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)
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.
Commitment Matters 