In recent times, reputation risk has increasingly featured as one of the growing areas for executive concern. Much has been written about the ned for business to guard against the type of faux-pas that will generate adverse publicity – whether it be the use of child labor, unethical marketing practices, product safety issues or allegations of bribery and corruption.
I recall various researchers – including my friend Profesor Rob Handfield – undertook analysis to show the impact of reputational risk, in particular on a company’s share price. If I recall correctly, it often took 2 years or more to recover and even then performance was often left negative to wider industry performance.
But is reputation risk actually just another fad? Has the market – and society generally – now accepted reputational issues as another feature of doing business? Perhaps we are at a point where such issues are deemed relatively normal and inevitable; and maybe the scale of actual penalties levied by the regulators (once so feared) have in practice proven quite manageable. Indeed, in many cases the benefits achieved from ‘the offence’ perhaps exceed the scale of the resultant fines.
Take the case of Walmart and its alleged activities in Mexico. When news first broke, the share price fell by almost 5%. But since then, it has actually climbed by around 12%, outpacing the performance of its main competitors. Indeed, in a recent blog, business ethics consultant Lauren Bloom observed: “According to the Wall Street Journal, Warren Buffett said that in general, someone at larger corporations is always doing something wrong, and that the company’s job is to get the issue corrected. Translation: a scandal may be embarrassing but, unless it seriously impacts a company’s profitability, investors probably won’t care about it very much.”
This attitiude is generally reflected in the priorities we discover among many supply chain and commercial staff. While they certainly are not careless about these issues, there seems to be an increasing attitude of self-insurance – it is not worth paying the premium involved in being overly zealous about reputational risk. So perhaps it is a case that familiarity has once more bred contempt.
What do you think?
I received a question today from an IACCM member that i thought might be of wider interest – because it is the sort of thing we should know, yet not something i have previously encountered.
So the question is this: “We have an executive presentation coming up at the end of this week and I’m hoping you can help with some information we need to present.
Specifically, from an industry best practice perspective, what are the key criteria or issues a large company would expect its employees to be aware of for each phase of the sales contracting lifecycle. The phases we are using are:
a) Initiate
b) Pursuit (Bid and Contract Negotiations/Execution)
c) Service Management (Transition and run and maintain)
d) Completion (e.g. Unwind as a result of expiration or termination of a contract).”
They want to put forward 3 or 4 criteria that employees who are involved in the phase (either internal or external to the Contracts Department) should be aware of and adhere to. As an example, in the Initiate phase, you might always check the credit rating and gather background information on the client, including any past performance with your company.
I will be assembling a list this week; i would welcome any input and will share the recommendations we come up with.
Those who follow IACCM already know that we are enthusiastic advocates of user-friendly contracts. That means contracts (and contracting processes) that are designed to respond to user needs – simple to execute, easy to understand, of practical help in reaching goals. Our enthusiasm is not simply because we beleive that service providers should focus on their users; it is also because it reduces risk. A user-friendly approach will gain increased adoption; and it will also ensure more use of the contract to support implementation and performance. So who could object to that?
Well, of course, many contracts professionals find a myriad of reasons why such a radical change could be undesirable. But perhaps the biggest objection is that it is unfamiliar and may demand skills that we, as a community, do not currently possess.
Today I was once again in Finland where we held a member meeting and one of our sessions focused on the usability of contracts.. It was led by Helena Haapio and Stefania Passera. Here is a brief summary of their presentation:
“User-centeredness is a fundamental principle in the design of artifacts. What designer deliberately makes their product hard to use?
Today, contracts are designed primarily with lawyers and courts in mind. Yet lawyers and courts are secondary users; by designing for them, we increase the probability that they need to be involved – is that really our goal?
New collaborative, networked and service-based businesses need new models that are not based on the old industrial world, so it is time to re-think the way we go about contracting.
Stefania reported on a test involving a traditional contract and new form of contract, using graphics and simplified terms. The terms themselves were the same. They were provided to groups from Sales, Legal and Sourcing, with half receiving the traditional agreement and half the new agreement. They were then given a questionnaire to test their understanding of the agreement.
