The New York Times yesterday carried an article highlighting a law suit that revolves around law firm fees and charging practices. A client of DLA Piper has not only refused to pay his bill, but has filed counter-suit alleging ‘a sweeping practice of overbilling’ and seeking punitive damages of $22.5 million.
The disclosure process has resulted in a number of emails becoming public, which reveal interesting exchanges between the attorneys involved in the case. When asked to comment, a number of law professors comment on the growing hostility to current charging methods and one observed that ‘the billable hour creates perverse incentives’.
While lawyers come in for specially strong condemnation on this issue (doubtless because of the scale of their fees and hourly rates), there is plenty to suggest that this is a more generic problem related to the services industry. TPI set up an entire division scrutinizing invoices from outsourcing service providers and found typical error rates equivalent to 7%+ of annual charges.
It seems surprising in today’s technology-driven world that service agreements still rely on either fixed fee or hourly rate billing. Performance or outcome based contracts remain the exception, but may be part of the answer for clients. Other solutions may come from the increased involvement of Procurement in oversight of law firm billing, plus a drive for greater transparency in the billing system (e.g. remote access into real-time charges, as opposed to monthly bills).
Overall, the formula and methods for services pricing and charging seem due for an overhaul and an area where surely there must be innovation.
In response to a past blog, Charles Rear poses a question: “I wonder if an IACCM member in a Procurement function, and an IACCM counterpart in a sales-function, have ever agreed, openly and with their employers’ blessings, to undertake a contract negotiation according to the IACCM principles of Principled (“win-win”) negotation styles. In the Western world, the instinct to keep information and skills privy to oneself, inhibits application of best practice in negotiations with external parties and knowledge sharing within one’s own organization ….”
I can certainly offer examples from both IACCM members and personal experience. But it does tend to depend on specific conditions, typically either strong personal relationships that have generated underlying trust between the negotiators, or (on the buy side) a history of adversarial relationships and disappointing outcomes that have led to internal soul-searching and a realization that things must change.
Charles is right that ‘win-win’ negotiating tends to be the exception, not the norm – in spite of the fact that a vast majority of negotiators claim that they prefer a win-win approach. It seems to me that there are several factors that result in adversarial negotiations being more typical:
1) Absence of trust.
2) Measurement systems (driven by incentives that have no connection to long-term win-win outcomes).
3) Inadequate planning.
4) Poor coordination within the internal team.
5) Absence of substantive authority to negotiate (especially within Procurement).
What are your experiences and what factors would you say lead to the predominance of a win-lose style?
(As a footnote, I should comment that while it is generous of Charles to credit IACCM with the concept of Principled Negotiation, it was of course introduced in the book ‘Getting to Yes’ some 20 years ago)
Building on my comments in yesterday’s blog, an example of ‘asking the right questions’ comes from Sidd Mukherjee on the IACCM Forum.
Sid asks whether organizations are assessing and measuring whether their contracts are effective in communicating intent. He comments: “The universal truth is a poor quality contract causes ambiguity, delays the project, and brings in more changes or claims. Hence having good quality controls is important …”
it is an excellent question. Our research into measurements does not suggest that there is any significant activity in this area. There are perhaps indirect measures such as user satisfaction or monitoring cases of claim and dispute (including analysis of underlying causes, which could include poor contract structure or drafting, or ineffective communication).
At IACCM, we are doing a lot of work on the useability of contracts because poor structure or bad wording, including excessive ‘legalese’, clearly do have negative impact. This work is exploring how we ensure the contracting process delivers clarity to users – and this includes not just the original contract, but also the change procedures,
Also, IACCM is introducing a formal assessment process whereby an organization can gain approval for the quality of its contracts with regard to their clarity for users, so this could offer an effective answer to Sidd’s question.
Once more, this offers a great example of the importance of ‘asking the right questions’ and recognizing that in our data-rich age, we really should have answers to some of these fundamental issues.
It seems to me that the key to raising commercial capability – and to delivering value more generally – is to ask the right questions.
We all know that today’s networked world is enabling many new questions to be asked and answered. Our ability to collect, consolidate and analyze data is progressing at a remarkable pace. Perhaps the biggest challenge is to help people realize the range of questions that can now be asked – and of course the way that answers to these transforms the nature and effectiveness of what we do.
