputation. He is working to improve the company’s reputation for social responsibility. But if I were Apple, I’d rather have another product development guru like Steve Jobs. To drive continued growth and margins, the company needs to continue to excel at product development, but only needs to be competent in supply chain management.”
I agree that competitive advantage is more typically driven by product innovation. However, to be sustainable, it must be supported by the ability to deliver against market demands and expectations. And there are in fact many instances where the delivery capability actually trumps the innovation. If we look back at the history of great inventors, it has often been the imitators – not the innovators – who have made a fortune. Typically, that is because the inventors lack the infrastructure to exploit their ingenuity. It is the people with strong supply chains and access to markets who actually benefit.
Perhaps the most unusual thing about Steve Jobs was his ability or willingness to assemble a team that could take advantage of his innovations. Apple executives also appreciated the importance of keeping things simple. For example, their decision not to sell directly to corporate customers has resulted in a far simpler business model and removed the need for much of the complexity of market and supply chain management faced by other large corporations.
One of the first signs that the Apple innovation machine is in trouble will be when they start to introduce incremental commercial complexity into the business model. Truly leading-edge businesses are led by demand and have no need to offer contract or commercial flexibility. It is only when that demand starts to wane that new markets and special deals need to be found.
There is nowhere in the world where you can point to a completely standard model for contract and commercial management – and this is especially true in Asia, where diverse cultural and political traditions and highly variable levels of exposure to the global economy have resulted in a complex mix of attitudes to the way that business is negotiated and managed.
To the extent that generalizations can be made, Asian business has relied more strongly on relationships and personal connections than on contracts and litigation. That picture is changing fast, but what approach seems likely to emerge?
Growing participation in international trade has led Governments and business leaders to appreciate the need for – and benefit of – more formally structured business relationships. This takes several forms, prime among them being an appreciation of the need for the rule of law, for the development of model contracts and investment in commercial capabilities.
For countries to prosper, a predictable rule of law within which businesses can invest and trade is of paramount importance. This means not only that laws are clear, but also that they are enforced through an honest, open and accessible system. As WTO surveys reveal, many countries in Asia have made rapid progress in this regard, though substantial issues remain, even in the largest markets. For example, the perception of China is that rulings are often unpredictable, while for India the court system is impossibly slow and bureaucratic. But the most recent World Bank rankings on ease of enforcing contracts puts 5 Asian countries in the top 25.
Contracting models remain quite variable, with a tendency to develop pro-formas that may lack flexibility. There is still a tendency to create standards that are not adjusted to provide effective business instruments. In part, this is because of a lack of skills and experience. Those involved with contracts tend either to be lawyers or administrators, in both cases lacking wider commercial understanding and authority. Western companies struggle to find recruits for positions as negotiators and contract managers.
However, the fact that the region is increasingly engaging on the world stage does not mean that it must mimic Western models for doing business. Key differences will remain, based on variations in areas such as regulation, trust, the importance of relationships and perceptions of authority. But another key difference may be in software adoption and use. The right technologies can assist in addressing skill shortages and also in maintaining competitive advantage on price, even as salary levels increase. To date, contract management software adoption has been low (in part because Western developers have not focused on selling into the Asian market), but it shows signs of picking up. However, the absence of established solutions is leading to far greater interest in developing in-house solutions, based on Open Source software and collaborative technologies such as Sharepoint.
Creative use of technology may allow Asian business to leapfrog its Western competitors through the development of far faster and more efficient methods of contracting. After all, far too many contract management resources today are deployed in overcoming the obstacles to doing business and correcting the problems with executing on commitments.
IACCM recently published its report on current approaches to Legal / Contract Management support in the outsourcing and IT services industry. The study focused primarily on large US and European providers, with some reference to the models being pursued in India. I am providing the executive summary because I think it may be of wide interest; similar studies of trends inothe rindustries will follow later this year.
The executive perception of the importance of contract and commercial capability has increased over the last 5 years. However, this has not always been accompanied by satisfaction over the ability of existing resources and organization to rise to the challenges of today’s markets, nor resulted in clarity over where such support should be placed (for example, within Legal, Contract or Commercial Management groups, or integral to the business units or delivery teams).
Increased regulation (affecting both the industry and its clients), growing reputation and supply chain risks, continuing pressure on margins and aggressive demands on contract terms and performance have combined to raise awareness of the importance of contracting discipline and commercial creativity. Market volatility, client uncertainty and competitive actions have driven a need for greater continuity of resource and oversight throughout the lifecycle of the contract, including more frequent renegotiation.