- The percentage giving correct answers was 72 v 60%
- The time taken to answer was 146 v 224 seconds average
- The frequency of skipped questions (unable to answer) was 1 v 4
You can probably guess which version of the contract achieved the better result.
This topic is a significant one in our recent study on ‘the future of contracting’. In fact, I have realized that the issue is in some ways less about reforming the contract itself and more about inserting term selection into front-end requirement and bid processes. If we could have the deal or relationship owner making more intelligent selection up-front, then the whole contracting process would benefit and become quicker, more accurate and more valued. So as user-friendly professionals, I think we should be embedding charts, graphics, flow diagrams into the bidding or RFP process so that users select the type of termination provisions, price models, performance criteria that they want to include.
Even if we then feel compelled to draft these into a formal contract, we can re-use the relevant graphics when we move to implementation – and it means the users at both inception and delivery gain a very different experience and one that is relevant and useful to their needs.
Today I am in Finland and among the meetings I had been asked to present to the Scandinavian offices of an international law firm on the subject of benchmarking.
In the context of contracts, benchmarking is not a topic to which I had previously applied a great deal of attention. Of course I am familiar with the use of benchmarks, especially related to pricing, but have never really applied much thought to its wider context, application or impact.
In the presentation, we discussed the fact that benchmarks can be used at three quite distinct levels – one being to drive general improvement relative to past performance, another to check competitiveness by comparison with others, and the third to achieve transformation by setting a vision or goal and benchmarking progress towards it.
Each of these is quite different in its impact and in the actions necessary to support measurement. Yet in my research, it became clear that many of today’s benchmarking clauses are in the contract due to habit, rather than with any specific purpose. Frequently they have little correlation to key performance indicators or business priorities; typically, they are designed to provide leverage over the supplier, rather than being a statement of shared goals and value.
So I discovered that benchmarking today is often ineffective and just another source of contention. Yet used properly, it could be so different. A shared benchmark could provide the basis for joint working and problem solving. Benchmarks that focus on achievable data can provide an objective insight to performance. For high quality suppliers, they can illustrate the benefits of their offerings or services relative to competition.
We also explored the extent to which networked technologies allow the collection of a far wider range of benchmark information (through low cost, targeted research); and we looked at the extent to which a benchmark against the supplier’s own internal data might reveal some excellent insights. For example, if the supplier is competitive in the market, why would we not request periodic benchmarks of their pricing for winning bids over the last 90 days? Or perhaps a benchmark of performance – for example, the percentage of wrong invoices that they issued to us versus those to other customers for the same services.
Overall, the research for the presentation and the discussion that ensued suggest that benchmarks have a valuable place in contracting, but that today they are not being approached in a practical way. Often the measures or the base data are impractical, misleading or unachievable; the incentives that result from them are negative; and their practical benefit is therefore extremely limited. It is time for contracts experts to step back and look at a more effective and beneficial approach.
A copy of the Benchmarking presentation is available in the IACCM Library at www.iaccm.com
Every 2 years, IBM interviews hundreds of CEOs to compile its Global CEO study.
In 2010, the big issue was complexity – the struggle that CEOs were having in making sense of increasingly global interconnections and interdependencies. They were seeking employees who showed leadership, especially in driving simplification, introducing innovation and forming and managing better customer relationships. The opportunities – and challenges – for those in the field of contracting were clear – and in many cases transformational.
In 2012, many of those challenges remain, but IBM has once again provided us with exciting additions to the agenda. This year , their study focuses strongly on technology – a field for regular emphasis by IACCM. Indeed, we saw the use of technology as key to achieving the leadership that was demanded in 2010 – and it remains an area of fundamental weakness for most contracts and legal groups. Simplification, innovation and relationships depend on improved analytics, a more holistic understanding of risk and improved integration between contracting and relationship management. The contracting community needs not only effective applications in its own right, but also integration with other business applications to support data gathering, to aid collaboration and to promote simplification. Many have still to make these investments and therefore remain severely constrained in the value they can offer the business.
