“The question of incentives is fundamental to economics.”
This statement comes from a working paper published by Harvard Business School “When Good Incentives Lead to Bad Decisions“. As any mature contracts or commercial professional knows, incentives play a major part in shaping the way that bids and negotiations are managed. When pitched wrongly, they frequently lead to delayed involvement, withheld information and poor judgment. This observation is reinforced by the working paper, which reports on research findings that were based on loan decisions using three distinct incentive models.
Not surprisingly, incentives that were based entirely on contract closure led to a much higher level of accepted risk, with a 5% detriment to overall business profitability. Rewards that included consequences for actual performance led to a more conservative approach – and a 3% improvement in profits. These findings are unlikely to surprise many contracts professionals (who would point out that it is both Sales and Procurement incentives that currently distort behavior). But there are some other interesting points that emerged:
1) The scale of the incremental reward / claw-back for performance has to be quite large before it has a strongly beneficial effect.
2) The timing of payment is also key. Significant delay in granting the incentive reduces the impact and the quality of personnel.
3) The incentives appear to have a direct impact on judgment, more than on moraility. In other words, people did not make bad decisions just because they wanted to gain immediate reward; an incentive scheme that provided immediate reward instead leads them to believe that things are less risky than they truly are.
A problem with changing the system is that, while the effct on profits muight be positive, the impact on revenue would most likely be negative. Also, in circumstances where one company changed to a more balanced risk – reward system while its competitors did not, it might lose many of its most talented dealmakers, who would be incented to move to a less risky sales environment.
IACCM surveys have revealed growing stress on the part of many contracts and commercial staff.
There are a number of factors contributing to this situation and they vary somewhat between organizations. For example:
1) The general economic uncertainty affects many, but not all, member companies. Some are struggling to maintain revenues and in many there is unrelenting pressure to cut costs.
2) The struggle to retain market share while at the same time cutting costs can bear heavily on contract and commercial groups, since they are under pressure to find ways to support new business while at the same time performing with no addditional resource. Across the board, most legal, commercial and contract management teams indicate steady increases in workload.
3) As at any time of pressure, management is unrelenting in its questions over value and its expectations of ‘doing more with less’. For some groups this has led to major changes in role, status or process. They feel threatened and insecure.
4) An on-going problem is the feeling in many practitioners that they lack strong functional leadership. Many heads of function appear to have reached their position because they were excellent dealmakers or practitioners; that does not necessarily equip them well for the politics of senior management. A large proportion of staff feel their leaders lack the strategic insight and networking skills to keep them safe.
These concerns are by no means limited to the contracts and commercial community. Studies related to most business functions reveal similar insecurities about the future. Many argue that we are on the brink of fundamental realignments in business organization and that these stresses are inevitable.
Should the contracting community be especially nervous? I think that they are right to worry about their strategic positioning and the understanding by senior management of their value. But I think they should be optimistic about the future, so long as they grasp the importance of developing a clear vision and message associated with the delivery of that value. Right now, there is too little commitment to raising professional standards or doing the things that ensure the function’s competitiveness in such a dynamic business environment.
So for a New Year resolution, I would be determiend to invest in my own future (i.e. become certified, participate in working groups, expand my network and visibility); I would be pushing functional management to develop and explain the strategy for contracts and commercial excellence; and finally, if I felt that my company simply would not progress, I would be researching those organizations where the role is understood and valued. There are plenty of them – and stress is not inevitable!
On a typical day, about 100 people connect to this blog because they have done a web search on ‘the role of a contract manager’.
Should we be worried that so many people seem anxious or uncertain about their role? Is it just that they want affirmation, or perhaps to benchmark, or are they being asked to describe what they do? In many cases, it may be driven by executive questions – which are sometimes positive and sometimes negative. And of course there are some who are not contract managers and are either considering a career change or perhaps wanting to challenge the role that is being performed in their organization.
Before we get concerned about this apparent uncertainty, it is worth remembering that almost everyone – no matter what function they perform – is assailed by similar questions right now. It isn’t just the volatility of markets; it is more fundamental than that. Business organization itself is being challenged to adapt to a far different world, where agility is key to survival. Within this context, the management of risk and opportunity has become critical to success.
