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.
IACCM research has pointed to the fact that disagreement over scope and goals is the primary issue underlying claims and disputes.
At today’s IACCM member meeting in Paris, speakers from law firm DLA Piper expanded on that with some observations regarding ‘clarity of intent’. They highlighted a number of recurrent factors that underlie disagreements and disputes:
- Recycling of old contracts. Business groups may either simply select an old template which may either not include relevant or updated terms, or they may use an agreement that was actually designed for a different purpose or relationship.
- ‘Renewing’ an expired agreement. If companies have been working together for some time, it is easy to continue issuing purchase or work orders that either implicitly or explicitly relate to an ‘expired’ agreement. Again, this may be missing key terms – for example, changes of regulation or new internal policies – or it may be an entirely different type of project or acquisition.
- Use of clauses from another jurisdiction. Rather than go to the time and expense of checking the applicability of corporate standards, there can be a tendency to use tried and tested clauses which may not work in the context of a foreign jurisdiction.
- Poor version control. The intent may be confused not only between the parties, but also within the parties. Often it is hard to work out what is the ‘final’ version, especially if there have been extensive on-going changes .
- Multiplicity of documents. Increasingly there are very long contracts with many supplements, attachments, appendices, schedules … with many different people drafting them, there is often weakness in naming conventions, so even if there is an order of precedence clause, it may be unclear which category a particular document falls into. And then there are emails, which often prove critical in determining intent, but are not formally embraced by ‘the contract’ at all.
- Last, but not least, is when the contract has been lost!
I thought this was a useful list of things to consider when seeking to protect against the risk of disagreement over intent. Maybe you have other causes you would like to add.
IACCM surveys tell us that many contracts and commercial practitioners work from home. They also confirm that flexibility over location, working hours and conditions are of major importance when selecting or remaining with an employer. It is clear that such benefits significantly reduce the importance of traditional drivers, such as salary.
The cost advantages for an employer are obvious – a major reduction in fixed facilities and their operating expense, the possibility to reduce travel costs by having people located within their territory etc. But are their disadvantages? In particular, do creativity and learning suffer?
That appears to be the conclusion reached by Yahoo, which has announced that by the middle of this year it plans to have all its staff working from office facilities. In an attack on this concept, Jeanne Roue-Taylor points to the irony of its adoption by a web-based company that advocates remote working.
I do have some sympathy with Yahoo. it does seem to me that the interchange of ideas and experiences suffers in a virtual environment. Perhaps if we are working within a dedicated development team, that may not be the case. But for individuals who are really busy performing their daily tasks, the casual conversations that occur in a workplace become a luxury. Cross-learning and experience exchange become far harder to achieve.
Perhaps the answer depends in part on the nature of work being performed. It would be interesting to see whether there is any correlation between the extent of home-working and the extent of innovation within the business sector.
Last week I was talking with an attorney at one of the top London law firms. He made the observation that ‘data centers lie at the heart of the new economy’.
it strikes me that the corollary of this is that those who own or manage those data centers – and consciously work on disseminating data that is of value to users – will be the beneficiaries of that economy.
Contracts – and the contracting process – offer a wealth of data, yet today it is typically not consolidated, let alone mined. There is a remarkable opening for those with the imagination to support data consolidation and mining, who commit to enabling others rather than acting purely as a point of control.
This is a far cry from where most contracts and commercial groups stand today. For example, in a recent roundtable discussion on ‘big data’, most of the contracts and legal executives protested that they are still too busy building systems to capture all their contracts; until then, they cannot focus on these grand ideas of analytics and using contracts as a driver for business performance.
I believe this is entirely the wrong focus. if they set the vision of contracting as a value-add data center, then issues such as compliance will become obvious imperatives. And the contracts function will be positioned to deliver real and sustainable business value as the driver of commercial competence.
In a blog on Successful Workplace, Chris Taylor asks the question ‘Just who owns the customer, anyway?’
Chris goes on to observe the growing influence of technology in data gathering and assessment and how this is transforming the way that relationships are evaluated and managed. No longer do they depend on the appointment of a dedicated account manager or account team to operate as internal analysts and champions. Increasingly, the business has objective data, auto alerts and mechanized segmentation to assist its decisions about the value of any trading relationship.
This enables the customer interface to be far more fluid, based more on the nature of the topic. It reduces the need for a dedicated intermediary, whose role was in part to build ‘the relationship’, but in reality most time was spent researching opportunities, making connections and facilitating the right discussions. Automation eliminates the need for much of this activity – and is far more thorough and accurate in its targeting.
Certainly we should not discount the importance of the relational element. This can make a big difference to loyalty and trust. But some companies have already decided to dispense with this – for example, RBS (a large international bank) recently announced the elimination of its relationship managers for corporate clients.
