IACCM research identified a 20% increase in the frequency of claims and disputes last year. The reasons for this are becoming steadily more apparent.
The ‘boom and bust’ cycles of the economy are inevitably reflected in business behavior. Anyone in Contract Management or Procurement is only too well aware of the swings between laissez-faire pursuit of growth and the stringent push for tight controls and cost reduction.
But current conditions are different. Past downturns in the economy have typically been accompanied by relatively short-term measures. The prolonged nature of this downturn – now into its fifth year – is resulting in more sustained action. Businesses face the twin challenge of maintaining or growing revenue and maintaining or growing margin. The former points to the need to enter new or more risky markets; the latter depends on a combination of cost reduction and extracting greater value from existing contracts.
As highlighted in previous blogs, these conditions have led to a new level of appreciation for the importance of contract and commercial management, both buy and sell. One area for particular focus is post-award contract management. The old perception of ‘administration’ is fast giving way to a far more proactive – and aggressive – pursuit of value.
In the case of Procurement contracts, this may mean either ensuring that anticipated savings are realized, or alternatively a greater focus on decommitment in situations where needs have changed. For those overseeing Sales contracts, there is particular pressure to protect and grow revenue, which means preventing no-charge scope creep and seeking compensation for changes.
The potential for conflict and disagreement is obvious and therefore the greater frequency of claims and disputes should not be a surprise. The real question is therefore ‘What next?’ Will organizations continue to invest in confrontation, or will they start to explore ways to avoid the need for claims and disputes?
Periodically, companies ask whether there are good examples of b2b loyalty or ‘preferred customer’ programs.
The question seems mostly to arise when and organization is struggling to achieve differentiation. Facing an erosion of their negotiation a power and influence, they wonder whether they can achieve heightened status through ‘preferential’ terms and conditions.
This approach always seems to run into problems. One is the difficulty of segmenting customers. A public program carries significant risk; for example, will a ‘gold’ customer feel especially flattered and how will you explain to a ‘bronze’ customer why they are receiving worse service – and why they shouldn’t move to one of your competitors?
A second challenge is usually to identify tangible benefits for the high-status customers. They have already pushed you on price and risk – that is usually why the program is being considered. So what do you offer next?
It seems to me that loyalty programs in the business to business environment are a sign of desperation. Essentially, they are an admission that the company has no real distinguishing value and is struggling to develop a coherent approach to marketing and market segmentation.
Strategy+Business recently carried an update on the debate over whether globalization is creating ‘a flat world’ or whether the forces arguing that this is ‘globaloney’ have the upper hand.
The article is relatively inconclusive, pointing to merits and weaknesses in both arguments. At IACCM, right from the time Thomas Friedman’s famous book “The World Is Flat” was published, we argued that Friedman’s perspective was too narrow and simplistic. Back in 2005, we suggested that the correct depiction would be of a ‘spiky world’, where global technologies are in some respects shifting worldwide behavior and attitudes, yet at the same time they are accentuating and making differences more visible.
Interestingly, many of the patterns of today’s international challenges are fundamentally unaltered from those which have prevailed throughout recorded human history. It is actually a story of wealth creation, empire and exploitation. Trade, not politics. has been the consistent force that has both united peoples and driven them apart. Take any empire and you will discover that it was the merchants, not the military, who were driving expansion.
This is very true today. Modern technology has enabled a new form of outreach, where businesses can penetrate to almost any corner of the world – often without the need for any physical presence. Yet such outreach is threatening to the local power sources. It challenges underlying cutlural beliefs and threatens new influences. The very technologies that enable this penetration can then be used by those who oppose it to carry their ‘war’ to the heartland of their enemy. ‘Globalization’ today means that a US general can sit in his chair in the Pentagon and press buttons that rain remote destruction onto any part of the world. At the same time, the ‘forces of terror’ can establish worldwide networks and strike anywhere, anytime.