As we look at the list of critical issues for 2012, we find once more that the commercial community has much to contribute, if it will rouse itself. Here is the list: I will write more on individual elements over coming weeks, highlighting examples where IACCM members are leading a response to these issues:
• The sudden convergence of digital, social, and mobile spheres is putting pressure on companies to adapt, while creating opportunities to innovate.
• Technology now tops the list of external factors impacting organizations and expected to drive organizational change.
• To attract top talent, CEOs are looking for individuals who can collaborate and are creating more open, collaborative cultures.
• Companies are investing to build analytical muscle.
• Extensive partnering is being used to drive innovation.
Based on these findings, IBM sees three imperatives that are essential for outperformance:
• Empowering employees through values.
• Engaging customers as individuals.
• Amplifying innovation through partnerships.
For those who wonder whether contract and commercial management really make a difference, current research by IACCM is revealing interesting trends in the outsourcing and IT / telecoms services sector. These developments will be of interest to the wider contracts and legal community.
Across the industry, there has been significant growth in the resources applied to contract and commercial management. In recent times, the relationship between Legal and Commercial resources has also clarified within the provider community, though remains less clear for many buyers. This reflects the growing appreciation by executive management in supply-side organisations that the contract and its effective management are critical to business performance. Similar understanding of the need for investment on the buy-side is often lacking, with a greater readiness to assume that the supplier is responsible for performance and that existing resources will somehow be adequate. This is reflected also in the buy-side reliance on external law and advisory firms.
However, the nature of the investments made – and the way resources are deployed – show significant variations. For example:
- Industry leaders have been developing a more coordinated approach to shared services within both Legal and Commercial / Contract Management. These include growing use of offshore resources, with some outsourcing, but a general preference for captive centres.
- Technology and systems tools are playing a much larger role in the management process. This has moved beyond the creation of contract repositories and obligation management tools and is increasingly reflected in investments in applications such as Sharepoint and others offering advanced risk management analysis. For some, there is growing integration with relationship management software to support improved proposals and better focused negotiation.
- The role of Legal and Commercial Management pre-award has become far better defined; smoothing the transition to post-award delivery teams remains an area for focus. On average, pre-award Commercial resources outnumber those in Legal by approximately 2:1. The post-award organisational model varies, but across the industry it outnumbers pre-award resources by a substantial margin.
- There is growing alignment between Commercial teams and the finance and risk organisations, with the focus of negotiations reflecting this improved balance of interests.
- However, in several of the poorer performing providers, contract management remains fragmented or is seen as primarily an operational resource focused on compliance, administration or risk containment. This results in higher levels of inefficiency (e.g. up to 20% more time expended on contract / commercial issues by sales and delivery teams, more frequent disputes etc.) and increased ‘value leakage’ (up to 30% more claims, higher proportion of under-performing contracts).
In terms of funding, the high performers are typically spending approximately 1.5% of revenue on their contracts and related legal services. This represents a significant increase over the last 5 years and also a widening gap between the companies that have been growing and those which are generally struggling to maintain market share. This divide reflects in other data assembled by IACCM relating to the ROI (return on investment) from contract and commercial capability. Overall, the data provides a compelling business case for top management – and of course, it is data such as this that we will be sharing and discussing at the IACCM regional conferences this year, as well as at our many local memebr meetings around the world (see https://www.iaccm.com/events/ for those which are currently scheduled).
A frequent question about contracts is ‘who should own them?’
More specifically, that question really means ‘who should own what?’ Because in general, different groups in an organisation want control over bits of activity. And they usually want only those bits that suit them and only when it suits them. They certainly don’t want to be viewed as responsible for the overall quality or outcomes from contracts.
Hence, Legal may insist on retaining full control over certain clauses – but not ‘the business terms’ or schedules. Engineering or project management may lay claim to service levels or statements of work. Finance will of course demand ownership of price and payment terms, while Sales or Product Development might say it must have scope, requirement definition and negotiations authority.