An appreciation of the need for front-end integrity and back-end governance standards is also affecting customer selection criteria. Growing sophistication on both sides (customer and provider) is generating wider appreciation of the broader ‘costs of doing business’ and that successful outcomes require better negotiation and management of contracts.
In the words of one CEO (provider): “I used to think that good relationships emerged quite independent of the contract. Today, I appreciate that a good, sustainable relationship is underpinned by the contract. It offers a critical management framework and the surrounding process offers the management barometer for relationship health”.
Or as expressed by the Chief Procurement Officer at a top 5 UK corporation: “We have traditionally seen negotiating the contract and managing the contractor as two distinct activities. In complex projects, that is a recipe for failure. We have to become much better at ‘defining the handshake’ between these two activities – and that includes thinking about more integrated skills and suppliers who can show they understand that linkage.”
The Vice President of Sales at one global provider summed it up like this: “Growth must be balanced with judgment; we have to design deal structures that support the bottom line and reduce the potential for disputes, both pre and post-award. Commercial contract management has a critical role in ensuring this and we have been hiring to build our capability”.
Many of the surveys undertaken by IACCM involve ‘crowdsourcing’ – that is, seeking a high volume of responses from an audience of suitably qualified or knowledgeable respondents.
Often, when presenting the results of such research, I feel that part of the audience is dismissive of the approach. They feel it lacks hard, scientific data or the rigor that comes from methods such as in-depth interviewing of acknowledged ‘experts’. I am therefore glad to see an article in The Economist (Science & Technology: The Roar of the Crowd – May 26th 2012) which hails the growing adoption of crowdsourcing by the academic community and the rapid emergence of companies that assemble ‘crowds’ which can be ‘sourced’. But the article does more than simply offer respectability to this approach – it suggests that it may often be more accurate than traditional research methods.
At IACCM, we have used crowdsourcing for three primary reasons. One is speed – it is far faster to collect data from across a global community like ours than it is to target individuals for interview. Another is scope – we endeavor always to gather and compare representative opinion spanning industries, contrasting functional perspectives and geographies. The third is accuracy – not only do we want to check comparative data, but we also know that in many cases our audience lacks accurate baseline information. Crowdsourcing is a way to establish baselines (which then support further research).
I was pleased to see each of these reasons highlighted in The Economist article. It explains how traditional research has been skewed by the nature of people interviewed or surveyed (based upon communities that have been easy to access, rather than representing the entire community). Some long-held beliefs in areas such as human psychology are being turned on their head – and this has potentially major significance for people in the world of contracts and negotiation. For example, research is finding that people with deep religious beliefs will make different moral decisions from non-believers and that US and Western European attitudes to co-operation (and to punishment for failure to co-operate) are quite distinct from those in other cultures.
Crowdsourcing is just another of the ways that global networked technology can shift our understanding of the world – at least, for those who are willing to be sufficiently open-minded to its findings. But what percentage of contracts, commercial and legal professionals possess that openness to innovation is just another issue for psychological research!
This question is attracting more and more interest and is an area on which IACCM is building a body of knowledge. Increasingly, we face the question ‘what is the best form of contract to use?’ Hidden in this is a broader question of different relationship strategies and, of course, the impact of specific strategies on terms and conditions.
All of these questions are important because we have growing evidence about the very real differences that our choices in this regard have on the outcome of the project or transaction.
I thought it might be of interest for me to share a specific example that comes from research into EPC contracts. One of my contacts recently referenced a book by Edward Merrow – IPA – Industrial Megaprojects – 2011, which studied 318 projects with costs from 1,000 MM to 20,000 MM USD.
Chapter 11 – pp 253 to 303 addresses the issues of the various contracting forms, currently adopted EPC projects.
Some numbers:
1- Adoption:
EPC/EPCm reimbursable – 25%
Alliances – 12%;
Mixed Approach – 10%;
EPC Lump-Sum – 53%.
2- Contract and Project Outcomes – Success / Failures:
EPC/EPCm reimbursable – S = 78 % ; F = 22 %
Alliances – S = 8 %; Failure = 92 %;
Mixed Approach– S = 91 % ; Failure = 9%
EPC Lump-Sum – S = 39 %; F = 61%.