In my role at IACCM, I come across examples of this every day. For instance, something I have been wrestling with for a few years is to better understand the interaction between contracts and relationships. Traditional thinking sees them as connected, yet largely independent of each other. Yet much has changed. The complexity of relationships, the increased numbers of ‘stakeholders’, the regulatory pressure for transparency and clarity, the growing responsibility of suppliers for securing outcomes …. many factors are increasing the importance of increased rigor in the relationships we select and the discipline with which they are managed.
But on the counter-side, this also means that the ability to have a good relationship is becoming acknowledged as far more important. So factors such as behavior, culture, demonstrated competence in contract management are becoming key elements in supplier (and sometimes in customer) selection.
All of this raises many ‘new’ questions and I plan to discuss a number of these over coming days. But for today, i am interested in the issue faced by many buyers; if I select suppliers based on the potential for a good relationship, how do I prevent erosion of the benefits gained from ‘commoditization’ and ‘competition’?
Of course there are arguments – and methods – to address this, which include better understanding the true elements of cost (rather than just price) and expanding the elements of competition to include demonstrated performance in the market. But the concern will remain – ‘how do i know I am getting value if i don’t go back to the market on a regular basis? How do I stop this relationship becoming ‘cozy’ and inefficient?’
I think the answer to this may lie in transforming the benchmarking process. In this day of ‘big data’, there are many more possibilities to benchmark and it is not unreasonable to expect that much of this data should be coming from the supplier itself – and of course be something that the buyer can verify. For example, why would I not ask the supplier to give me regular updates on the percentage of bids they are winning for products or services similar to mine, and the average price at which those are being won?
I might also commission periodic benchmarks of the regulatory performance of my supplier relative to their peers. And I might recognize the need for shared benchmarks related to our interactions with each other, so that we could work together on improving performance and reducing the costs of our operations.
I have been working on a presentation about the role of benchmarks in the future; I hope you will share your thoughts and ideas on this, especially in respect of how it could lead to more sustainable relationships and a more efficient way to measure and monitor ‘competition’.
Yesterday I was invited to give evidence to the UK’s Public Administration Parliamentary Select Committee. The topic to be examined was Procurement skills, but the focus was in fact around the question of ‘commercialism’ and to what extent it is lacking in Public Procurement.
It is possible to try to define commercialism as a list of demonstrated skills or the application of specific knowledge – and IACCM has of course done that as part of its skill assessment program. But perhaps it is more important to try to describe the way that commercialism manifests itself – what are the key deliverables?
For most people, it seems to boil down to the simple matter of whether there was good business judgment. The select committee cited numerous examples in which that judgment – in hindsight – appears to have been lacking. In my mind, there are three core phases of commercialism:
- Possibility. At an overall level, and given known constraints, does it appear possible that whatever is being proposed can be achieved?
- Probability. As we examine the proposal more closely, what are the probable issues and opportunities and how will alternative approaches affect those probabilities? In this phase, we are exploring both macro issues – for example, the likely reaction of major stakeholders and how that can be managed, or the probability that we can access adequate resources with the right skills – and micro issues, such as whether a particular contract term might have an adverse or beneficial impact on the outcome. Obviously this probability analysis is a phased activity based on relative importance of the item under review.
- Affordability. Within the various options available to us, can we demonstrate that this initiative will generate economic benefit for all significant stakeholders (in the case of the public sector, benefit may of course be measured by some non-economic indicator, but affordability will remain a critical issue).
Of course, another significant question is where responsibility for commercialism should reside. Is it primarily within the remit of a specific function, or is it a more generic organizational capability? My opinion on this question is that it must be intrinsic to the organization, but ultimately management has the responsibility for framing the underlying commercial capabilities for the organization and a ‘commercial function’ should have the job of implementing and overseeing those management policies. This function should be responsible for delivering required knowledge and capabilities to the wider business as well as alerting management when commercial policies are misaligned with business strategies or market needs.
If such a framework had existed, I believe many of the high cost and high profile failures in public procurement would have been avoided. But it is perhaps unfair to level all the blame at Government employees because it was also the responsibility of the major suppliers to apply good commercial judgment – and they also appear to have failed to make those assessments of possibility, probability and affordability.
Finally, how realistic is it to link ‘commercialism’ with the Procurement function? It seems to me that at present it is largely unrealistic. There is little to suggest that most Procurement groups have the skills, knowledge, systems or motivations that are consistent with the holistic view that commercialism demands. Certainly, at this point, it seems important that we distinguish the role of the Procurement function from the bigger question of the procurement process – and work out how those should interact and become better aligned. And that view seems to be reflected in the attitudes of the average CPO, most of whom seem reluctant to take on such a massive expansion in their role and accountability.
