There are times when my conversations yield recurrent themes and during the last few days, performance management has been a recurrent topic.
It began with a study I was asked to review, which yielded insight to the current state of contract performance oversight by Procurement. The results confimed that for a majority of organizations, performance management is more about conducting a post-mortem than it is about generating better results. While some large corporations may have invested in a more pro-active approach, they appear to be the exception. In most cases, Procurement is not even involved in performance oversight unless they are called in or unless it is part of a contract close-out process. In both cases, interest only seems to arise when things are badly wrong and someone needs to be blamed.
This experience led me to pay added attention when people started talking about ‘obligation management tools’. Strangely enough, this term occured several times this week during meetings in Germany and Switzerland. As complexity grows, as the frequency of change increases, and as long-term outcomes become a point of greater focus, the importance of capturing, monitoring and amending ‘obligations’ becomes ever-more significant. In addition, effective obligation management requires clarity over roles and responsibilities; it isn’t enough just to know what needs to be done, it is also critical to know who is responsible for doing it – and that is one of the key weaknesses that emerged in the performance management report I mentioned earlier. Far too often, the allocation of tasks is far from clear – convenient when it comes to handing out blame, but not good if you actually want to succeed.
Of course, if we have reliable obligation management systems, we can be more effective in overseeing performance. So this has set me onto a search for effective obligation management tools or systems and I will comment on those in a future blog. But another link in the chain of obligations and performance is the corollary of poor management – claims and disputes. And this was another topic that kept arising. In several presentations I attended, there was emphasis on the growing importance of good claim and dispute procedures. In these hard economic times, it seems that companies are paying increased attention to their contractual rights and obligations, at least when it comes to making money or cutting costs. So they have become more robust in their readiness to issue or fight claims. Of course, one might argue that it would be smarter (and long term more cost effective) to invest in improved obligation and performance management rather than engaging in battles over what went wrong.
Today I am chairing a CFO conference in Geneva. My interest in doing this (apart from my own background in Finance) is to continue efforts in raising CFO awareness of the important contribution that improved contract and commercial management can bring to bottom line results.
In listening to the various presentations and discussion forums, I am struck by the similarity of many of the lead topics with those at contract management events. For example, one head of Audit and Risk highlighted the need for Finance to look beyond cost and budget, to focus instead on value. He gave an excellent example, where a project came in on budget, yet was delayed by 3 days at a cost to the business of $1 million. Another conversation revolved around the importance of considering risk holistically; it revolved around the point that a concentration on risk mitigation tends to undermine potential results, especially when driven by specialists who may be unable to see the wider chances for off-sets or alternatives.
Another topical theme is that of cost reduction. Finance is also under scrutiny and needing to find ways to reduce its cost of operations. Within this, it must determine how to deliver the right balance of operational activity, reporting and strategic support. The challenge is familiar and indeed the approach to analysis is similar to that which should be going on within any contracts / commercial / legal function. However, in listening to presentations, it strikes me that many of these functions are far behind Finance in their reengineering efforts and their understanding of value delivery. Often, we appear stuck in the low-value operational mode and have yet to grasp the importance of turning transactional data into substantive management reporting and ultimately a strategic contribution. Finance is one of the leading functions when it comes to the outsourcing of its work, or creation of shared service units. Now they are focused on ‘Finance Competency Centers’. No wonder there is growing impatience on the part of many CFOs about the unreformed nature of the contracting process and resources.
So while I believe there is an important message that we can deliver to CFOs, I also appreciate that we must learn from them when it comes to putting our organizational house in order. Perhaps they would be more inclined to hear our calls for greater commercial awareness if they felt we had grasped the principles of added value in our own service delivery.
I will expand on this topic in a future blog where I lay out some of the analysis used by Finance which I think those in contract management could be using in our own organizational and process design.
