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.
I was talking today with some of the top recruiters for contracts and commercial staff. We were comparing experiences in terms of market demand and trends.
IACCM surveys have shown that most contracts and commercial groups are avoiding significant staff reductions. Indeed, many have received increased investment, reflecting a growth in workload and perceived importance. But management expectations of value are shifting, and this has resulted in changed expectations and demand. For example, there is now much greater focus on the role the function plays in safeguarding value from contracts. With tough economic conditions resulting in low or zero growth, it has become essential to ensure that existing contracts perform better. So the major recruitment opportunities have shifted to a focus on post-award contract management.
Similarly, the overall skills of the contract manager are now expected to be broader, offering ‘commercial judgment’ rather than simply oversight of performance and compliance. This includes a need to share information and knowledge – as one recruiter put it, the contracts staff must be capable of ‘workshopping with the business’. They are not only practitioners, but also teachers and enablers.
We also discussed whether this growing focus on a post-award role places the contracts or commercial manager in a position of greater contention with project management. The overall consensus is that it does not. Businesses appear to have recognised that project managers tend to bring technical delivery skills and methods, but need a commercial partner. Therefore contracts and project professionals tend to be peers with dual responsibility for successful delivery.
Not all organizations have yet grasped the potential scale of savings or incremental revenues that can be earned from investment in contract management. Those that have are realizing a high level of return – and hence the observed trend to retain or grown the function. But the counter-side of this is that it has been a tough period for interim hires. The itinerant contracts or commercial professional has seen a marked drop in the demand for their services.
This year’s IACCM Europe Forum kicked off with a workshop on Commercial Assurance.
Delegates were alerted to the growing concern by executive management over the quality of commercial awareness and judgment. However, they were then warned about the challenge (highlighted in last week’s blog on The Declining Role of the Contract Manager) that faces the incumbent contracts and procurement community – too often seen as part of the problem, rather than being key to a solution.
This generated a lively debate over the role of contracting in identifying and driving change. For example, if a commercial group undertakes analysis and discovers that sales compensation is resulting in consistent over-commitment and financial losses, will the organization welcome this news?
There are many insights to be gained from analysis of the contracting process and of contracts themselves. Simon Chard form PwC offered some excellent examples in the meeting. But is it the role of contract management or procurement to highlight the areas of weakness caused by other functions, or by internal measurements, policies and practices?
To my mind, the answer is clearly yes. Executives cry out for more leadership. They want improved analysis, driving greater quality and improved business performance. Contracts staff are in a highly privileged position, having insight to many areas of the business and controlling one of the key economic and risk assets.
So we must consider how we ensure that contract and commercial models and standards are ‘fit for purpose’ – i.e. supporting business strategy and goals. And that means we have to propose new models, based on analysis of problems and performance. We need to understand how the terms we use affect behaviors; we need to explore the impact of contracts on relationships and in particular where revenue and savings are lost as a result of weaknesses in the process.
The workshop explored all of these areas and offered many examples of possible improvement. The opportunity is there, waiting to be grasped ….
I frequently write about the growing importance of contract management as a business discipline. There is extensive evidence to support this, including IACCM’s recent interviews with 50 of the Global 250 corporations.
But growing importance for the discipline does not automatically translate into growing importance for the function or the individual practitioner. Indeed, the growing spotlight simply serves to illuminate the weaknesses in the current practitioner community, whether lawyers or contract managers. This leads to alternative models for the delivery of contract management services.
I am going to briefly answer three questions:
- What is happening?
- Why is it happening?
- What should the current contract management community be doing about it?
What is happening? I see two big trends. One is that companies from emerging markets are investing heavily in technologies that support more automated approaches and also ensure portfolio analysis as methods to oversee and ensure commitment management and performance. In longer established companies and those where the focus is strongly on high value projects, the project management community is showing far more leadership in addressing contract and commercial issues. Project management training and focus increasingly includes a strong commercial focus and there is far more openness to innovation in contracting.
Why is it happening? Quite simply because the incumbent legal and contracts community is too slow and resistant to change. They appear far happier to continue fixing problems as they arise rather than looking for permanent cures. Top management and our colleagues in functions like project management increasingly see us as part of the problem rather than offering a solution. Business cannot afford the costs or delays inherent to a function that is reluctant to innovate, to drive quality and to contribute clear value.
What should the current contract management community be doing about it? Focus on corporate goals and be rigorous in contributing to them. Everything around us is changing, yet we appear resistant to the research and analysis that is now the order of the day. Indeed, contract managers rarely look for a research-based approach to their work. They do not think in terms of data analysis or look to eliminate repetitive activities. In many cases, they push back on the idea that technology could transform what they do and how they do it.
If I sound frustrated, it is because I am. I see a community – buy-side and sell-side – that could be delivering so much value and securing its position as a strategic enabler of the business. But in general, it is not. The groups that are interested in change and improvement are the client groups, like project management. They are the ones who want to discuss new contracting models, ideas such as relational contracting, the impact of terms and term selection on behaviors, the economic impact of improved contract management ….
The position is not irreversible, but it is time for the existing contract management community to wake up to the challenge and opportunity that is currently passing it by.
It can be difficult to persuade an organization to give up on its traditional approach to negotiation. I am quite often asked to suggest how to transform adversarial attitudes towards suppliers.