In such an environment, there is clearly a very real danger of an uncoordinated and poorly constructed output. Rather like building a house, it needs an overall design and a master plan within which the various trades (electricians, plumbers, bricklayers etc) can work. It also needs some form of quality control and inspection to ensure the finished product meets necessary standards.
The real issue with contracting is coherent capability. The problem with most organisations – and the reason for poor performance – is a lack of coherence and a failure in quality control.
For example, front end requirement-gathering or responsibility for negotiation are frequently grey areas over who does what. In a highly collaborative organisation, that may not matter much of the time. But in an environment where there are less cooperative practices, issues and opportunities will inevitably be missed because of the absence of relevant knowledge or expertise at key points in the design or construction.
Post-award is another area fraught with difficulties. It is still quite common for those who took the contract to the point of signature to then disappear. The business unit, Sales, Operations – someone else picks up responsibility for overseeing performance. But do they have expertise, do they have the necessary understanding, not only to implement what was agreed, but also to actively manage it? And given the weaknesses in construction, what they are given is often not what they need, or is incomplete, or has included responsibilities they cannot perform.
In an organisation that operates off highly standardised contracts, none of this matters. But for those where negotiation is necessary, it means continuous risk of failure and inevitable value leakage (operational costs and revenue).
The key phases when contracts expertise must be applied are in the initial design (do we know what is required to meet the need or opportunity?); in the event of major rework (circumstances or understandings altered, we need to re-design); and in quality assurance and hand-over (do those who must now implement have the necessary understanding and capabilities?). If you do no more than focus your efforts on achieving excellence in those three areas, you will certainly see an improvement in business results.
But don’t try to start the debate with questions of ownership, or you will most likely go nowhere. This is about skills, capabilities and process – and how they get built and deployed.
This is a question that never seems to go away – and it was posed to me again today by an IACCM Member who asked: “We are urgently looking for a high level differentiation or comparison of the differences and / or structure between the old traditional focus of a Procurement versus Commercial department (ICT focused Commercial and Contracting team).”
This member is dealing with a territorial battle between the CFO (and Procurement) versus the CIO (who owns contract and relationship management resources). Here is my answer. What would yours be?
“Perhaps a good way to look at it is whether the business is more interested in ‘inputs’ or ‘outcomes’. Traditionally, a procurement group reporting to the CFO is focused on –and by – relatively short-term measures of price. Historically, when the main IT acquisitions were bits of hardware and software, that was often a reasonable focus. But in those days, it was largely up to the CIO to have the technical skills to make all the pieces work, to gain investment for updates etc. Procurement got the components. The CIO strung them together and was responsible for the outcome.
But now, IT acquisition is very different. Much of it is about services and solutions. There is far more responsibility on the supplier to deliver results. The CIO department is far less focused on technology and far more focused on enabling business needs through technology. As such, they have to be far more aware of supplier capabilities and they have to partner far more with their suppliers to safeguard performance and business results.
The history of where ‘commercial support’ sits has transitioned several times. In the early days of IT, the IT procurement group tended to be part of the CIO organization because it was seen as a specialist area with unique knowledge. As Procurement matured, and as consolidation, compliance and ‘commoditisation’ became core principles of purchasing, it was common for the IT Procurement group to move to the (increasingly centralised) Procurement organisation (and frequently therefore reporting to the CFO, who wanted to control spiraling IT costs). Today, we are seeing some shift back towards the CIO. However, we are also often seeing a split of function; this may mean that there are IT Category Management Teams in Procurement, responsible for acquisition, and there is a Commercial or SRM team in the CIO organisation, responsible for interaction with key suppliers and for managing the contract and relationship post-award. They may also partner with the Category Team in up-front selection and negotiation.
I think the key issue related to ‘best practice’ is the need for coherent, consistent life-cycle management of contracts and relationships. Whether this is through consolidated groups within a single function, or through connected groups in different functions, is not the most important point. There are distinctions in expertise and IT acquisition and management require different skills at different points in the process. The real issue is a consistent process with clarity over expectations and measurements, management approaches that demand cooperation rather than rivalry.