The Contracts and Commercial Mission
Good contracting starts with defining the best form of relationship to achieve the desired business results. Since ‘the relationship’ will often continue well beyond contract signature, it is essential that the parties include governance principles. Negotiators should think in three phases – first, relationship models; second, contracting models; and third, communication models. Traditional Procurement and sourcing processes focus on price, rather than value. They are built on assumptions that ‘suppliers take advantage of us’. Many suppliers, on the other hand, feel that customers are ‘confused about what they really want’. This stand-off frequently results in poorly established relationships and a failure to focus on ’value extraction’.
In the future, contract and commercial management will be measured on its ability to deliver growth and value. That demands involvement throughout the contract life-cycle. Since resources must be contained, this enhanced role will be enabled through extensive automation and outsourcing of transactional management; commercial resources (buy-side and sell-side) will provide an integrated overview of market conditions and trading relationship performance. They will identify business inhibitors and propose the changes to policy, practice, procedures and terms that enable competitive advantage and financial performance.
Contract and relationship management must integrate in order to deal with the growing complexity of today’s trading relationships. This transition will face obstacles and challenges, among them is the need for different skills among procurement and contracts staff; another is a shift in measurements; and a third is to address the challenge of organizational models and perceptions – in particular, to determine the connection between relationship management and contract / commercial management.
This blog is based on the conclusions from an IACCM report on the State of Contract & Commercial Management. A full copy is available on request to info@iaccm.com
The Apple lawsuit complaining that the charges being levied by Google / Motorola for use of patents are ‘excessive’ has been dismissed. Meanwhile, in Germany, Apple succeeded in a lawsuit related to Google / Motorola mobile devices which led to their withdrawal from the market. In a similar multi-national battle with Samsung, Apple achieved a much-publicized victory in the US courts, winning substantial damages (though now on appeal for more); but in the UK, a different suit by Apple against Samsung was rejected and Apple has been forced to issue a public notice withdrawing its claims of infringement.
The list goes on – and it becomes hard to see who really benefits from this battle, except law firms. Behind it, there appear to be two particular strands. One relates to patents that resulted from genuine research and development; another relates more to general product characteristics – the more nebulous question of specific design. For example, one suit related to the shape of the corners.
As suit and counter-suit develop, one has to wonder to what extent this conflict is simply part of a protracted negotiation, with each party trying to establish power. For example, will Google now compromise on its pricing in return for Apple backing down in Germany?
Another noteworthy aspect is that these high-profile law suits are predominantly between major US corporations (Samsung is clearly an exception). This is interesting, given the years of publicity we have had about the patent and copyright abuses that come from the East. It seems the real enemy – at least in these technology wars – remains in our own backyard.
Two recent articles on globalization highlight important issues for contracting and commercial management.
One (http://www.strategy-business.com/article/00139) continues the assault on Thomas Friedman’s influential book, “The World is Flat”. IACCM challenged the Friedman vision from the outset, suggesting that the emerging world for business was in fact ‘spiky’. By this we meant that there was great unevenness in the process of globalization and that increased openness would also result in growing tensions between countries, trading blocs, political elites and social or religious groupings. We went on to suggest that far from creating uniformity, businesses would be forced to become more sensitive to diversity and that this would demand new forms of market segmentation.
This ‘spiky’ vision is indeed proving true and this has significant implications for how we approach commercial management and contracting. For example, it has become essential to develop a portfolio of contract models that are sensitive to different relationship needs and types. Without this, businesses are forced into long cycle times, contentious negotiations and a level of non-standard terms that generate heightened risk of non-performance and heavy cost burdens. Contract and offering design must today be multi-dimensional – global, regional, local and trans-national, to cover not only trade blocs, but also customer segments that traverse traditional boundaries.
In the early days of globalization, companies believed that they could standardize terms and processes, developing universal templates and imposing rigid compliance policies. In many ways, this was necessary to overcome the uncontrolled diversity of previous multi-national operations; but today, it has become an impediment to doing business and to remaining competitive in the face of new competition. Hence we are seeing a new and more inclusive ‘center-led’ model that ensures oversight rather than rigid control and which collects data rather than suppressing it.
