There is plenty of evidence that improved contracting delivers better business results. There are also strong indicators that senior management is increasingly interested in this topic and would welcome proposals for improvement. But at the practitioner level, these issues often translate into a perception that the only way to perform better is through the addition of more staff and by executive management giving the contracts or commercial function a mandate for greater power.
Neither of these things will happen – to some extent because they are unnecessary, but even more because they are not merited unless the function shows itself to have a stronger grasp of its future role and the extent of the value it can deliver.
Contracting excellence will occur only when contracts and commercial teams are ready to ask and answer some fundamental questions. In the next few blogs, I plan to suggest some of the questions we should be asking. It will not be an exhaustive list – the aim is to provoke some thoughts and get organizations started. I hope that readers will add their ideas for some of the questions we should be posing – and answering – if we truly want to secure our influence and business contribution.
I am starting with process. In my opinion, ‘contracting excellence’ demands a holistic, life-cycle approach that enables the creation, delivery and management of contracts and relationship models appropriate to the overall needs of the business. So here are some questions that seem to me worth pondering:
- Is there one process, or many, depending on the type of contract or relationship?
- What is the distinction between process ownership versus process accountability and how does this impact what you are trying to achieve?
- What is the purpose of the process; for example, is it about compliance, or commercial judgment, or controlled innovation, or all of these?
Over the next few days I will pose similar questions for other contracting topics – for example, organization, technology, change management, risk and the purpose of contracts themselves. Please add your comments!
I believe one of the key trends this year will be a growing focus on outcome-based contracting. There are already clear signs of this – for example, in the last week there was an article in the Wall Street Journal quoting the CEO of Novartis, who sees this as a key trend in the pharmaceuticals industry. In the UK, the Government has announced a new wave of outcome-based outsourcing contracts to support improvement in the criminal justice system. Across the professional services community, there is ever-increasing discussion about shifting from traditional hourly rates to payment based on outcomes.
The logic is inevitable. it is now 20 years since the big move towards ‘solution contracts’, in which suppliers started to take greater responsibility for the packaging of goods and services and entering commitments of inter-operability, even ‘fitness for purpose’. That marked a major departure from the ancient principles of ‘caveat emptor’ (Let the buyer beware).
But while such solutions represented a major step in the level of supplier responsibility, this still resulted in many acquisitions ending in disappointment. Neither side is blameless; both customers and suppliers could have taken additional steps to improve performance. However, one solution is to push even more responsibility onto the supplier and to make some or all of their compensation depend upon the output or outcome of the contract.
This has many implications and at IACCM we will be explaining these over the coming months. Among the challenges are the implications to funding and cash flow, the shift in measurement and motivation systems and the need for new systems for tracking and reporting. There will be many debates over what represents a fair price or charge relative to the increased supplier risk – and what rewards there should be for out-performing the committed targets.
Another major shift will be in operational management of the contract – the need for skilled resources, the importance of mutual tools and forums to oversee and improve performance. For the contracts and commercial community, this represents a major opportunity and it will be important that we are at the forefront in understanding such offerings and advising senior management about the implications and the steps needed to make outcome based contracts a success.
Yesterday I was talking with Barbara, an IACCM member, about her experiences climbing mountains. Having conquered Mont Blanc and Kilimanjaro, she will depart shortly to ascend Everest (at least to about 6,500 meters).
We discussed the nature of the people who undertake these feats and Barbara explained the extent to which their success depends on mental resilience and determination. She described people of advanced age, people who had limited physical strength, people who suffered badly from height sickness, yet they made it to the top. Many of the people who give up are younger, physically fit – yet ready to abandon the challenge at relatively low levels of personal discomfort. They also have some extraneous reason to account for why they gave up; it is never a simple admission of personal responsibility.
Although the physical demands of contract and commercial management have few parallels to mountain climbing, the mental demands often do, At a time of such rapid change and uncertainty, we all face tough challenges that require personal resilience and determination. These may be around tackling change within the business, or leading reform within the function, or perhaps of developing personal skills or credentials for the future. At IACCM, we see this through corporate projects, or member-led association initiatives, or individuals and teams embarking on professional certification.
As with ascending mountains, many never even reach base camp. Of those that do, a high proportion start the climb and turn back. They ascribe this to reasons such as lack of support or having too many demands on their time. Sometimes they simply dismiss the whole exercise as irrelevant or inappropriate to their needs. Whatever the excuse, the truth is that relatively few professionals have the resilience and mental stamina to pursue goals to completion unless there is someone behind them, forcing them along.
Looking at the needs of your business, your function or your personal goals in the year ahead, how many mountains will you have climbed?
The WordPress.com stats helper monkeys prepared a 2012 annual report for this blog.
Here’s an excerpt:
19,000 people fit into the new Barclays Center to see Jay-Z perform. This blog was viewed about 74,000 times in 2012. If it were a concert at the Barclays Center, it would take about 4 sold-out performances for that many people to see it.
In the publication Logistics Viewpoints, Adrian Gonzalez has written an excellent article on supply chain risk. He highlights some examples of the many and varied risks that confront today’s global business operations and calls for management to “make thinking about supply chain risk part of the corporate DNA”.
