This posting comes from Paul Mallory, IACCM’s Vice President for Europe & Africa.
A working group of the International Organization for Standardization (ISO) is currently drafting an ISO guidance standard on outsourcing, and IACCM is acting as an external liaison to this group. I have spent the past two days in Paris with the group, where some fascinating debates have been taking place around what does best practice in outsourcing look like.
We are all familiar with the common stories of outsourcing deals that go wrong, and are terminated early. The statistics suggest that far too many such deals fail to deliver on executive expectations. The causes are undoubtedly many and varied, though some common patterns can be found. One example would be that some external market change meant that the deal entered into was no longer as viable as expected at the outset, and now failed to meet the original business case.
These discussions raise the interesting question of whether such a thing as best practice exists, and if so who will define ‘the standard’ and how can we have confidence in it? Listening to the many and varied experiences of the working group members in the room, from a variety of industries, countries and cultures, I was stuck not only by how it is possible to reach consensus on what a best practice is, but also on how much value is available through the diversity of views. If we’re prepared to share views, listen, compare with our own experience, and then be open to trying a new/different approach, we can identify areas for improvement in our current approaches. By comparing our performance and working standards to an external benchmark view, we are able to identify ideas to raise our game.
The working group is a great example of collaborative learning. All members of the group are learning, by recognising that we share a common issue (outsourcing deals that fail to deliver), sharing a common objective (better outsourcing deals and management of them), and being willing to both contribute our views and to listen respectfully to those of others, with a willingness to be open to new possibilities, solutions, directions.
This work will result in a guidance standard from ISO which everybody will be able to access and share the learning.
What group could you pull together today to work on a common issue and develop a better answer, raising the standard of performance for all concerned?
Contract terms can generate value, or they can destroy value.
I can cite many examples where a failure to appreciate the impact of term selection has had a heavy cost – the loss of business: the loss of innovation: the failure of major projects. On the counter side, companies with a more balanced approach have snatched business they were not expected to win, or have attracted innovative partners, or achieve a higher success rate.
In other blogs I have described specific examples, ranging from large companies such as GM, Toyota, AT&T, BP, Walmart, as well as creative approaches by small and generally unknown businesses. There have also been studies based on industries, such as construction or public sector, and how their contracting practices impact costs and performance.
Overall, I can be confident that contracting policies and practices make a substantial difference to organizational performance. So now the issue becomes one of knowledge and expertise. Specifically, whose job is it to ensure that an organization is optimizing its contracts?
And here we find that the answer in most companies is no-one. There is no accepted point of responsibility for ensuring that contracting practice, policy and strategy deliver value (or even that they prevent loss of value). Different functional power groups tend to dictate elements of the contract, frequently without understanding the business impacts of their approach.
Some organizations try to build in greater sensitivity through empowered negotiation teams, but these typically operate without the benefit of true insight to the statistical, operational or psychological impact of individual terms and conditions or commercial approaches. They are also limited in the extent to which they can ‘fix’ core policies or processes to accommodate the needs of a specific deal. What is really needed is far greater market and business intelligence about the policies and practices themselves, so that different deal types are structured appropriately. For example, if a goal is innovation, here is the best form of contract and related terms. If this is a relatively complex project, here are the key terms to consider, etc.
What is see in many organizations is an environment that stifles and prevents the growth of this expertise. Powerful groups claim an ownership of contracts and related terms, often in the name of compliance and risk avoidance, with no accompanying measurements or accountability for the actual impact they are having. Alternatively, they may not actually claim ownership, but they take steps to oppose anyone else stepping into the role.
I spent the last two days in Amsterdam, participating in the SSON conference, along with a variety of other meetings.
