The New York Times reports that US corporations are poised to cash in on Eurozone troubles, acquiring businesses and assets at knock-down prices. The challenge for many European companies arises from a lack of liquidity, as banks are forced to raise capital and cut lending. This has already resulted in a growing number of acquisitions by Chinese buyers.
How long does it take to register a company? The answer – and the process and costs involved – varies dramatically depending on where you are. In New Zeland, for example, it is typically one day and costs under $200 (US). In Congo, on the other hand, you would be facing an average wait of 65 days, 10 discreet process steps and a cost of more than 5 times average income.
The World Bank Report on ‘Doing Business in 2012’ offers invaluable insights into the relative complexity of operating in different countries around the world. It makes interesting reading in its own right; but it should also cause each of us to reflect on the rules under which we operate and what impact they may be having on our competitiveness.
In Congo – or many of the other relatively bureaucratic countries highlighted in the report – I am sure people complain about ‘red tape’ and the difficulty of getting things done. But in the end, tehy accept the rules, or find ways to work around them. And of course, the same happens in business. We become accustomed to the rules and the processes, we assume they are normal, and we make little effort to either understand their impact or to change them.
Even when we observe high levels of non-compliance, or realise that staff in other groups try to avoid us, we don’t necessarily react by asking ‘How can we do this better or differently?’ Our natural reaction tends to be ‘How can we enforce compliance?’
So as we enter a new year, and a year in which increased competitiveness and efficiency will be crucial to survival for many. it is time to think about the activities we perform and whether they can be changed, accelerated or eliminated. Where do we spend time? What do we wish was different? How would our internal clients like things to be done? How is our competition managing similar activities?
IACCM has recently launched a program which encourages and recognizes ‘agents of change’. It has been developed in conjunction with the Aalto Business School in Finland and provides a forum to share ideas and to promote new thinking. It can be accessed at http://www.iaccm.com/act-differently/
Projects are made complex by the underlying complexity of the systems that are needed to support them.
There are three major elements that must be brought together to achieve project success:
– people
– process and rules
– legal and commercial frameworks
One of the fundamental challenges facing any major project is to ensure that each of these elements is adequately understood and that they are brought into alignment (i.e. that differences or contradictions are reconciled). Because this is relatively complex to achieve, there is a need for a disciplined methodology. And that is where the contracting process comes into play. A good contracting process will ensure that there is consensus over scope and goals, that there is an appropriate procedure for on-going governance and management. This includes forums for discussion and negotiation, reports that offer visibility and insight, analysis that places the spotlight on risk and copes with reducing its probability and consequence.
Conflicts between people, their interests, rules or commercial practices lie at the root of most under-performing or failed projects. Failure to understand and address them adds to the complexity and becomes potentially overwhelming. No matter how talented a project manager may be, he / she needs effective tools and a coherent framework within which to work. That is what a good contracting process will deliver.
Bad contracts are those that are dominated by specific interests, where power or measurement systems have been allowed to overwhelm wisdom and judgment. This is evident when a contract is imposed by one party on the other, or when a particular functional group such as Finance or Legal or Sales is allowed to dictate the terms. Another source of failure often comes from senior management or project owners, where they prevent an open contracting process – perhaps because their past experience of contracts is negative.
As businesses face a growing range of complex projects and trading relationships, the importance of developing a more structured and reliable approach to contracting and commercial process is growing. There is increasing management realization that this is an area for focus. To build trust, profitability and competitive edge, organizations must become consistently better at aligning needs with capabilities, with defining and managing contract scope, with establishing sustainable and long-term relationships.
To achieve these goals, contracts and the process by which they are created must become simpler. They must be quicker and more efficient to form; they must be beter at addressing real and tangible risks; they must be more focused on delivering success; they must support and underpin constructive relationships.
In 2012, IACCM will offer in-depth insights to these challenges and a road-map for their resolution. Starting with the IACCM EMEA conference in April 2012, executives and senior practitioners will be invited to come together and explore how simpler contracting can help them to master complex project delivery. The prize for success is enormous. IACCM research suggests that the average business could be adding almost 10% to its bottom line.
An IACCM member commented recently on the ‘top ten negotiated terms’, saying that while the areas of liabilities, indemnities etc feature large on the agenda, he is finding that negotiation of change clauses is proving increasingly contentious and time-consuming, especially in technology contracts.
My observations with regard to that comment were as follows:
Our research shows that issues related to change clauses are the #2 cause of claims and disputes (beaten only by disagreements over scope). Hence your focus is addressing a critical area.
We find that often the contention is driven by a couple of factors:
1) There may be genuine uncertainty about future needs or capabilities, for example because of new technologies that may become available or difficulty in predicting future business requirements.
2) Change is a regular battleground over price, with the customer anxious to remain within original budgets and the supplier wishing to ensure recovery of costs, or perhaps raise margin.
Several factors can make this situation especially contentious. One, of course, is the underlying risk associated with commitments in an uncertain environment. In this case, it may be wise to think about the contract structure and to enable more fundamental renegotiation at particular milestones. This also implies that the extent of customer commitment is reduced and that there may even be a joint work team to ensure close alignment between requirement and capability.