For those in contracts or commercial management, this trend means that the old days of subservience to the account team may be drawing to a close. Already, many post-award contract managers find that they are often a key interface to the customer organization. Increasingly, there will be a need for practitioners to take a lead role both pre and post-award, depending on the nature of the issues and the specific customer interface.
The same factors actually apply with regard to supply-side relationships. Old assumptions that ‘the business’ owns the interface to its suppliers similarly make little sense. With the erosion of relationship management in general, those who anticipate an army of ‘Supplier Relationship Managers’ may be very wide of the mark. Account management is increasingly a discipline that focuses on data and analytics, rather than a job title.
Last week I was asked to present on the topic of ‘Contract compliance as a core competence’.
Compliance is not a new issue. It lies at the heart of all successful business because it relates to meeting commitments. So why has it become such a major item on the corporate agenda?
I believe the answer is because of trust – or in reality, the erosion of trust. This has been documented by a variety of researchers and it appears to be accelerating, especially with regard to the public view of corporations and politicians.
Some of this erosion is probably justified. Certainly modern societies have witnessed an erosion of loyalty and a growth in transparency, revealing many previously hidden secrets. Behind this lies the networked world, which has severed long-standing relationships and driven a culture of low-cost acquisition. Globalization has introduced many challenges regarding controls, ethical standards, effective jurisdiction – the list goes on.
In their eagerness to redeem their own reputation and to ensure some continued relevance, politicians have added to the confusion and mistrust by rushing to introduce or threaten new regulation, helping to create a compliance nightmare. Indeed, Stephen Covey estimates the cost to US business associated with this ‘lack of trust’ is $1.1 trillion annually – and that estimate was made in 2004!
Other research has found that the biggest single factor in engendering trust is a visible commitment to ethical business practices – though sadly it often seems that ‘success’ and ‘ethics’ become confused, when you consider how many highly admired companies have fallen from grace when the source of their success unravels.
An article in Psychology Today seemed to capture the essence of what a compliance system should be trying to achieve when it observed that “Trust is based on the perception that efforts between parties will be reciprocated, reactions will be predictable and produce a sense of security for the parties”.
So what part does the contract and contracting process play in creating this trust environment? Today, I would suggest it is frequently very little. In fact, the terms of most contracts and the way they are negotiated tends rather to reinforce the absence of trust through its tendency to be adversarial in style and focused on the terms and conditions that essentially say ‘I don’t trust you’.
It seems to me that our contracting process has to become far more expansive in its thinking. As a start, it might seek to better understand the likely causes of failure (non-compliance) and seek to address their root cause, both internally and externally. As a simple example, failure to achieve committed outcomes could be a result of lack of integrity or could be attributable to lack of competence. But since we tend not to distinguish these characteristics, we do nothing specific to guard against them. When it comes to business exposure, I would deem absence of integrity to be in general far more serious than lack of competence. Competence I can correct or make up for; integrity I cannot.
Best practice compliance systems are those which are capable of distinguishing the types and severity of non-compliance and far more adaptive in their means of addressing lapses. In the end, we come back to the point that corporations have inflicted severe costs and damage on themselves by dismissing the value of long-term relationships built on trust and founded on integrity.
Will the European horsemeat scandal at last lead to a rebalance in procurement measurements?
Yesterday the debate turned to whether the food chain is being threatened by a focus on price. According to the head of one major retailer, it is the only basis on which business can be won.
Over the last couple of years, the voices calling for less focus on price and more on value and outcomes have increased in intensity. Many – including those within the Procurement profession – have grasped the negative effects of an unrelenting focus on input costs. This focus simply does not generate long-term cost reductions – and it results in many unwanted outcomes.
The European horsemeat crisis would be a rather ironic catalyst for change, but certainly welcome. The constant push for lower price as the only way to win contracts inevitably drives unscrupulous behavior. But which side truly lacks morality in this situation and how should we alter measurements to secure better results?
A second aspect of the horsemeat affair is that we are immediately into the blame game. This is also typical of poorly managed procurement systems, in which performance management is often a post-mortem rather than an active and collaborative discipline.
In an interesting example of the growing use of gainshare arrangements, the US courts have given clearance to an initiative covering more than 100 hospitals in New York.
The legal review was based on concerns that the proposed gainshare program might prove anti-competitive and to address these there is a high level of transparency in the overall process. The gainshare applies to physicians and awards will be based on their efficiency and effectiveness in the use of resources, both relative to others and to their own performance over time.
I find the program interesting because it demonstrates the power of technology in allowing us to think in new ways about undertaking benchmarks and measuring performance. As companies seek better ways to determine the relative value being provided by their internal and external providers, i believe we will see increased use of programs like this. An interesting question is who will sit behind their development – for example, industry bodies or associations, software companies, analysts, major consultancies, or a new breed of service providers focused on supplying the information that drives continuous improvement?
And for suppliers, what exactly does this trend mean in terms not only of rewards, but also with regard to their performance obligations and the customer’s termination rights?
Commitment Matters 