The week has been very much oriented towards discussions with Procurement – and has yielded further evidence of a strong trend towards contract and relationship management skills. It began with a negotiations workshop, in which I was highlighting the things that typically go wrong in business relationships and the fact that many of these ‘problem areas’ do not make the risk register, and therefore are inadequately addressed in the contract. The group was not large, but there was lively discussion and wide recognition that the focus of negotiation needs to shift in order to drive better results. We explored subjects such as the timing of involvement, the definition of scope and goals, approaches to change management and communications.
Contracts must better support the uncertainties and volatility of business needs and market conditions. Essentially, they need to move from the rigidity of being a red ‘stop’ light, to offering clearer routes to the management of alternative routes. This was further reinforced by a number of other discussions, in particular with a representative of the Dutch public sector, who emphasized that contracts and relationships should reflect the need for greater transparency and the ability to adjust to shifts in user requirements. He cited examples of the unexpected adjustments that are needed due to changes in operating conditions or public expectations; our contracts and negotiations ought to make improved allowance for these. I will cover a number of these interesting challenges in detail in further blogs this week.
Yesterday saw two sell-out meetings of IACCM members, one in Melbourne, Australia, the other in Toronto, Canada. Despite modern transport capabilities, I only managed to be at the one in Toronto!
Of course it is gratifying to see the sustained growth of IACCM, but more important than the numbers is the steady adoption of the message. It is the realization by many individuals that their role and contribution is enhanced when they step outside the narrow perspectives of traditional functional thought.
Professionals in Procurement and practitioners in sales contracting and Legal have been taught that ‘the other side’ (customer or supplier) cannot be trusted and that their role is to to anticipate and prevent their nasty tricks. This leads to one sided contracts and constrained negotiations, which in turn contribute to poorly structured on-going relationships. Professional associations and consultants on the Procurement side in particular generally stoke these fears and highlight the danger of allowing suppliers access, or the frequency of wrong invoicing, or the (horror of horrors) fact that suppliers are there to SELL things!
The message that comes increasingly from those who attend the IACCM events is that they truly welcome the chance to be in a balanced forum representing both buy and sell. It is through these events that they form an understanding of each other that reduces the fears, identifies better solutions and results in more productive contracts and relationships. Of course they must always remember that they represent the interests of their respective organizations, but that is never going to be achieved by an environment of animosity and suspicion.
Last week’ s edition of The Economist exhorts us to ‘simplify and repeat’ . It suggests that the growth of complexity threatens to overwhelm many businesses and render them unable to fulfill market demands and their own customer commitments.
Anyone in the world of contracts and commercial management will be familiar with this challenge. We are frequently at the forefront of complexity, seeking to balance internal policies and practices with external needs and requirements. Indeed, so many of those issues come together when we are forming contracts or handling negotiations that we are oftten seen as a cause of this complexity. It almost seems like those mandates from Legal, or the rules imposed by regulators, or the pricing or charging principles established by Finance, are somehow seen as our fault.
And the truth is, in some respects, they are our fault. We have so many insights to the issues surrounding and causing complexity, yet rarely do enough to challenge them, update them, make them simpler. In fact, we often glory in the complexity because it has become confused with our sense of value. Sorting all the confusion and making sense of it has become our role.
That is wrong and it is very short-sighted. The Economist is right – survival depends on making complexity simple. So our goals should be to do precisely that. We must monitor the things that cause delay, the things that result in commitments not being met, the things that disappoint our customers and suppliers; we must then propose or lead work to achieve improvements. And because complexity will not go away, the task before us is not only extremely valuable, but also unending.
How much better to be seen as a person or a function that is making things better than to be seen as someone who is a representative of the complexity that everyone wishes would disappear.
Lawyers and accountants can move between industries. So can procurement managers and and HR professionals. So what about contracts and commercial staff?
Earlier this week, I responded to questions about the best qualifications for a contract or commercial manager and whether contract and commercial management are cross-industry disciplines. That left one issue to tackle – the transferability of skills between industries.