These changes are reflected in an upsurge of interest in international contracting. Whether it involves dealing with local subsidiaries, agents or distributors, or direct with overseas suppliers or customers, there is a new appreciation of the need for sensitivity to local norms and customs, as well as legal requirements. As a result, there is rapid growth in the number of members using IACCM’s global resources, networks and learning materials. Once again, it confirms that contracting skills are increasingly about knowledge, judgment and the management of change, rather than the creation and imposition of inflexible rules or inefficient case-by-case negotiation.
The recognition and sophistication of contract management varies substantially around the globe. As my previous blog indicated, in some countries and industries it is still viewed very much as an administrative discipline, yet in others it has evolved to being a strategic capability.
Top companies understand that they must perform on their contracts, whether buying or selling. But they have very different approaches to their management of performance – and high on the list is the variation in how much visibility senior management actually has into its contracts. A majority only know when there is a major problem; the minor issues, the day to day erosion of value or savings, is not something they see or hear about.
Most organizations have invested substantially in the quality of their sales process and their procurement organization. Together, these yield promises of revenue or savings. Yet without a robust contracting process, companies fail to optimize both revenue and savings; and they suffer signifincant erosion in the subsequent delivery or acquisition cycle. Good contracts ensure that commitments are achievable; they also ensure that value trades are made through intelligent negotiation; and they establish a robust governance and performance framework, which includes active monitoring of the output or outcome.
It is encouraging to see growing understanding of the need for a contracting system that ensures enhanced performance capability. At IACCM, we witness this as a result of our worldwide operations. It is evident in growing skepticism about traditional approaches to Procurement; it is evident in growing discussion over the tools and the timing for commercial intervention in the sales process; it is evident in teh number of countries in which investment is being made to build contract management skills. A recent example is a survey of Hispanic countries undertaken by IACCM member Pablo Cilotta, which reveals a strong demand not only for increased member meetings, but also for formal training. We observe similar trends in India, Indonesia and Africa.
Management hunger for better business performance is increasingly reflected in their readiness to invest in contract management.
It is about three years now since Professor Leslie Willcocks of the London School of Economics wrote about the growing importance of contract management. He outlined the evolution of the discipline, which started with ‘contract administration’ and ended with a new era of ‘collaborative innovation’, driven by a fresh understanding of the role of contracts and the skills of commercial practitioners.
Professor Willcocks used an alternative term for contract administration; he called it ‘negativity’. That view was based on the fact that organizations which view contracts as purely administrative instruments lose the value that comes from a proactive and holistic approach.
I am writing about this today because on LinkedIn, Tony Yuan posed a question about the importance and influence of contract administrators. I suspect this was driven by a sense that the role should be gaining status, but often does not in organizations where it is seen only as a support function for the project manager.
Good contract management within a project is critical to its success. Indeed, this has been illustrated time and again in public sector audits of failed projects and in research undertaken by groups such as the International Centre for Complex Project Management, as well as the important findings of IACCM which has placed specific financial values on improvement.
A couple of the things that go wrong are:
– the absence of any over-arching contracting strategy results in tools, process and contract models that are frequently inappropriate for the nature of the project to be undertaken. That is not typically something any individual project manager can fix because it goes to the heart of corporate policy and practice.
– compounding the fact that the process and the contract often fail to offer the right framework is that many project managers lack rounded contract and commercial skills. A majority come from technical backgrounds and many have been led to believe that contracts (and those associated with them) are bureaucratic obstacles to getting the job done.
My list of issues could continue. But the truth is that many of today’s projects are far more commercially complex than technically complex. There are many situations where the project manager should in fact be providing support to the contracts or commercial expert, not vice-versa. For organization’s to flourish in today’s complex business environment, we must take note of the ideas of Professor Willcocks and others like him, who are calling for an end to ‘contract administration’ and the development of true contracting and commercial competence.
The contracts and commercial community is not good at sharing knowledge and this inhibits everyone’s performance. In spite of the tools we have available to us, most practitioners remain locked into learning either through their own experience, or from conversations with a narrow circle of current and former colleagues. Networked technologies are not a significant source of information or of testing ideas.
