Of all the many topics contained in the IACCM on-line learning program, there is one that stands out for student comment. Indeed, it arouses strong emotions – and almost always negative.
The section in question relates to a discussion of the options when negotiators find themselves at an impasse. Everything is resolved – except one item on which they just cannot agree. And one of the suggestions offered is ‘flip a coin’.
On the surface I can see why students may be upset by this idea (even though it is one of several suggestions). They feel it trivializes the negotiation process; they cannot see how they could possibly justify such action within their organization (except, perhaps, if they won) and they suggest it is simply a ridiculous idea that no negotiator would ever accept – so it should be eliminated from the training materials.
While understanding the reaction, the very fact that this idea generates so much heated debate is itself useful. I suspect if suggested in practice, it might assist the two sides sometimes to step back from their entrenched positions and reconsider the importance of the item on which they are stuck. After all, the suggestion here is not that we are talking issues of monumental principle – if that were the case, the negotiations would have broken down.
Given the reactions we have observed, I was very interested to see that the issue of tossing coin to reach resolution has been raised by the author of Freakonomics – indeed, research is now being conducted to validate the fact that this is often the best way forward when a decision can’t be made.
http://successfulworkplace.com/2013/02/01/tough-decision-flip-a-coin/
When it comes specifically to use during a negotiation, it seems to me that it would be validated in situations where:
a) The parties are agreed that there are two options, but neither is sure which would be better
b) The parties have distinctly different views on an issue that is significant, but both agree it should not be a deal-stopper and that they need to move on.
I wrote on this subject just a couple of weeks ago and received a number of interesting replies. Among them was one that pointed to a report by the UK’s Intellect group from 2010, in which they suggested that the main inhibitor to outcome-based contracting is supplier resistance. The paper seemed to imply that resistance is primarily due to risk aversion.
In a conventional sense, it is certainly true that it is risky for a supplier to take responsibility for an outcome since there are many elements over which they have little control. However, intelligent contracting can address those points, not only through the right terms and conditions, but also through an appropriate governance process for the contract and the relationship.
However, I think the bigger issue for a supplier is the fundamental impact that outcome-based contracts have on internal management systems and on cash flow. It is hard to manage outcome-based contracts on an exception basis – they simply do not fit easily with traditional skills, measurements or business systems. But a business transformation to make this a standard offering has massive implications – and of course depends on the readiness of the market to accept that change.
And it is here that we come to what I see as the real inhibitor to outcome-based contracts – the customer. While welcoming the theory and in some cases even issuing bids that request outcome-based proposals, my experience is that most customers then back off from such deals because they are not equipped to manage them and cannot easily calculate the implications. For example, how do you calculate savings? How do you agree incentives or charging levels for over-performance? How do you budget for an uncertain cost? And perhaps most important, how do you oversee and manage performance?
The truth is, for all the challenges that outcome-based contracts may represent for suppliers, the buy-side is generally even worse equipped to manage such contracts, having made virtually no investment in post-award contract and relationship management. So despite all the talk and all the benefits, progress in this area remains painfully slow – but there are at last signs that it is picking up pace (and I will write more about that tomorrow).
Would a sales representative ever try to mislead a customer? Yes, according to ICN. In an enjoyable article, they discuss the ploy beloved of technology companies “I’d love to say yes (to your negotiation request), but it would not be fair to other customers to set a precedent”.
I recall this approach from my days at IBM. It was used on pretty much every occasion, with the 1970’s anti-trust suit and settlement used as an excuse. And, the sales rep woould point out, “If I give this away, you are bound to wonder what other customers are getting, so actually my refusal to negotiate saves us both a lot of time and angst”. There was usually a comforting follow-on. “In any case, don’t worry what the contract says – we always do much more than the contract promises”.
It is in some ways surprising if technology sales people are still using this tired excuse to avoid responding to their customers. Though I must say that some buyers are no better (and this is a point ICN do not mention in their article). Many Procurement staff also lack negotiating authority and increasingly it is the buyer’s paper that forms the basis for discussion. So what do you do with a buyer who denies the ability to alter terms and then says: “This will have to go to Legal and that takes at least 6 weeks to turn around”? Of course, no sales person wants to face that delay so they fight tooth and nail to get their company to accept the customer’s standard term, however unreasonable or inappropriate it may be.
In the end, many sales people are driven by speed. They want to close the deal – not just because they want their commission, but also because they have targets, they know that delay can cause a change of mind and until the deal is closed, they are always open to competition. It is these factors that make them averse to most meaningful negotiation, no matter what its source. They do not want to have to go back to their internal staff groups to push for a contract change. It takes control of the deal out of their hands and creates a high degree of unpredictability.
So just as buyers often fail to focus on value (because they are driven by price savings), so sales people often fail to structure the best contract. In the end, it is down to measurements and time, rather than any evil intent.