Contracts and contract managers lie at the heart of the problem and of the solution. They can either be a negative and reactionary force, constraining change through clinging to outdated rules and procedures. Or they can be dynamic enablers of the new and emerging world, through challenging old policies and practices and bringing judgment and innovation to commercial and contracting process.
It is these twin forces that are increasingly evident in the discussions I have with executive management. The contrast is stark: some see contract managers as the problem and a hang-over from the past, while others see them as representing a core competence for the future. Therefore in some places the challenge is to grow skills and contribution, while in others it has become a battle for survival.
In this environment, the fact that so many are seeking advice on their role is not surprising. This blog contains many articles that provide an answer, but early next year we will consolidate those thoughts and ideas into articles for IACCM’s ‘Contracting Excellence’. Meantime, share your ideas – or get in touch (tcummins@iaccm.com) if you need more immediate help with an answer.
Earlier this week I attended an excellent seminar on Innovation in Thought Leadership, conducted by Meridian West, a company that focuses on professional services (and advises many leading law firms on their marketing and value-add).
Among the many interesting items that were covered, there was a section that highlighted eight ways to grab management attention through thought leadership offerings and reports. Many of these have great relevance to business functions (Legal, Procurement, Contract or Commercial Management). Of course, i reviewed them in the context of how well IACCM is doing in addressing the topics – so I have illustrated the different areas with examples of IACCM reports.
1. Future gazing (eg Future of Contracting)
2. League tables (eg Most Admired Companies for Contract Management, Most Admired for Negotiation)
3. Gap analysis (e.g. team and individual skills assessments; process maturity assessments)
4. Individual function / job role (with so much change there is universal uncertainty so predictions of how things will look are of great interest)
5. Business sentiment (infographics – our State of the Global Economy reports did this)
6. Benchmarks of performance (eg maturity assessment, IACCM benchmark reports)
7. How to …. (reports that tackle things like ‘How to do business in Russia’ or ‘Best practice in cloud computing’)
8. Breakthrough models (eg Relational contracting study and implementation guide)
Another key aspect of the message is that simply relaying high value data is not enough; attention spans today demand that there is direct interpretation into specific ‘calls to action’.
The session will change some of our approaches at IACCM. But I believe it contains some key messages and tools for functional leaders everywhere, as they vie to deliver value and raise management appreciation of their team’s contribution. As a result, I plan to work with Meridian West to deliver some executive roundtables, in which we can share ideas and inspire our community to action.
The sad consequences of the recent hoax call to King Edward’s Hospital in London have featured on world media and inevitably led to widespread discussion. Something that has struck me in the course of my conversations is the extent to which cultural background appears to affect opinions.
As someone raised in a society that finds pranks amusing, I see the actions of the Australian DJs as perhaps misjudged, but certainly not malign. Indeed, if anyone is to be blamed, it is surely the executive managers of the radio station who appear to have approved such behavior. But this type of hoax is by no means unusual in countries such as the UK, US and Australia and had it not been for the subsequent death of the nurse who took the initial call, the event would already have been forgotten.
In my conversations with friends from around the world, I have come to realize that the concept of such hoaxes is simply alien to their culture. They cannot understand why anyone would want to play a trick of this sort and see it as cruel, not funny. As a result, if they were themselves victim of such a call, they would feel a terrible burden of responsibility for having trusted the hoaxer.
As I think about this in the context of global communications and negotiations, it makes me realize just how little many of us understand about the way that the nuances of language and behavior may be perceived by those outside our culture. Indeed, it also leads me to wonder how often I may be misinterpreting the intent of others.
This week I am in India, where we are running an IACCM workshop on Contracting Excellence.
Yesterday we reviewed a number of recent newspaper headlines that illustrated the costs associated with poor contracting. Workshop participants explored the underlying causes and the role that contracts / legal professionals should be taking to reduce or eliminate them.
As if wanting to illustrate the importance of this workshop, ‘The Times of India’ has featured contract issues on its front page twice this week. The first related to action by the Government of the Maldives, revoking a $500 million contract with GMR to build a new airport. Today, the headline relates to a hospital and its gas pipeline system. Apparently there was a failure in oxygen supply which has resulted in the death of four patients.