Adversarial behavior tends to be self-reinforcing. It stems from a lack of trust, yet inevitably it causes those on the receiving end to lack loyalty and therefore to be untrustworthy. I recall an excellent example of this when I was researching the negotiation style of the major US car manufacturers. Before the financial collapse, they were famed for their domineering treatment of suppliers. I spoke with a few of those suppliers and their attitude was “We hope the major US producers go out of business. Yes, we work with them, but our loyalty and investment is focused on their foreign competitors. People aren’t going to stop buying cars – and we will be pleased if they buy them from manufacturers who behave fairly and want partnership with their suppliers”.
Over time, adversarial behavior takes a toll on any business. It will most likely be starved of innovation. When times are tough, its suppliers will have little interest in helping out. Management time is far more likely to be spent fire-fighting than it is on creativity or process improvement. But all these things seem remote and distant, and the immediate benefits of more collaborative behavior are hard to define or illustrate when there is no baseline for comparison. Often, the behavior is also common to an industry so there may not even be external benchmarks.
IACCM’s study of the companies ‘Most Admired for Negotiation’ provides clear evidence of the benefits that flow from a less adversarial approach. This was reinforced by last year’s study of ‘The Future of Contracting’, in which there was almost universal belief that a more collaborative style is evolving, supported by today’s advanced technologies and analytics. But while these reports provide supporting data, they do not specifically answer the question “How do I go about getting my organization to change its approach?” So this week, with my colleague Paul Mallory, we recorded a short podcast offering our ‘Top Ten Tips’ on this topic. It can be accessed at
https://www.iaccm.com/members/library/?id=4752&src=contractingsrole
Measurements of customer satisfaction have been around for some time now. Those for supplier satisfaction are rather more recent. But in both cases, I am surprised at how little they are used to gain real insights to the quality and impact of the contracting process.
There is growing understanding that the way organizations negotiate and handle risk, the way they manage scope definition and change, their approach to performance management are among the critical elements that define the value achieved from their relationship. Yet I have encountered few analyses – other than those performed through IACCM – that actually explore these key areas.
An effective study would of course not only address these topics, but would want to know the answers relative to competition. Satisfaction indicators have limited meaning unless we understand their influence on choice. And there is generally no better way to generate management attention than to have comparative data of this sort.
Historically, research of this sort tended to be driven through a central research department and there was reluctance to include too many questions. In today’s internet age, it does not have to be especially complicated, time consuming or costly to obtain data on customer or supplier satisfaction. Questionnaires can be far more targeted to specific recipients, allowing more segmentation of survey type and more detailed topics.
Satisfaction surveys that produce actionable information are a powerful way to generate management information and to gain investment. Is the reluctance of the contracting and commercial community to acquire such data an indication of political naivete, a fear of the results, or just the fact that we have never really thought about it?
Last week, IACCM held its inaugural meeting for members in Russia. More than 40 attended a half-day session in Moscow, hosted by law firm Baker & McKenzie.
Opening the presentations, Max Gutbrod – a partner with Baker & McKenzie – made some interesting observations. He started by commenting on the legal profession and its perceptions of contracts. Using Germany as a n example, Max explained that legal training since the 19th Century has focused on training people to eventually become judges. This results in the development of skills and knowledge ‘designed for the courtroom’.
While the focus of legal training in other countries may have some variations, Max’s point was that it rarely equips its graduates for the realities of business. In his opinion ‘much of the training of the future should be on contracting’ and he perceives this as a discipline that ‘finds common ground, including the need to work across legal and cultural systems – using contracting to build bridges’.
Working in a country like Russia, Max well understands the need for practical tools that can assist in generating better understanding and trust. Several speakers emphasized this point when discussing the big challenges for doing business in Russia. Not only are formal systems lacking, but trust levels are also weak and therefore there is a need to build confidence through the open conversation and methods that good contracts can bring.
Max illustrated this by pointing to some of the fundamental misunderstandings that will arise if there is not structured discussion between the parties forming a relationship. For example, a general principle in Russian law is that the user or customer has responsibility for selection and use; there is no evident liability on the supplier unless specifically stated otherwise.
He concluded with the observation that there is much to be gained by improving contractual practices in a country like Russia and using contracts as a method to raise mutual understanding and address areas that otherwise are likely to become issues of contention at a later point.
Research consistently points to the challenge of accurately defining the scope of work. It is the number one cause of claims and disputes.
In this context, I came across an interesting article outlining a case study from the construction industry. As an industry, construction has made great efforts to tackle the sources of claim and dispute, or to simplify their resolution. An example highlighted in the case study is the definition of differing site conditions – for example Type I, Type II. These definitions allow for far greater efficiency in both negotiating and managing the contract.
The article emphasizes the importance of the contract and its wording when embarking on projects where there is a significant degree of uncertainty.
In this particular case, the discipline developed by the industry did not prevent a dispute. However, it made me think about the value that industry-wide definition could bring to other sectors, such as IT, software development or outsourcing contracts. In construction, terms such as Type I or Type II are used to depict levels of uncertainty in the underlying site conditions – for example, related to sub-soils or possible obstacles. In a sense, contractors for projects in IT or outsourcing face very similar ‘site uncertainties’. They have to rely upon the representations of the buyer with regard to management support or user attitudes. They often face unknown elements regarding interfaces or related strategies.
Today, those uncertainties frequently lead to delays, unexpected changes, added costs. But because they were not identified as uncertainties, they typically become an issue of dispute. Like construction, might we not list the areas or ‘site conditions’ that are typically encountered and rank the extent of uncertainty and impact – thereby creating Type I, Type II, Type III models to reflect the areas and extent of potential variation to the original scope – and thereby more accurately set the expectations of both parties?
Commitment Matters 