In my years of heading IACCM, thee have been many communications from members about job opportunities and the absence of a clear career path. This has frequently been accompanied by a complaint that few employers deem contracts and commercial skills to be transferable across industries – a view that has a severe effect on career options, especially when a particular industry may be in crisis or decline.
How valid is that complaint?
I can certainly point to many instances of individuals who succeed in crossing industry boundaries. My own commercial career inclued switching from automotive, to aerospace to technology and services. Another IACCM member recently wrote: “? I believe that there is no industry or geographical factor involved in this particular issue. I strongly consider that skills and knowledge applicable in one industry area able to be transferred to others depending on the particular circumstances of the capabilities of the individual who is moving from one sector to the other. I was able to experience such transferability from the fishery industry to the software and IT sector, without any type of previous training, this is something that comes by nature with each individual, regardless of the industry and of the region we are talking about”.
So is the difficulty more one of personaility or presentation? Do some individuals seek to mask their own inadequacy as a candidate by blaming prejudice or narrowness of thinking in others? I am sure there is some truth in this, but I think the issue goes deeper and relates to a point I made in the earlier blogs. That is, the absence of clear and transferable professional credentials. As an employer, I need some evidence of core competence; I need to be sure that the individual I am hiring actually possesses transferable knowledge. And without any basis for objective judgment, it is far easier to hire someone who has a pedigree within my industry.
Many of the leaders in commercial and contract management make the situation worse when they position this role as something that can only be learnt ‘on the job’ and not taught. This reinforces the perspective that contracts and commercial is not a profession, since any profession has by definition an underlyign body of knowledge, which in itself supports transferability between industries.
And that, in the end, is the reason lawyers, accountants, procurement professionals and others find it easier to move betweeen industries. They possess credentials that confirm their status and knowledge. Most contracts and commercial staff do not. Yet that is a problem they can fix; IACCM certification is designed to help and, for those in the US Federal sector, they also have the option of NCMA credentials.
Yesterday I responded to a comment regarding the most appropriate background for a contracts professional. The IACCM member who asked that question also sought opinions on whether contract management is a cross-industry discipline, or industry specific.
There are two aspects to this question; one is whether dedicated contract management resources are required in all industries; the other is whether the skills and knowledge applicable in one industry are transportable to others.
With regard to industry needs, my view is that all industries require contracts and commercial competence. They need the ability to design, structure and manage sustainable and effective trading relationships and to do this must have people with the judgment and knowledge required to interpret market strategies, to negotiate appropriate agreements and to oversee their performance. However, the depth of this need and the way it is established varies substantially between industries and even between companies within an industry, depending on their market strategies. For example, in consumer-facing companies, there is very little need for in-depth contract management. On the sell-side, it is negligible; on the buy-side there will typically be a need for in-depth expertise to handle areas such as technology, outsourcing, real estate and logistics, but the bulk of commodity purchasing operates with little negotiation or contract flexibility.
In a sector such as technology, the picture is more variable and driven by business and market strategies. For example, the extent of b2b versus b2c will have a major impact (think Dell compared with Apple). Also, choices over routes to market will be influential (direct sales versus the use of third party channels). Another factor will relate to the extent of market dominance – is negotiation necessary, or are contracts instruments for business and market control?
In general, the more that a company offers or acquires services and solutions and the more that its primary markets and interactions are business-to-business, the greater its need for contract management resource. Similarly, project-based industries (such as oil and gas) depend on the strength of their trading relationships (especially with suppliers and sub-contractors, and also with partners in collaboration and joint ventures).
The industry scope of IACCM membership demonstrates the cross-industry mix of contract management today and also reflects relative volumes of professionals within each industry. However, I should point out that the picture is not unchanging or complete. For example, both oil and gas and financial services have seen substantial growth in demand for highly qualified contracts staff in recent times, due to industry-specific risks and performance issues. An industry such as construction has large numbers of people who perform contracts and commercial tasks, but often under an industry-specific professional umbrella, such as Quantity Surveyor. And finally, geography perhaps has even more influence than industry. Until recently, it was relatively hard to find recognizable contract or commercial management roles outside Common Law countries. Business was based far more on localized, long-term relationships for which contracts were seen as having limited relevance. This remains the case in much of Asia and Latin America, although the picture seems to be changing.