It is ironic that trade operates in this dual fashion, both unifying and dividing people around the world. Yet there can be no question that the last 10 years has witnessed a dramatic and continuing shift in global power balances. The latest Forbes Global 2000 analysis of the largest companies illustrates this. Back in 2004, 43% of the companies on this list were based in the Americas. Today, that percentage has reduced to 32%. In contrast, Asia has grown from just 28% to 37%. And ‘sick man’ Europe has – interestingly – grown from 29% to 31% – though it hit a peak of 33% in 2008 and is on the decline.
In the end, historical analysis suggests that overall trends and behaviors have not actually changed all that much. It is the relative speed and the methods through which change occurs that have fundamentally altered. But in that sense, ‘global networked technology’ is just the latest advance in human communication techniques. Before this, the invention of writing, ships, road transport, airplanes, the telegraph were also transformational in how and where trade could be conducted. And each of these had an impact on the need for – and content of – documented contracts and terms and conditions. So keep writing!
Many organizations develop contract templates or standards as a way to impose internal controls. However, few have undertaken analysis to determine the impact on external relationships or contract effectiveness.
The questions that IACCM sought to answer were two-fold. First, do templates in general have an impact on customer or supplier relationships and second, is there any evidence that the approach to development and maintenance of the templates alters this impact?
An obvious place to start our investigation was to look at cycle times. We know from extensive benchmarking that the bid-to-contract cycle times vary substantially between organizations, up to 400% for some contract types. It seems obvious that the existence of a standard template should reduce the time it takes to put contracts in place. Our findings were interesting. While the top quartile performers in terms of cycle time (bid-to-contract) almost universally use templates, so do many of the organizations in the second and third quartile. However, the nature of the templates proved to be significantly different.
The leading companies develop and maintain what we term ‘market-based’ templates and they also tend to have pre-approved fall-back or alternate terms. Their focus is on ensuring proposed terms are appropriate to the customer or supplier – for example, that they reflect industry practices, regulatory needs and are attuned to the specific product or service under consideration. In addition, via their pre-established term alternates, they significantly speed the process of negotiation, sometimes through empowering the customer interface, sometimes through simply accelerating internal review.
The ‘laggards’ are those who develop templates purely as a method of internal control. They generally lack an established process for periodic review and update of the templates and almost none have developed term alternates or fall-backs. Their attitude is often driven by perceived market power and a wish to impose greater risk onto their supplier or customer (these template approaches are particularly common among buyers). Their cycle time performance was only marginally better than the organizations which had no templates at all and operated on a case-by-case review model, generally based on the counter-party’s template.
Ultimately, does this matter? The answer is yes. Cycle times certainly impact the attitude of the business towards its Legal, Procurement or Contract Management groups. Faster closure is obviously important, whether because of time to revenue, time for product development and availability, time to savings or as a source of competitive advantage. It encourages internal compliance. Organizations with market-based templates suffer a lower level of non-compliance.
But perhaps the most telling statistic was our discovery that the nature of the templates also impacts the frequency of subsequent claims and disputes. Market-based templates have the effect of reducing disagreements by 8% – 18%, reflecting significantly more harmonious relationships.
In summary, the analysis suggests that contract templates definitely create value – so long as they are the right form of template. There is plenty of room for further research in this area, to look at more detailed impact on areas such as margin, savings or innovation.
The IACCM report on contract templates is available in the member library at http://www.iaccm.com.
Several IACCM members forwarded the most recent newsletter from legal placement firm Kerwin Associates. The reason for interest is that it states ‘the value of the Contract Manager is steadily rising’ and it highlights their growing role in development of company policies, not only their oversight. The article describes today’s Contract Manager as ‘the hub in the wheel’, overseeing numerous contracts and maintaining relationships with all relevant parties.
While welcoming these general observations – which are borne out by IACCM research – many Contracts practitioners will have rather more mixed feelings about the ‘supporting quotes’ from a number of senior in-house counsel. While these confirm that Contract Managers have a growing role, they also reflect a common view among lawyers that this is largely to support the legal department. They are lower-cost resources; they provide ‘eyes and ears’ for the lawyers; some even have talents that may be distinct from those of the attorney and hence offer helpful ideas or insights.