I think a key challenge when analysing this data is to understand the connection between contract strategy and organizational capability / commitment. Our research suggests that many times the problem is that they are not aligned; specifically, different strategies depend on different tools, resources and staff attitudes. If we design for one relationship buit put in place an infrastructure for another, failure rates will be high.
There is growing understanding that contracting strategy and practices influence the behaviors on which outcomes depend. This is obviously a topic that goes far wider than oil and gas, yet from which oil and gas should learn. For example, the strategy related to risk allocation or compensation methods will alter the way the relationship develops and is managed, creating environments that may be highly collaborative or where the atmosphere is one of blame. Therefore I recommend all contracting professionals to take lessons from other industries which undertake similar forms of contract and handle similar levels of complexity; we have a long way to go in developing a coherent answer to the questions that users of our services increasingly pose.
The September edition of IACCM’s ‘Contracting Excellence’ magazine will focus on Global Contracting. This week, I held a series of calls with members of our editorial board to discuss content.
As always, this resulted in lively and interesting conversations as we explored the main issues associated with global contracts. They ranged from areas such as the need to streamline internal review and approval processes, to differences in the way that companies structure their global deals, to topics such as the complexity of managing across multiple regulatory environments. We also discussed more technical questions, such as approaches to dispute resolution and governing law .
An issue that led to prolonged conversation was the suggestion by one participant that many customer organizations undermine the value of global contracting because of their failure to design a process to support it. In his experience, the negotiation can be grueling, with the customer driving for high levels of consistency on price, service delivery, specifications and terms. Yet when it comes to implementation, they have no process through which the contract is effectively communicated and implemented. As a result, many times the local subsidiary insists on renegotiation. The original goals and objectives are frequently forgotten. Performance suffers – and the supplier is then blamed for failing to meet the terms of the contract.
The problem is that the success of global deals depends on a mutually agreed process for its dissemination and management. I think much of the difficulty comes from the fact that many Procurement organizations remain focused only on price, not on performance. They use global agreements to drive discounts and savings, but relinquish on-going management to local entities that may have very different goals and objectives. This leaves the supplier with an agreement based on one set of economic assumptions, but a reality that is very different. They are then accused of being inflexible or unreasonable when they struggle to meet the actual requirements of the customer, or seek to charge more for these new requirements.
We will continue this debate – as well as covering a range of the other challenges for global contracts – when we publish the September edition of Contracting Excellence. Meanwhile, your ideas and comments are welcome – especially if you want to volunteer as an author!
I am delighted to be working on a new book with Kate Vitasek (author of Vested Outsourcing) and colleagues Jeanette Nyden and Jacqui Crawford. Our theme is ‘Getting to We’ – an update on the thinking and methods that need to surround today’s negotiations. Between us, we will be posting a number of blogs that underlie some of our core thinking. Here is a brief background on why it is time for us to start thinking – and acting – differently.
Most of today’s business leaders have received negotiation training, yet most of that training was rooted in a different era. It was based in a world where face-to-face negotiation was the norm, where most relationships were local or within a single country, where the use of contracts was far more variable and the portfolio of risks far smaller.
Today we operate in a networked world, in which many relationships cross cultures, languages and jurisdictions, where concepts such as commoditization, compliance and contracts are the norm. Much negotiation is undertaken through virtual means – email, teleconferences, webcasts, e-auctions – and in an environment of complex regulation, superficially similar across countries or regions, yet quite different in reality. And the risks have multiplied, as social, political and economic expectations have grown and the opportunities for high-exposure failure have increased.
| “In 2009, the net income of the Global 2000 declined by 30.9%. In that same period, the upper quartile of companies for ‘negotiation maturity’ posted an average net income increase of 42.5%.”(IACCM / Huthwaite International study “Improving Corporate Negotiation Performance”) |
Just as the world around us has transformed, so must the way we think about, plan for and execute negotiations. As most executives know, the ability to negotiate makes a difference, but quite what constitutes that ability remains rather vague. So we will be looking at the characteristics of ‘best practice’ companies – those in the top quartile of performers. As the quote above shows, companies that are good at negotiating also achieve dramatically better financial results. It would be wrong to suggest that negotiation is itself the cause of these differences, but it is a contributor and it seems to reflect a broader commitment to superior business planning and clear business goals. These organizations view negotiation as an area for strategic competence and invest accordingly.