It is important to recognise that IT has changed and will continue to change. The cloud, mobile apps, continuous evolution of technology, shifting demands from customers and the impact of constantly evolving regulation are going to make the delivery of effective IT solutions an extremely challenging role. Much of that delivery will be through third party partners and their effectiveness and costs will be substantially impacted by your ability to offer them clarity, consistency and appropriate interfaces.”
Earlier this year, an IACCM member asked for input on the purpose and structure of supplier councils. A number of organizations responded, with their answers reflecting some uncertainty over how best to approach this topic.
It led to the conclusion that many Supplier Councils seem to be rather general in character and without well formulated goals or objectives. They appear often to become a forum for the customer to present their goals, objectives, state of the business etc., in which suppliers largely listen. There may be some break-out sessions in which specific targets or topics are discussed, even roundtables at which ideas could be exchanged, but the measurable value often appears limited.
One response stood out for its clarity of purpose and direction, with the result that they have continued to attract senior level representatives from key suppliers and have been successful in engaging them, even across competitive boundaries.
“Ours are structured to focus on a particular objective, typically one that spans many industries. For example we have a supplier council to provide advice on how we might increase spending with diverse and women owned suppliers. We had another on environmental sustainability. Membership of the Council is usually at a senior level from companies that are representative of our supply base and geographies. Similarly membership from our company is at a senior level usually with leadership from our Purchases organization.
The Council meetings are advisory in nature. We want to come up with solutions that work well for both our company and suppliers.”
From the varied responses I received, I think this is a good approach. Otherwise, they often tend to become talking shops, and as a result the level of attendance starts to fall and they become moribund.
What is your experience – either as an organizer or as an attendee at such Councils? What do you consider represents ‘ best practice’ in formulating this type of supplier engagement?
In 2010, Harvard Business Review published an article co-written by Jeff Weiss and Jonathan Hughes of Vantage Partners. It was entitled ‘Extreme Negotiations’ and here is the synopsis (the highlighting is mine):
“Business leaders today report feeling that they must constantly negotiate to extract complex agreements from people with power over their industry or individual career. Sensing that they’re in continual danger makes them want to act fast, project control (even when they don’t have any), rely on coercion, and defuse tension at any cost.
The end result may be a compromise that fails to address the real problem or opportunity, increased resistance from the other side that makes agreement impossible, resentment that sours future negotiations, a failure to develop relationships based on mutual respect and trust, or an agreement that creates enormous exposure to future risk.
To avoid these dangers, executives can apply the same strategies used by well trained military officers in hot spots like Afghanistan and Iraq. Those in extremis negotiators solicit others’ points of view, propose multiple solutions and invite their counterparts to critique them, use facts and principles of fairness to persuade the other side, systematically build trust and commitments over time, and take steps to reshape the negotiation process as well as the outcome.”
I am sure many negotiators can relate to these statements. But it is my impression that the syndrome that Messrs. Weiss and Hughes raise in this article is far more widespread than they suggest. I do not think it is restricted to executives; I think for many it has become a symptom of organizational behavior.
Most organizations (and the employees within them) today feel under constant time pressure. They are overwhelmed by the ease – and consequent volume – of communication, which has in many cases slowed decision-making, not accelerated it. This problem is compounded by the growth of choice (opportunities are global) and the speed of change (there is always a new idea or offering just around the corner). So we are continually worried about whether we are making the right choice; will I regret my decision tomorrow? Factors such as these create tremendous stress and frustration, especially because of the difficulty in getting decisions made and making things happen. Overall, we tend to depict this in terms of ‘ever-increasing complexity’.
And all this leads to exactly the scenario depicted in the first sentence of the synopsis – it causes managers to want to act fast, project control (even when they don’t have any), rely on coercion, and defuse tension at any cost. As the article points out, this is not a scenario that generates good or sustainable negotiated agreements or relationships – which is why so many of them yield disappointing results.
What do you think? Does the scenario depicted in ‘Extreme Negotiations’ strike a chord with you?
Commitment Matters 