There is plenty of evidence that high quality contract management teams can deliver considerable value to the business – and this goes far beyond the specific role of the Law Department because it impacts financial returns and overall trading relationships and practices. Ironically, this value is frequently (but not always) eliminated when contract management resources are made part of in-house legal, simply because they are viewed as a low-cost alternative to ‘the real thing’. Lawyers don’t think about process and life-cycles; they think about transactions and precedents. Good contract management often demands that the specialist legal view is challenged to ensure that it does not constrain the wider business opportunity or needs. Lawyers are a stakeholder in contracts, not their owners. There are enlightened General Counsel who appreciate this point and a number are showing leadership in raising the credentials and status of their contract management teams, in no way viewing them as subservient or inferior to the in-house lawyer.
So if the value of good contract management is so clear, why do we still face such frequent confusion over its organizational role and reporting line? Why is it that some of the best Contract Managers feel a need to become qualified attorneys? I think quite simply because the demand for a high performing process is not matched by the supply of suitably qualified candidates – and hence the role lacks status. Most Contract (or Commercial) Managers do not have a specific professional qualification related to contract management, or they have been trained in the context of public sector acquisition rules. Hence they do not perform to common standards of value and there are wide variations in their underlying skills and knowledge. Indeed, in some geographies, there is still a broad perception that the function is largely administrative; this is especially true in the US, perhaps influenced by rules–driven Government Procurement and the army of Contracts Officers overseeing FARS and DFARS.
As a function and as a career path, Contract Management can come into its own only by demonstrating its professional standards. Every individual carrying this title must be able to describe the unique value that they – and their colleagues – deliver to the organization. At IACCM, we have been tackling this challenge and more than 10,000 contracting staff have now entered our skills assessment and development programs. These are designed to ensure underlying competency and consistency in the approaches and methods that are applied in the workplace. But of equal importance is the growing body of research that we undertake because this offers the source of our distinctive ideas, knowledge and statements of specific value.
With more than 30,000 members worldwide, IACCM is working hard to ensure that there is a new breed of Contract Manager, clear about their purpose, the methods they deploy and able to demonstrate the unique contribution of their role – a contribution that is truly distinct from that of the in-house lawyer.
It will surprise few that over 90% of suppliers say that a customer’s competitive bidding practices impact trust, loyalty and behaviour. Indeed, customers would be rather disappointed if the use of competitive bidding did not impact behaviour. But the key question is whether the effect is positive or negative – and there the answer seems to vary.
Recent research by IACCM suggests that many customers need to give careful consideration to their use of competitive bidding. A majority (68%) see it primarily as a tool to drive lower prices. Around 25% view it as a way to ‘incent improved supplier performance’ – by which they appear to mean an incentive for continuous improvement and innovation or of ensuring the quality of resources and supply. This attitude is consistent with other aspects of contracting and performance management, where negative incentives are the most commonly used approach (e.g. through allocation of performance risk to the supplier, the use of liquidated damages etc.).
But what is the actual effect of competitive bidding on supplier performance? The answer seems to be rather mixed. Regular use, or threats of, competitive bidding certainly keeps a supplier more alert. In commodity environments, it appears to generate some benefit regarding price. For example, 32% of suppliers in this category acknowledge that they are more likely to undertake regular price reviews and pass on any potential reductions. But the other 68% say that they are unlikely to take proactive action; they will store any price benefits until the threat materializes.
It is in higher value relationships that the potential cost of aggressive use of competitive bidding becomes even more apparent. In environments where suppliers are making significant commitment of assets or resources, regular competitive bidding generates understandable caution. For more than 70%, this translates to decisions over customer preference, the quality and timing of resource allocations and the extent to which they share opportunities for improvement or innovation. One executive explained it this way: “Customer A is big, but they use this size aggressively. They make regular use of competitive bids and this sends the message that everything is about price. They forget that they are not the only show in town. Some of their competitors behave very differently – and that is where we are investing our best resources, our development budget and our loyalty.”
