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?
Trust is certainly an influential factor in the world of trade, especially on the nature of associated terms. But of course it is not essential that the trading parties have trust in each other. Their willingness to trade may be underpinned by a mutual reliance upon a third party intermediary or their confidence in the underpinning legal system. Or it could be that the potential economic benefits outweigh the risks associated with the possible areas of ‘untrustworthy’ behavior.
The increased volume of global trade, coupled with the involvement of more and more individual markets, have pushed this issue of trust further into the limelight. Perspectives on who can and cannot be trusted tend to vary widely depending on where the stories are being written. The truth is, physical distance and unreliable legal systems tend to make all involved parties less honorable. Many corporations do whatever is expedient, rather than what is honorable. But increasingly, since international trade is extremely important to economic wealth and world politics, there are methods and principles being adopted that can increase confidence.
A simple example is the way that Alibaba (poised to become the world’s largest e-commerce platform) introduced an escrow-based online payment system which now handles more than half of China’s on-line trade. In the West, e-Bay and Paypal have been similarly successful in creating a trusted intermediary that enables mushrooming trade between individuals and companies that would historically have never connected.
But is trust always critical to trading relationships and the overall growth of economic wealth? CREATe.org (the Center for Responsible Enterprise and Trade) has produced an excellent paper that bemoans the detrimental impact of trade secret theft on the development of the world economy. It suggests that companies lose revenues and profits, that jobs are lost and the future of entire industries potentially threatened. And for the developed world, there is some truth in these assertions. But what the article fails to highlight is the extent to which those ‘thefts’ also result in new business start-ups and increasing wealth in another part of the world.
Back in the 1800’s, there are documented cases of US entrepreneurs sending their workers to Europe to steal the ideas, methods and ‘intellectual property’ of their more advanced rivals. That theft underpinned the rapid growth of a new, low cost economy that in turn drove global wealth creation. I struggle to understand why that was an acceptable and apparently beneficial practise, yet somehow today’s ‘trade secret thefts’ are not. Might this perhaps have more to do with wealth transfer (from large Western corporations to newly developed companies in emerging markets) than with wealth creation?
The CREATe.org paper rightly sets out some practical steps that companies can take to protect their assets. It seems to me that this is precisely where responsibility should lie and I applaud its efforts in that regard. However, the paper also suggests that current levels of trade secret theft are ‘a threat to the expansion of prosperity’ – but on this point, it fails to offer any evidence to support its assertion.
Many years ago, I recall being sent to support an account team in the negotiation of a major opportunity with a large international pharmaceutical company. For that company, it was an important strategic initiative, with Board-level involvement.
During our discussions, we were joined by the senior executive charged with overseeing the project. He looked around the room and then enquired: “Who is going to be my alter-ego from your company? Who will I be speaking with if things are not going to plan?”
We lost that deal and in large part because that executive did not feel confident about the level or authority of the interface. His personal prestige was on the line; he wanted to be sure that this was mirrored in his selected supplier.
I remembered this incident when I was reading an excellent article from the MITSloan Management Review, sent to me by innovation expert Kevin McFarthing. Overall, the article reinforces the points made by IACCM in its push for ‘Relational Contracting’, or those widely espoused in initiatives by Kate Vitasek and Vested Outsourcing. To quote from the article: “An effective leadership pair — one person from the client organization and another person from the provider organization — goes a long way toward invigorating the innovation process. In high-performing BPO relationships, the leaders are experienced and capable, with high levels of credibility, clout and power within their own organizations”.
So does this lend support to those who argue that contracts are not really relevant, that it is relationships that matter? In my view, clearly not, though it does reinforce the point that we must think of contracts in a more holistic way – as a support for the relationship, rather than something independent of it. Dependence on individuals (and their memories) is a very risky approach to any important project or business relationship; they move, they change jobs, they fall out with each other ….. the contract is the only permanent memorial.
The article also points out the importance of what it terms ‘acculturation’ across organizations – and this is where it ties closely with the IACCM work on relational contracts. To quote again:
“innovation won’t happen unless clients and providers implement a more comprehensive process that combines acculturation across different organizations, an engaging method for generating ideas, adequate funding and a system for managing change”.
This is where IACCM promotes a contracting process that ensures the right dialogue, covering areas such as joint working, shared communication systems, problem-solving and escalation models, focus on risk probability reduction …. areas that typically undermine productive relationships if they are not discussed and mutually agreed and funded.
Contracts alone are not enough to generate and support a successful relationship. But important relationships tend not to flourish without the support and discipline of a well-structured contract. Business today demands intelligent integration of these two elements.
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)
Commitment Matters 