A second cause could be a lack of trust between the parties. For example, if the supplier feels disadvantaged in negotiation due to a lack of ‘fairness’ in risk allocation, or perhaps the price negotiation has been especially severe, then they will naturally be nervous about their ability to charge for subsequent changes. It may even be that they have priced low with the specific intent of then recovering margin during the change process. (I came across this blog that makes a very similar point.)
On the second point, it should be possible to discover whether this is an issue of trust or of policy. For example, is the supplier significantly cheaper than competition? Do they have a market reputation for being difficult to do business with, especially in the post-award phase?
The situation you describe is not uncommon and to address it, we may need to think carefully about our own behaviours and the extent to which we are building cooperative, rather than adversarial, relationships. We may need to change the conversation and also to see the link between this clause and the way that other elements of the contract have been negotiated. One approach might even be to raise the points I have outlined above and make them part of the discussion.
What have your experiences been on this topic? How do you address the challenge of change in your contracts and negotiations|?
When I talk with contracts and commercial teams about the potential to add value, some are enthused and others give me blank looks. It can be hard to imagine quite how to deliver added value through improved contracting. We have mostly been taught to focus on individual deals and to avoid bad things happening. So it can be tricky to envisage how a more portfolio driven view might actually make GOOD things happen.
I thought I would share this recent example that came from a long-time IACCM corporate member in the United States.
Having read IACCM’s annual study on The Most Negotiated Terms, they wanted to improve contracting effectiveness, so started exploring where time is spent and what impact that had on outcomes. What they discovered was a direct correlation between the timing and duration of the contracts organization in requirement definition and the subsequent amount of time spent on negotiation. They then tracked through and found similar correlation to the likelihood / frequency of claims and disputes.
Essentially, in those deals where they were involved earlier and spent time ensuring clarity of scope and requirements, the negotiation time fell significantly and the ‘adversarial’ behavior over risk allocation reduced (though total cycle time from inception of bid to contract signature remained much the same). The big value difference came in subsequent customer relationships – those where the requirements had been thoroughly defined had 40% lower incidence of claims or disputes, which of course meant higher levels of customer satisfaction, better margins, increased renewal rates etc.
This is one of a growing number of examples where real value can come from contract process analytics. The challenge for many groups is that they have no access to data because they don’t measure the right things. But that is a different story and has been covered by a number of previous blogs that looked at metrics ….
Last week, I commented on the weaknesses created by a focus on low-cost sourcing and the apparent absence of analysis related to the resulting supply chain risks and their cost to the business. Among the observations in my blog was: “It can be hard to get the right balance between cost and risk. But a start would be through an understanding of the ‘costs of vulnerability’ – that is, the actual cost to a business that occurs as a result of selecting low price supply. This would of course be a cumulative number over a specified period of time and would capture the costs associated with supply disruptions, crisis management etc. that were a direct result of deciding to take the risk of going with a low-cost supply option.”
In his Friday blog, Jason Busch raised similar concerns when he suggested that ‘spend analysis is broken‘.
The common strand to both of these is that contracts and commercial staff need to focus on business and market intelligence that will help steer the business towards improved decision making. This is a point that Professor Rob Handfield has made on many occasions in the past and of course, by fulfilling this role, those in the commercial contracts group would place themselves into a far more strategic business position. To do this, we need to be far more thoughtful about the nature of the data needed for analysis and how to combine this with forecasts based on likely market trends and directions. Through this combination, the quality of risk management would improve and result in increased bottom-line contribution.
Last week, I was asked to present on trends in international contracting. It was a lively session, with excellent participation from an experienced audience. One of the key points I made was that the growth of international business has not been accompanied by sufficient thought about contracts and contracting practices. In particular, I suggested that there has been an increase in disputes, but that many of these could have been avoided if we improved our approach to contracting.
A report on litigation trends by law firm Hogan Lovells, in conjunction with Legal Week, proves timely. Their survey confirms that international disputes are on the up, with commercial / contractual issues leading the list in terms of added workload. Regulatory issues are in second spot, with fraud / bribery in fourth. Not surprisingly, the research indicates that the recession has increased the workkload for in-house counsel and, with budgets remainign tight, they are under pressure to reach resolution faster.
An aspect of the report that I find especially interesting is the absence of discussion about dispute avoidance. There is focus on doing things more cheaply and on speed, but nowhere does anyone ask “Is the increase in volume avoidable?” And that brings me back to my presentation, in which I highlighted that today’s contract terms and practices contribute to disputes, rather than assisting in their reduction. To give some simple examples, we know that the biggest sources of dispute relate to disagreements over scope or over changes to the agreement. Yet these topics are not among those that top the list of most frequently negotiated terms. Lawyers and contracts professionals spend far more time debating the clauses that govern when things go wrong – liabilities, indemnities, jurisdiction. So our contracts are being designed for disputes, rather than establishing a framework to reduce their likelihood.
In addition to focusing on the wrong things, contracts are also designed for litigants, not for day-to-day users. Most contracts (especially in international transactions) are structured and written in a way that renders them almost useless to those who are charged with their implementation. We take situiations where clarity of communication is key and then offer instruments that are composed by lawyers, for lawyers.
If legal and commercial staff spent more time up-front ensuring that there was clarity of intent and process, they would spend far less time dealing with disputes and failure.
Commitment Matters 