There are two problems for any buyer. First, can they trust a supplier to pass on benefits proactively? Second, how do they know that a particular supplier remains competitive over time? The IACCM view of best practice is that buyers should be making far greater use of on-going benchmarks. Our work points to the use of incremental terms within the contract, requiring new and different forms of reporting by the supplier. These can not only ensure the customer is getting a competitive deal relative to other customers, but can also operate as an effective indicator of overall market competitiveness.
Such terms also generate a closer relationship because they prevent the cost and disruption of regular bidding and they also ensure shared data for performance reviews. This sense of working together to achieve shared value has a positive impact on trust, loyalty and behaviour. It generates obvious benefits beyond price – better resourcing, higher investment and the potential for greater innovation.
So it is time for buyers to think about less use of competitive bidding and more use of market benchmarking.
2012/13 Salary Survey Reveals Limited Change
The latest IACCM Salary Survey looks at the state of the US market for contracts and commercial professionals.
In line with broader economic trends, it finds that salary levels are in general flat-lining. While the overall market for contracting professionals looks relatively robust (except for interim staff), this has not translated into increased pay. Bonuses and benefits also show little change from the previous survey.
This summary report focuses on averages at different job levels and industries. It also explores the impact of ‘complexity’. For example, practitioners with global responsibilities typically earn 27% more than their colleagues who focus only on a specific country. Those who are handling large, complex deals attract a massive 85% premium over staff engaged on more repetitive or transactional forms of agreement.
The level of executive interest in the contracts and commercial field shows a slight increase, with 57% reporting growing interest versus just 8% indicating a decline. Overall motivation amongst professionals has remained steady, with 81% saying they would recommend their role as a career path, but general morale remains volatile, with 1 in 6 saying that there has been a significant decline. Since wider perceptions of career opportunity remain relatively strong (only 17% feel they are reducing, down from 23% last time), it appears that there are issues with specific companies. These often appear linked to changes in reporting line, with a shift to Legal being the most likely to result in negative perceptions on future opportunity.
Those who are satisfied versus dissatisfied with their salary remain split at around 60:40. However, this has not significantly altered the percentage actively seeking to change company or job. Most would still consider a move only for a pay increase of 20% or more, although other evidence suggests that there are additional factors that are influencing this decision. Specifically, professionals are increasingly concerned about the cultural and ethical position of their employer; they are also more driven by quality of life issues. Also, the continued malaise in house prices is a persistent constraint on relocation.
Do you recall the end of 2011, when many commodity and raw material prices were soaring?
That is when experts at Deloitte wrote a report “Tracking the Trends 2012: The top 10 trends mining companies may face in the coming year”. It made excellent reading for any procurement or contracting professional interested in the mining industry and highlighted a range of opportunities and (in particular) risks and challenges that they would need to take into account in their contracting strategies and plans.
Yet what a difference a year makes. I shared the report with an IACCM member, the head of contract management at one of the largest mining companies. This is what he said:
“Interesting reading, but in many ways a “time warp.” The report’s data reflects the “boom” environment in place in 2011/beginning 2012 when mining companies couldn’t expand quickly enough to meet the huge increase in demand coming mostly out of China. Commodity prices spiked at record levels, and most miners were concerned with how quickly they could bring on new production. The report does reflect the struggle against fast-rising costs (everyone chasing the same people and other resources) and governments interesting in getting a slice of the “super-profits.” Fast forward a year or two – China is suddenly growing much slower, the US and Europe continue to lag, and some of the new supply/capacity is coming on line. Prices plunged and forced miners to focus on dramatically cutting costs, pulling back or moth-balling investments and looking for pieces they can sell to improve their balance sheets. Several of them (including Rio Tinto and BHP) have changed CEOs and senior management in the last year as well I understand that mining has always been a “boom and bust” type industry, but wow what a difference a year makes!”