The article carries a sub-section entitled ‘Blame Game’ – a term familiar to any contract manager. The supply and maintenance of the hospital’s gas pipeline had been contracted to an outside supplier since 1998 – but according to that supplier the operational contract expired in October 2011 and the maintenance contract in October 2012. As a result, they had started to reduce the number of staff deployed at the hospital and were threatening to withdraw all personnel. The hospital claims that it had given verbal assurances of extension and that necessary funding was sanctioned 3 weeks ago.
The precise truth of the matter will doubtless emerge over time, but the story clearly indicates the importance of contract management discipline and the potentially fatal consequences when it is lacking.
Earlier this week, I was reminded of a survey that IACCM undertook a few years ago exploring member attitudes to negotiation style. One of the key discoveries was that almost half were not even aware of the ‘positional’ and ‘principled’ terms that were used in the seminal work on negotiation, ‘Getting to Yes’.
The reason I re-discovered the study was because of a question from three MBA students at the Norwegian School of Entrepreneurship, who are studying what frameworks business managers and negotiators use when planning or conducting negotiations.
On reflection, I had to admit that I don’t spend much time thinking about these questions of style, because I believe most b2b negotiations tend to be a hybrid. Also, a discussion of preferred style seems to imply far more planning by the average negotiator than is really the case. In my experience, they are more often driven by the broader policies and practices of the organization than by any personal propensity for negotiating style. So, for example, if the company operates with strong ‘powers reserved’ by specific functions, the style is largely one of stone-walling.
Many large businesses appear driven more by concepts such as avoidance, assertion or compromise. Value trading tends to be eliminated because of management and measurement systems.
Also, we have to bear in mind the fundamental shifts that there have been in business operations in the last 15 years, none of which are adequately reflected in current literature. Specifically, the globalization of trading relationships and the intervention of networked technologies have fundamentally changed the framework for negotiation. Things like e-auctions have altered the playing field for negotiability; communication technologies and distance have made most negotiations virtual; the growth of specialisms has rendered negotiation far more defensive and iterative (rather than holistic); and procurement practices have eroded trust and loyalty between trading partners. In addition, ERP systems have created a set of enterprise standards that create complexity for one or both sides – the challenge of ‘what happens when ERP meets ERP’.
Overall, the nature and scale of complexity that faces negotiators today means that the rationality implied by concepts such as ‘positional and principled’ just doesn’t exist. Even if I want to be collaborative and open, the barriers to achieving it are often simply too great. In either preparing for, or observing during, a business-to-business negotiation, I have to understand not only the personal character of the various negotiators, but also the measurements that motivate them and the ‘organizational culture’ that will eventually affect not only this negotiation, but also the subsequent performance of the contract. It is a complicated mix – and rather defies the theories of specific style.
“The function must re-invent itself or it will not survive”.
That was the view of one supply chain academic at an executive forum i attended last night in Germany. The audience – primarily current or former Chief Procurement Officers – appeared to agree. Indeed, one made an analogy with the Pony Express, put out of existence almost overnight by the final link being made in a new technology, the telegraph.
It was in this context that the forum was wrestling to address questions over the future role and purpose of the Procurement function. They did not doubt the need to buy things; they simply wondered what need there would be for ‘a profession’ to oversee the process.
While it is certainly possible to redefine and extend the role that today’s Procurement practitioners could play, there are at least two major challenges. One, of course, is the nature of the skills or knowledge required, relative to those held by the incumbent community. The other is the openness of others in the business to the expanded or altered role that is envisaged. In this context, the issue is not only whether they feel the activities need to be undertaken, but also whether they view Procurement as the right place for them to be done. Given that many other functional groups are also busily redefining their future role, there is potentially a lot of competition.
The organizers of the forum had undertaken considerable research – and it did not appear to offer a comforting message. Specifically, even in those areas where Procurement executives believe there is potential for the function to expand, there appeared little receptivity by other parts of the business to allowing them to do so. Indeed, the best hope was in shifting to a more holistic role in determining total business cost associated with purchasing decisions, yet even here there was resistance by the Finance executives.