IACCM member Edward Willey drew my attention to a report from the The Center for American Progress which comments that “the US Government is getting more aggressive on cost savings through improved contracting”.
For those who have not worked in this area, Edward points out that it’s important to understand that purchasing is devolved to the various government agencies. In other words, if the Department of the Interior needs to acquire specialized commercial products, it willl buy those (through a competitive bid process, usually) on its own, based largely on its own criteria, even if a sister agency is purchasing substantially the same goods from the same vendor for a lower price. For too long, inter-agency cooperation has been the exception, not the norm. As the article highlights, computing resources, especially data systems, have been a key area of redundancy and overcapacity. The decentralized model notably led to reduced efficiency and negotiating power, which when combined with the non-bid contract trend has probably resulted in many, many billions of dollars in waste.
Edward asked what comparative data there is regarding similar trends in other countries. Here are my thoughts – but reader cometns and knowledge on this would be most welcome.
First, it is worth observing that the potential for cost saving is of course bi-lateral. In other words, greater consolidation of spend and more consistency in buying should yield incremental savings on price. But while this appears often to be the focus and force behind consolidation, it probably represents just the tip of the iceberg in terms of actual benefits. For both buyer and seller, consolidation of spend can also offer major operational efficiencies. It needs less resources for its negotiation and management; there is far less diversity of support; there are less vendors to manage, fewer customer interfaces. Our research suggests that efficiency savings alone can represent up to 10% of the total cost.
Second, in terms of trends, procurement consolidation is certainly an area that has gained some attention, especially in Northern Europe, though in my experience so far rather limited action. Departmental turf in Government remains very strong; it is, after all, at the heart of politics and history tells us that politicians are often much more diligent in fighting for their own power and prestige than they are in fighting for the public good. In some other countries, public employment appears to remain core to Government policy so far from seeking efficiency, they maintain inefficiency as a way to keep down the level of unemployment. Hence the scale of action is far below where it should be.
As pressure grows on business to further develop contract and commercial competence, this reflects into the way that the practitioner community needs to acquire and disseminate knowledge.
Earlier this week, I wrote about the pressing need for greater professionalism and how this depends on commitment to a uniform ‘body of knowledge’ and to principles of continuous improvement. Today’s global networked economy means that learning and knowledge must also be far more international than they were in the past. This is not only because more of our business dealings are international, but also (and more importantly) because good ideas and good practices are not defined by geographic borders.
So as the contracts and commercial community moves from a largely transactional support role to also having responsibility for raising organizational capabilities, its approach to work and to knowledge management must also change. The sources of information are diversifying and the channels through which we can learn have multiplied. In particular, the technologies that have generated global commerce must also be employed to promote global commercial knowledge.
In part this is achieved through media such as the IACCM on-line learning program, but there are also day-to-day tools like the IACCM Forum. As someone who started in this field before the days of the worldwide web, I find the possibilities to ask questions, discuss issues and share ideas truly fascinating. The range of topics on the Forum is truly diverse, reflecting the varying levels of knowledge and sophistication within any global community. But many times I do not know the answer and it causes me to go and do some research, or to read with fascination the answers provided by others. Despite some 35 years in the field of contracts and commercial management, including 12 as leader at IACCM, there are so many areas about which I know little or nothing.
My one disappointment is how little the practitioner community appears to make use of these fantastic tools that are now at its disposal. I do not refer here only to the IACCM Forum because there are of course others (even if IACCM’s is the best!). I am sure the reasons are 1) time and 2) confidentiality. But I think those are pretty weak excuses. First, I believe that such shared learning helps to make each of us more efficient. Second, I see very little that represents a competitive or confidentiality issue – and anonymity combined with good judgement provides an easy way to avoid conflicts.
Perhaps this is a generational issue and today’s junior staff will – as their experience grows – be more willing to share their ideas, to mentor others in the community. I hope that is the case because i am convinced that it is key element of the path to sustained value and a healthy, high status profession.
My friend Richard Cellini, CEO at Briefcase Analytics, recently shared with me an interesting piece of research.
We had been discussing the extent to which organizations accused of bribery and corruption may also be guilty of other regulatory breaches. Richard undertook a massive piece of cross-industry analysis to see what patterns would emerge.
Having looked at the risk history of 30,000 different companies, covering a period of 5 years, it emerged that 1.5% have had at least one bribery charge made against them in that period. This translates to 15 per thousand – but given their geographic diversity, it is of course likely that the real figure is rather higher and that many instances simply are not exposed. The number of countries in which suits were filed is very low.