There were of course many others who got ‘the trends’ badly wrong. Governments – for example Australia – thought they could cash in through extra taxes and planned expenditure accordingly. Now they face a revenue ‘black hole’.
So what are the lessons? Obviously a major point is the speed with which change can occur and how dramatically this can alter the risks we face. It indicates that a major priority for contracting is to build mechanisms that enable flexibility and include indicators that give early warning of change. The point is that many risks cannot be anticipated so in many ways the greatest risk is when we fail to allow for the unexpected. Given the volatility of business conditions, it seems to me that this is an area which requires far greater focus from the contracting experts.
Knowledge@Wharton has published an article featuring Beth Comstock, Chief Marketing Officer at GE.
Her message regarding leadership and change is important, especially for communities like Contract Management, Procurement and Legal. These groups are not famed for their advocacy of change, yet as this blog regularly indicates, it is in these fields that much of today’s change is needed, as a source of competitive advantage. To quote Beth Comstock: ” …you have to be willing to expose yourself. You have to put yourself out there. Instigators take on great challenges. The ultimate thing about being a leader is whether you can be an instigator and an agent for change.”
In the article, Ms. Comstock also highlights two sayings attributed to Thomas Edison – “I find out what the world needs; then I proceed to invent,” is one, and “The value of an idea lies in the using of it” is the other. These are valuable thoughts for the commercial community, because they go to the heart of our need to undertake research to discover what terms, practices and procedures are needed to support business in the modern environment; and also they point to the need for experimentation, a readiness to not only have ideas, but to pursue and implement them.
It is perhaps a good moment to pause and ask yourself, “Where is the source of my ideas, my understanding of what the world needs?’ And “what value have I generated through the use and implementation of an idea?” If you want to discover what others are doing, or to share your success stories, there are now forums to do this. IACCM has created its ‘License to Act Differently’ program and this year will see the 2nd Annual Innovation Awards, currently open for entries.
One of the most compelling presentations at the recent IACCM Europe conference was delivered by Qadir Marikar from PWC.
Qadir introduced his findings from an analysis of the IT Services and Outsourcing industry. He had started by examining the margins being achieved by the major suppliers and discovered a range that typically ran from around 2% to almost 30%. At the top end are some of the big Indian providers and their results are in large part driven by the low cost of labor (though they have also been successful in more effective use of underlying technology). However, his real focus was in understanding the difference between consistently high performers such as IBM and Accenture (each achieving around 15% margin) and the bulk of their competitors operating at 2 – 5%.
Research with clients revealed little difference in operational performance, but further analysis led to perceptions of ‘greater value’. It turned out that these are largely based on the nature and extent of ‘commercial conversations’ that occur. Qadir summarized his findings by suggesting that the low margin companies tend to respond to ‘what the customer wants’, whereas the higher margin providers ‘supply what the customer needs’.
As we examine this, there appears to be a difference in timing, allocation and purpose of commercial and contracting resource. The higher margin organizations tend to apply commercial analysis at the point of product or service development, to ensure that commercial terms and practices are aligned with the needs of target markets. As a result, they reduce the extent of deal-based negotiation and steer customers towards a robust and reliable deliverable, rather than encouraging high levels of risky customization. Second, they deploy post-award resources that ensure regular customer dialogue and performance reviews. They are focused on issues such as compliance, but tend to be more proactive in holding on-going commercial conversations around performance issues or changes in capability or requirement. By having a more reliable deliverable, they are able to operate with greater efficiency and focus on adding value rather than tackling crises. One example of this is that internal resources are much clearer about ‘the rules’ when there are clear standards and principles; organizations that are driven by individual customer requirements generate internal confusion over what can be committed.
Of course, this represents a generalized picture and not every client engagement follows these patterns. But the proportions matter and they add up to significantly higher margins.
As this case study illustrates, ‘commercialism’ is about more than contract management, but a good contracting process is a key enabler of commercialism.
Commitment Matters 