I am sure the analysis into Boeing’s problems with the Dreamliner will continue for some time. At present, there seems to be a growing consensus that ‘outsourcing’ was to blame.
My understanding is that management in the 1990’s was reluctant to commit funding to new aircraft development – especially on the scale needed for a concept such as Dreamliner. This resistance was overcome through a creative suggestion – to outsource almost 60% of the work to external parties and thereby slash the investment required from Boeing.
For the finance executives, this was an attractive solution. However, it seems that there was inadequate thought given to the implications of managing a portfolio of outsourced suppliers. This model was not the same as traditional procurement or project management. It required an organization capable of managing commercial relationships, equipped with the skills and tools to integrate across multiple stakeholders and ensure alignment of performance.
My suspicion is that Boeing did not make the investments needed to manage this complex network of relationships. It most likely relied instead on traditional skills that lacked the insights or the flexibility needed to succeed. This was probably a classic case of failed ‘commercial assurance’, driven by over-reliance on technical and financial skills, coupled with contract managers trained in standard administration procedures.
As a footnote, it is interesting that during the years in which development took place, IACCM received several approaches from teams in Boeing who wanted to join its member network. I can only assume that they were unable to generate top management support. To this day, Boeing remains the only major aerospace and defense company that has no links to the worldwide IACCM community. Of course, that may be just a coincidence, but equally it may be that Boeing management did not grasp the importance of developing process and talent that enables a new approach to trading relationships.
In the end, I doubt that outsourcing itself was the problem with Dreamliner. It is more likely that senior management simply did not grasp the organizational and operational consequences of an outsourced development model and therefore lacked the skills, tools, insights and management system needed to achieve success. If that is the case, they will certainly not be the first to learn this lesson.
So will Dreamliner kill outsourcing? I think not. There truly are economic and commercial benefits to be gained from outsourced relationships – but they can be secured only when there is organizational adjustment capable of overseeing this business model.
Governments appear serious about levying more corporate taxation and this has significant implications to commercial professionals.
Since last October’s G20 meeting, there have been frequent public pronouncements by senior politicians. In the words of Jeffrey Owens, Senior Tax Policy Adviser at Ernst & Young: “Governments have given corporations attractive tax regimes – and now they want to see people complying with the rules.”
In reality, of course, they want more than compliance with the rules, since the issue appears to be related to moral judgment rather than strict legality.
On one level, this is just a traditional battle between stakeholders arguing over how the cake will be divided. But it is also part of a wider social debate over fairness and sustainability. For example, to what extent should a corporation contribute to the national economies in which it does business?
Creative tax avoidance has increased the profitability of many contracts. But now those approaches have to be measured for their possible adverse impacts on business reputation. In addition, those managing long-term contracts may face a decision to change tax assumptions during the life of the contract. For example, the royalty schemes or off-shore passing of title that minimized the tax bill may be abandoned or outlawed. What is the best negotiation strategy to deal with this uncertainty?
As emerging markets also get into the action on tax, companies will find themselves exposed to more varied and often unpredictable rules. Again, it is necessary to consider how such an environment might be tackled within the terms and conditions of contract.
At a strategic level, tax planning now has a need for much wider consideration and therefore becomes a key element of commercial thinking.
Following yesterday’s story that data security is the number one Law Department issue comes the news that it is ethics and compliance that tops the General Counsel’s list! The 2013 report by the Association of Corporate Counsel (ACC) tells us that 87% put ethics and compliance as their biggest concern, followed by regulatory and government change. Data and information security was also high on the list.
Senior legal staff find themselves expected to give increasing amounts of business and strategic advice – probably no surprise if the issues listed above are considered so important. Executives need help in navigating through the morass of regulatory and reputational risks that surround business today.
The good news for the law department is that most are gaining an increased budget,which is being spent on both more internal resource and greater use of external counsel. This finding reflects similar discoveries from a recent IACCM study of both legal and contract management groups. However, this increased focus does not always lead to greater job satisfaction – there has been a drop of 11% in those who enjoy their work. It is often demanding to find ways to reconcile the needs for improved ethics and compliance with the demands of a business that is still challenged by harsh business conditions and facing a struggle for growth.
Inside Counsel magazine recently reported that data security is the top issue cited by more than half of in-house lawyers. This was reflected in a conversation yesterday at the IACCM Board Meeting, where both lawyers and non-lawyers highlighted its growing importance.
The Inside Counsel article focuses on the need to understand the nature of the data possessed within a business and then to take steps for its protection. It concentrates largely on worries over regulatory compliance and reporting, so various forms of personal data lie at the forefront of concerns. Since some level of hacking appears inevitable, the advice relates largely to the steps needed to limit potential fines and to eliminate the need for reporting. Much of this revolves around encryption, but also the need to analyze data flows to ensure weak spots are identified.