Overall, the situation is not so different for many other business disciplines. The relevance of project managers, lawyers, procurement managers, or even sales staff varies, based on similar factors.
The second part of the question relates to the transferability of skills between industries – and I will address that tomorrow.
Is it worth investing in contract management?
Whether they seek to define their value in order to gain investment, or need to respond to management demands for evidence of what they do, this is a question that taxes many contracts and commercial professionals. A majority struggle to provide credible data to support their contribution to business results. They rely upon executive sponsorship for the role – and frequently find themselves under-funded for the tasks they need to perform.
That is why IACCM research into the financial value of contract and commercial management is so important. And tomorrow, it will present a webinar in which early results will be presented. These include the impact of weaknesses in contract management on bottom-line results, plus the most frequent sources of loss and comparisons by industry and geography. Registration for this event is at https://www.iaccm.com/events/register/?id=1340
One of my recent blogs resulted in the following comment by B R Srikanth (an IACCM member from the oil and gas sector and based in the Middle East): “the more important question should be “Who is best qualified to be a Contracts Professional?” Is it someone with a law background, or Finance or technical or project management or a bit of all. “Is a Contracts Professional suitable across industries like an Accounts or Finance professional; if not, is it industry specific?”
In order to answer this question, we must address whether those in contracts and commercial management can truly be called ‘professionals’. And in my opinion, if they can only be defined in relation to other professions, the answer is no. A hallmark of professional status is a distinct body of knowledge which includes widely used techniques to undertake the diagnosis and remediation of problems. If contract managers are simply amateur lawyers, accountants, project managers or engineers, they cannot be deemed ‘a profession’. And of course, by defining the role in this way, it guarantees that it is seen as a sub-element of another functional discipline, with relatively low status and value. It also means that the role is performed inconsistently, depending on whether an individual or company sees its primary purpose as legal, financial or project-management oriented.
Of course, this is not to suggest that contract and commercial managers do not operate with professional standards – principles of ethics, integrity, a commitment to learning – but that is in no way the same as being ‘a profession’. And at this time, the contracts and commercial community remains on a journey towards professionalism because, while there are several thousand who are now certified practitioners, many are not – and therefore still define themselves in terms of a quite different professional background and qualification (or indeed have no formal qualification at all).
The syllabus for contract management does indeed include elements of finance, law and project management. But it also incorporates elements of marketing, economics, business planning, quality management and business development. And it moulds those fields of knowledge and understanding to create unique value propositions that support successful business outcomes. Therefore the real question should be more focused on the skills and aptitudes required for excellence in this role – and there we start to focus more on communications, analysis, negotiation, time management and a range of other personal attributes that ensure effective application of the knowledge supplied through the learning syllabus.
IACCM has defined the skill and knowledge requirements for contracts and commercial professionals and developed a body of knowledge to support their work. Through this, we are steadily observing the emergence of a profession that can define itself on the basis of its unique characteristics. It is also increasingly supported by extensive research in areas that are not addressed by other functions and professions – for example, the connection between contracts and relationship management; the impact of selected terms on trading outcomes; the effect of cultural variations on approaches to contracting.
For now, the lack of undergraduate programs in contracts and commercial management means that most will come to this role with other qualifications or background experience. In that case, they should be measured on the basis of aptitude (skills) as much as they are for knowledge. And while finance, law and project management may each be relevant, none of them is in itself enough; each is a component of the syllabus for a high-performing contracts professional.
Tomorrow, I will address the second part of Budgur’s question: whether contracts and commercial is needed across all industries and whether the role is industry-specific.
Commitment Matters 