It is probably not surprising that about 20% of those accused of bribery face more than one charge. Of much greater interest is the fact that 80% of those facing a bribery charge also show at least one other serious ‘business integrity’ event. For example, more than 80% have been accused of breach of contract, almost 70% of patent violations, 60% face product liability suits ….
This is clearly invaluable data to any company assessing its potential trading partners, whether as suppliers or customers. The fact that such data is so quickly and easily available today also illustrates the fact that there is no real excuse for ignorance. It is a great example of ‘big data’ in action for the contracts and commercial community.
When I was a child, I once had a headache and was given an aspirin. My headache went away.
A few days later, I had another medical emergency. I fell off my bike and cut my knee. I tried an aspirin. It didn’t work.
This story is of course not true. But I use it now to illustrate the point that whenever we have need for medical treatment, there is also a need for appropriate judgment with regard to the remedy or cure. The world of medical science advances through experimentation and observation which link solutions with results. We use health professionals because we believe they will fix our problem and we respect the profession because it is committed to continuous advances in knowledge.
These same principles lie at the heart of all professionalism. Whether we need an engineer, accountant or lawyer, we expect them to have developed expertise through understanding of an underlying body of knowledge. They provide value by applying that expertise to our specific situation and thereby increasing the chances that we will achieve our desired outcome.
The frustration that managers and colleagues have with contract and commercial staff is that they frequently do not exhibit these fundamental attributes of a professional. They appear to have a limited set of solutions which they apply in hope rather than with judgment. There is no evidence of research or diagnostics, except perhaps in the context of individual experience.
We apply aspirins (for example a liabilities clause) with no apparent understanding of the impact it will have. We recommend or produce form contracts, but often cannot predict whether it is likely to lead to a healthy and sustainable relationship.
The situation can be even worse when it is lawyers who intervene. When it comes to a knowledge of case law or regulation, and consequent riskiness of particular terms or the way they are drafted, the lawyers clearly have great professional expertise. But that does not translate to an understanding of the way those terms or clauses impact the chances of success. So they may be able to help us limit the consequences of our illness, but can actually increase the probability of becoming ill.
No wonder business people find contracts frustrating. What they need is expert advisors who understand what type of preventive methods and techniques should be used. They don’t want focus solely on protection when something goes wrong; they want to know how to increase the chances that it will go right. And that is where contracts and commercial staff must focus their efforts.
In order to do this, the community needs to accept the need for a consistent framework of knowledge and terminology. It must also grasp the point of on-going research and experimentation, to drive continuous improvement and added-value. Without that commitment, the role will become increasingly administrative in nature and will steadily be replaced by automation or integration into the work of others.
At first glance, it may seem difficult to find a connection between contracts, Italy and the Euro. But I believe there is an important lesson that contract negotiators should be drawing from the crisis that now faces Europe.
On the surface, the parties to any contract have relatively simple motives. One has a need, the other has a product or service which can satisfy that need. They then debate whether supply can be at a price that makes the arrangement of mutual economic benefit and, if it can, they reach agreement.
The key to success – as all experienced negotiators know – is whether the parties have truly understood the need and the capability; and whether they have undertaken ‘due diligence’ to check the honesty and integrity of the counter-party.
But while this may be an adequate process for a transactional contract, it often fails when there is a need for longer-term commitment. That is because either the personality or ‘culture’ of the parties prevents harmony, or that their interests diverge over time and they need to drift apart.
The grand European venture that led to the creation of the Euro was bound by contract (on this occasion under the title of ‘treaty’). It was never entirely obvious what the many stakeholders involved with this project hoped to gain. It is clear that there was some divergence of interests and in some cases, key stakeholders (like the populations in the countries affected) were offered limited insights and even less opportunity to express opinions.
What we see now is the huge difference in perceptions and expectations of the various peoples in Europe, as well as the continued variations in underlying culture. In the relatively high productivity northern states, ‘the common market’ is an opportunity for open trade and increased wealth creation. Corruption levels are very low and the rule of law extremely strong. In the south, the attitudes appear rather different, at least among the politicians, for whom the Euro meant avoiding tough decisions and living off borrowing and wealth transfer. Countries such as Italy and Greece also remain plagued by high levels of corruption and an archaic, slow-moving legal system that undermines trust or confidence in the law.
The moral of the story – it seems to me – is that you should never enter into long-term contracts without full understanding of your counter-parties culture and behavior. If you choose to ignore these realities, the chances of deep misunderstanding and costly failure is high.
Commitment Matters 