Last week, I wrote a short post about an IACCM member question on ‘what are the things everyone in our organization should be aware of?’ This is a topic of growing interest in many organizations, as they wrestle with how to better manage risk. As sources of complexity grow (as well as the consequences of getting them wrong), they have to find more streamlined and practical ways to undertake risk assessment and management. Simply adding more and more lawyers or commercial staff is not the answer. Many are therefore seeking to raise wider awareness across the organization, to ensure that all staff understand their responsibility to protect the company and to improve the quality of decision making.
Following a number of discussions, here is the list that we developed, based on topics about which there whould be wide awareness at different phases of the contracting process. Thanks to those who contributed – and please continue to add ideas or expand on the details behind these by sharing your comments:
Initiate
Alignment with business strategy (is this opportunity consistent with what we want to do?)
Probability of win (could be overall, or from individual perspective)
Nature of required relationship (do we understand it and what it means?)
Do we want to trade with this organization? (reputational risk/ethics/market risk)
What is our history with this company, as a corporation (existing/past relationships) and also with this industry
Pursuit
Possible regulatory issues
Non-standard requirements
Is solution robustly architected? (technical and business; based on needed information)
Clarity of scope and goals
Teaming / expertise needs (who needs to be involved for assessment and negotiation)
Do we control resources we are committing (or have authority to commit)?
Do we understand risks and have mitigation strategy?
Approval path
Governance – do we have approvals to make this offer/sign this contract/at this price/on these terms?
Internal alignment – is this a cross-division / cross-country deal? Which other business units may be impacted? What’s our account management strategy?
Service Management (implement / deliver)
Clarity: who does what?
Contract – interpretation and use
Change policies and procedures
Performance review procedures and contribution
KPIs – my role in delivery
Internal knowledge management: effective handover process from deal team to delivery team? Have we communicated the deal, it’s P&L, assumptions, dependencies, obligations and milestones, to all who need to know?
Completion
Don’t extend contract without approval / in error
Record lessons learned
Understand continuing obligations
Compliance requirements
Do we have an exit plan, with defined resources allocated and an exit project manager? Have we identified goals for the exit (we may want to do business with this customer again)
I recently received a question from one of IACCM‘s public sector (Government) members regarding industry’s attitudes towards standard terms and conditions. He wanted to know the extent to which consistency and clarity in Government contracting is valued.
In my reply, I suggested that there is little question that industry generally welcomes standards and the associated predictability they offer. Today, for any substantial organization, it is unusual for them not to have standard contract terms and templates (IACCM has precise data on this point). Their prevalence clearly indicates a preference for standards, generally driven by two major considerations:
1) Standards reflect a position of business need (buy side) or capability (sell side) which is driven by a view of acceptable risk and affordability.
2) Standards also reflect today’s dominance of ERP systems, which themselves mandate certain embedded policies or process capabilities. When operating within standard terms, the contract also draws on standard tools and methods. A departure from those terms creates the need for exception handling, with consequent impact on resource, cost and risk.
Picking up from this, the existence of a standard also facilitates evaluation of non-standards – what demands they may place on the business and an assessment of their impact and viability.
Although industry is accustomed to the need to undertake such evaluations, it is of course helpful when there are somewhat predictable parameters (after all, this goes the heart of the lean principles that many Government purchasing groups are themeselves adopting). The more variation they encounter (especially within the narrow time-frames of a bid process), the more difficult it is to make a thorough and reliable assessment of capability, cost and risk – hence a higher possibility that they will either feel obliged to no-bid, or that they will get it wrong.
Therefore the requirement is for some degree of certainty and predictability, within which appropriate risk assessments can be made, therefore simplifying and speeding internal reviews and bid responses and cutting the need for push-back and negotiation on important, but perhaps low value, terms.
However, while standards and their universal adoption will be welcome, this is not of course a blank check! There is an assumption of reasonableness and appropriateness. By this I mean that the assumed risk allocations are within acceptable commercial boundaries and that the allocation of responsibilities is balanced and conducive to good performance. In addition, that contract structures and terms are adaptive to the nature of the agreement or acquisition under consideration. This implies a portfolio of templates, with standardised terms and term options.
Finally, the ideal for industry would be to feel that there was room for manoeuvre within the proposed contract terms – that within the context of a specific acquisition there was a possibility for meaningful negotiation and value offsets. In the commercial world, this is sometimes achieved by inviting bidders to highlight terms that they would prefer to alter and to specify what benefit they are ready to give in return (frequently price-based). Such an approach could offer much greater insight to the cost of specific terms and policies contained in current approaches to Government procurement.
Commitment Matters 