At the IACCM meeting, perhaps because more of the companies represented are b2b, the focus was somewhat different. For them, data security was also about critical business data – product development, strategic plans, customer records. The concern is more around the exposure that arises from links with trading partners – the extent to which shared systems or information access creates a gateway to wider data loss. The implications of this force companies to consider a wider array of solutions. This includes terms and conditions that commit trading partners to appropriate steps and contain penalties for failure. It often incorporates some right of audit or validation.
But ultimately, terms and conditions are a relatively weak form of protection because the most likely reasons for data security breach are either because a trading partner lacks size and sophistication, or because it lacks integrity. And these issues will typically be fixed only one of two ways – that is, do the work in-house or select top quality partners who cannot afford reputational damage.
This week, IACCM‘s expert interview will be with Ben Kent, CEO of Meridian West. The topic is ‘Effective adviser-client relationships’ and discussion will be based on research Ben undertook, in conjunction with the Financial Times.
Although Ben’s research focused on the challenges facing professional advisers (law firms, accountants, consultants), IACCM recognized that these were often mirrored in the pressures facing in-house support groups such as legal, procurement and commercial / contract management. The demands for greater value, for better alignment with the business and key strategies are commonly felt.
Among the many areas of interest in the findings is the recurrent issue of ‘greater commercialism’. Executive management confirms its frustration with continuous messages related to risk, without practical solutions. They need advisers with a wider view, who do not simply instruct on the many things that carry substantial risk, but instead look more holistically across the various issues and compose a workable answer.
The fact that they increasingly expect this from external sources does not bode well for internal groups, unless they start to expand their awareness of broader market trends and competitive initiatives or weaknesses. Commerciality is on many executive lips – which is great news so long as groups such as legal, procurement and contract management focus on how they will respond.
Personally, I have always been fascinated by international trade. it has so many more nuances than domestic relationships, especially when it comes to the commercial and contractual implications.
Some in the IACCM community share this passion, but not a majority. However, I am seeing more and more signs of a shift in interest and sentiment – and the reasons for this are spelt out in a recent article in The Economist, “Gold Hunting in a Frugal Age.”
The article observes that ‘the age of austerity shows no signs of waning’. An obvious consequence of the crisis in the major traditional economies has been a growing focus on expansion into new markets. But that is often not a simple proposition. There are fundamental differences, for example in the level of infrastructure, in business practices, in social structure, in sources of funding and disposable income. So the underlying business offering and commercial terms may need major adjustment, as do the approaches to questions such as distribution methods, the nature of commitments and the management of risks.
Working through these factors to develop appropriate commercial practices and contracting models is itself demanding for the contracts community. But there is another angle that lies at the heart of IACCM’s ethos and which at the core of The Economist article. That is the need to look at emerging markets as a source of inspiration and new ideas. Established Western companies have to adjust to a world where growth may be tipped on its head; where customers are in a permanent state of cut-back; where traditional funding is no longer readily available. By looking at the challenges of achieving sales in markets where relative poverty is the norm, companies devise new offerings and approaches. They also learn to think differently about market segmentation and in ways to use technology to support innovative offerings or expand sales.
One key area for consideration is related to competition. Companies that are based in these emerging markets already understand how to deal with many of the complexities associated with ‘frugality’. In some cases, this will equip them in their emergence onto the global stage – so be ready to face new, low-cost competitors about whom you have never previously heard and know nothing.
Contract and commercial managers really do have an urgent need to develop their global understanding.
There are always so many interesting items in the news that are relevant to the world of contracts and commercial. I thought for today’s blog I would share just three that I spotted this morning.
First, The Economist highlights the growing squeeze on bribery and corruption. It hails the progress being made by the G20 group of countries and, while there are still wide disparities in enforcement, there are definite steps in the right direction. It goes wider than Government; consumer groups are increasingly vocal in exposing corruption around the world, with active web sites in countries such as Uganda, India, Liberia and Indonesia. Investors are also more inclined to scrutinize companies for anti-corruption compliance and the US FCPA and UK Bribery Act hold out the potential for large penalties. Industry networks, such as the Extractive Industries Transparency Initiative (with 70 members) are joining the push-back.
Second, there is the continued anger of citizens in a growing number of countries over corporate tax avoidance. The days of off-shore havens and preferential tax rates may be numbered, limiting the value of complex arrangements around cross-border management fees and royalties. These arrangements have also caused significant inflexibility in the way many contracts are structured, so these shifts could have real impact on how we do business.
Third, Europe has at last made some progress to simplify its patent system. Gaining an EU wide patent has until now been an expensive and time-consuming exercise, with the need to register in each country with a local language application. Registering a patent in Europe cost on average nearly $50,000, against less than $2,000 in the US. It still costs close to $6,000, but that is at least more realistic. Meanwhile, China overtook the US last year to become the country where the greatest number of patents was filed during 2012. The IP battle shows no signs of lessening….
Commitment Matters 