I certainly agree with Adrian that the quality of risk assessment and management needs to improve. He has identified a series of ideas and ‘best practice’ initiatives, but I think these overlook or ignore a few key points.
- Adrian correctly suggests that there should be greater financial analysis of risk and he cites the finance and insurance industry as a point of reference. I fully agree that one of the problems for business today is that functional silos have resulted in far too little overall commercial analysis. Finance is left to accountants, rather than being seen as fundamental to the operations of every business group. It is also the case that financial analysis is far too focused on individual deals or relationships and fails to look at risk portfolios. But to cite the financial services and insurance industry as one where ‘ managing risk is a core focus and discipline’ seems to me to rather ignore recent reality. Have we forgotten the financial collapse that underlies so many of today’s supply chain risks? Should we overlook the rogue traders, the weaknesses in compliance standards, the impact of ill-considered incentive schemes? And what about the constant need for regulation, including around supply risk, or the frequent headlines about regulatory breach? I think we need a rather different model on which to base the future!
- Building on the point I make about portfolio analysis, one reason that organizations are making such slow progress is because risk management is frequently positioned as n issue of resource and expertise (therefore an expense) rather than as an issue of business intelligence (and therefore an asset). Armies of risk managers scare the life out of top executives because they tend to strangle the business. Sadly, risk gurus often lack the incentive to make themselves redundant. What we really need is far better insight to the actual causes of risk, the things with a high probability that can be eliminated. Many examples of these have been highlighted in IACCM research; the real issues with supply chain management are weaknesses in defining requirements and scope, of managing change, of ensuring open and honest communications and clear allocation of responsibilities. They are also about areas such as performance management (or the lack of it) and developing contracts that share risk, rather than seek to allocate it to other parties and thereby ensure it is obscured.
- Improved supply chain performance carries a premium – and buyers are consciously choosing not to pay that premium. If they really cared about supply chain risk, the solutions are available today. They can select more reliable suppliers, they can dual source or identify alternatives, they can develop internal supply management resources to oversee outputs and outcomes, they can increase insurance. But each of these options carries a cost and there is no evidence that organizations are willing to bear those costs. Indeed, fundamental to improvement is the idea of greater collaboration, yet the actual behaviors of most Procurement organizations continue to undermine trust and place little value on cooperation.
In the end, the argument for improved supply chain risk faces a massive hurdle. Why would suppliers invest in the enhanced capabilities that Adrian identifies if the message they get from their customers is that price is the only thing that matters and loyalty is for idiots? Companies today are essentially saying they don’t want to cover the costs of largely unpredictable events – they will take the lower prices, shop around for alternatives and self-insure against the consequences.
As recently as 140 years ago, it was argued that science was not a professional field and that teaching of sciences in schools or universities would have little value. The cognoscenti of the time believed that there was no merit in learning method or techniques; the advance of science depended on enquiring minds, which would best be achieved through training in the liberal arts.
As society has emerged from that narrowness of thought – and indeed arrogance of established experts – it has increasingly recognized the merits of ‘professionalism’. That is, the value of developing levels of expertise through a combination of research, universal and established techniques and a documented and teachable body of knowledge.
There are few today who would question the need for training scientists. But as we look at the field of contract and commercial management, it is at a similar crossroads to the challenge facing scientists in the 1870s (or indeed of professional accountancy in the 1880s or project management in the 1980s). There are acknowledged experts in contract and commercial management, but they have all emerged from a background in other disciplines and many still argue that this is the route to the future – that you become expert through an enquiring mind and ‘liberal’ training, rather than through specific teaching in the commercial discipline. Some go so far as to deny that contract and commercial management can be taught. Quite recently I attended a meeting where those who should be leading professionalization were instead insisting that this is not a field for undergraduate study.
Within this blog, I have consistently illustrated the case for improved contract and commercial management. As with science, a growing body of research increasingly points to the value that professional standards could deliver. A growing number of senior executives have grasped this point and they are frustrated by the the low quality of practice within their organizations.
The years ahead offer a time of great opportunity to the contracts and commercial community and in particular to those individuals who grasp the chance for professional leadership. For some, that may mean increased commitment to volunteering their time and effort in raising the profile of the community as a whole. For most others, the start point will be a resolution to raise their personal standards by gaining certification and operating in accordance with the methods, techniques and body of knowledge critical to any high-status profession.
I have received a number of requests asking which Commitment Matters blogs were read the most in 2012.
Here is the list of the top 12, with the most popular having almost 30,000 unique readers. I will make further comments and observations in a future blog – and I will also highlight those that I consider the best and most important (these are not always those that receive the highest volume of readers).
| The Role Of A Contract Manager |
| The Role Of A Contract Manager – Revisited |
| The Purpose Of A Contract |
| Contract Management In India |
| Contract Exit Strategies |
| The Terms That Matter |
| Should Lawyers Become Contract Managers? |
| IT Contracting: Should it be part of Procurement? |
| Contract & Procurement Metrics |
| The Purpose Of Negotiation |
| Why Is Communication So Important? |
| The Role Of Lawyers In Contract Management – Part II |
“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!
Commitment Matters 