So in the face of the dramatic shifts in technology, where exactly will Procurement find itself over the next few years? Will the function indeed suffer the fate of the Pony Express?
Today’s networked computing offers much faster and more extensive access to data, but does this have practical application, especially in a field like contract management?
Many believe the answer is yes, but to date the evidence of effective application is limited. There has been some improvement in risk assessment and benchmarking, but this is not yet pervasive. A few legal and contracts organizations are starting to collect data and undertake analysis in areas such as timing of engagement and cycle times, or causes of claim and dispute. These retroactive analyses are proving useful in the delivery of value and the data certainly raises the profile of the function, because it contributes to policy and process rather than simply reacting to the frustrations of others.
How much further could we go? This week’s Economist magazine offers some insights. In ‘Micro Stars, Macro Effects’, it highlights the growing influence of economists on the way business decisions are made and markets work. It offers examples such as managing internal use of internet bandwidth as a means to contain costs and optimize market prices. Another relates to research on how honest we should be with potential customers about possible flaws in our products or services (for those who wonder, the answer is that greater honesty raises the probability of a sale and an increase in the price realized).
Both of these examples have very clear application to the world of contracts and commercial management. They demonstrate the importance of starting to ask new questions, to challenge old theories and practices. But going a step further, what information is hidden within the contract or contracting process that could assist improved business and market management?
In a third example, the Economist article cites the extent to which policymakers are always reacting to events. Data such as GDP growth, unemployment and inflation rates are typically lagging reality by weeks, if not months. Economists suggest that this is simply because we are failing to change the way we record the indicators. At Google, they have initiated real-time monitors on key words such as ‘job’, ‘benefits’ and ‘solitaire’ and have discovered there is almost complete alignment with the (eventual) unemployment data published by the relevant ministries.
So how might real-time monitoring of contracts change our insights? I think the impact could be considerable. For example, analysis of key words or demands in bid requests or capture of trends in negotiation (rigidity on price, growing concern over specific terms and conditions) will often indicate broader market sentiment – are customers tightening belts or pushing towards growth? Are there specific risk concerns rising to the surface? Are changes in competitive offerings impacting expectations? We know from IACCM’s annual (retroactive) study of the top negotiated terms that such trends exist, so why not capture them in real time and start to review internal policy, practice or offering capability as a proactive measure? Now, that would be revolutionary.
A quick look at the Appointments pages, or a glance at salary surveys, would seem to provide a rapid answer to this question. Being a practicing lawyer is clearly a far better career choice than contract or commercial management. Right?
Not according to two senior in-house counsel that I interviewed yesterday. Both come from large international corporations that employ several hundred legal and contract management professionals. And both – one a General Counsel, the other a VP of Legal – told me that they believe the contract management role is steadily becoming far more important than that of the lawyer.
Of course, neither was suggesting that the law profession is about to go into massive retreat. And both see contract management as a future direction for many qualified lawyers. But their observation of business needs and trends has led them to conclude that Contract Management will be a critical function for 21st century business, ensuring not just the integrity of pre-award processes, but ensuring the delivery of commercial benefits.
But if you are a contract manager, don’t start celebrating yet. You can’t simply sit back and wait for that promotion or increased recognition. The role that is being described is broad in its skill requirements and demands a role and contribution that only a few would match today. Legal understanding is certainly part of it; but as was demonstrated in IACCM’s recent ‘Future of Contracting’ study, the role must encompass solid financial and risk awareness, a grasp of project management disciplines, market and business intelligence as well as softer skills such as communications, analytical, problem solving and negotiation. It demands true ‘solution providers’ who are not focused on transactional ‘fixes’, but are bringing sustainable improvement to business performance and competitiveness.
Both of the organizations that I interviewed are investing heavily in building and developing these capabilities. They see an urgent need for greater engagement by the university sector, so that contract and commercial management are seen as viable career paths by the school leaver and the graduate.
With so many lawyers now entering the market, a growing number are converting to contract and commercial management roles. But in future, I believe we can expect a real choice, where individuals train to become contracts or commercial professionals, rather than falling into the role from another business discipline.
Commitment Matters 