Th3se highly generalized observations come from my experience at IACCM, both observing utilisiation rates of message boards, learning communities etc., and based on conversations with senior management from our Corporate Members. Everyone agrees we could all be more efficient and mroe creative if only we would get better at sharing and communicating.
It is with these observations in mind that I enjoyed reading a recent blog in Logistics Viewpoints. Adrian Gonzalez described an occasion when he created a discussion forum and invited 25 supply chain managers to post their questions and to benefit from sharing ideas. Just two of them had questions to pose (he doesn’t mention how many replied). And it seems that this problem of low participation rates is endemic.
Adrian cites an article suggesting the core issue may be the inability of many people to ask questions. “Asking questions is a skill that many people lack”. I think this may be part of the explanation. Certainly some people are reluctant to admit ignorance or seek opinions or directions from others. But it does not account for why so few read the questions or provide feedback. The problem seems to be more about a general lack of participation than a lack of intelligent questions.
I have also observed cultural and (not surprisingly) generational differences. Younger people, raised in the networked age, are more likely to use technology to pose questions – though I suspect even they tend to do it within confined networks. Across cultures, the IACCM data suggests that countries where functional and professional expertise is still emerging are far more likely to use electronic methods of outreach and learning. India is perhaps the most obvious example, being a culture that also has the benefit of good English skills that facilitate engagement on international forums.
I would like to ask your opinion about why participation levels in knowledge generation are not higher – but of course you would not be a representative audience, since you are reading this electronic medium in the first place!
Those responsible for contract terms often encounter demands for more flexibility. There is frequent conflict between the demands for ‘compliance’ (which most take to mean rigid standards and templates) versus ‘flexibility’ (which seems to mean high levels of custom drafting).
Is there no other way, no middle ground between these positions? That was a question that my friend Craig Guarente and I recently discussed, based upon an article entitled A Strategist’s Guide to Personalized Medicine. Based on this conversation, Craig wrote the following.
The Strategist’s Guide offers an interesting look at the healthcare industry and how pharmaceutical companies are using metrics and market segmentation to drive the business and increase profits. In the article the authors describe how there is a movement in big pharma to create medicines that are more personalized. For example, there are medicines that are designed only to treat cancer in people with a certain gene. In fact, there is an example cited where a medicine was only effective in 25% of the test patients. In the past that medicine would never have come to market but in this case the drug company segmented the cancer patients into smaller groups. This drug was approved based on its effectiveness in that 25% group.
Contracts professionals can draw some parallels from the experience of drug companies developing “personalized medicine.” In fact, I’ll go so far to say that we as contracts professionals need to develop more “personalized contracts.” Okay, okay, maybe I won’t go that far, but there are lessons to be learned.
The authors write that pharmaceutical companies “recognize the competitive advantage that could accrue from a segmented customer base with structures, processes, and capabilities to match. They are just unsure about how to leap ahead into practice.” Does this sound familiar? The IACCM best practices call for contracts personnel to first look at the market when designing processes, tools, and terms. We must understand our customer base (internal and external) to ensure we can meet their demands and provide a quality agreement that is acceptable to both sides. You can’t have a one size fits all approach to contracting if you are buying from or selling into different markets with different competitive forces and pressures.
The challenge for contract professionals, and in particular those in the medical/pharmaceutical space, is how we can guide the business to take advantage of these opportunities rather than following a course that is dictated to us. The IACCM offers a large knowledge base and a host of research topics that can guide us through the process. In fact, I’ve used this research as both an in-house contract practitioner, a functional executive, and now as an outside advisor to other companies. The IACCM’s “Future Of Contracting” research and analysis has provided me with concrete examples and strategies in my work helping companies and organizations advance up the value chain.
Traditional thinking has us believe that we must create one process with one contract to obtain maximum efficiency, lower costs, etc., or alternatively that we must offer custom negotiation in order to be ‘responsive’. In truth we should work on creating one option within a particular segment. If one contract will work for 25% of your customers without negotiation then that is something worth pursuing. This doesn’t mean you ignore the other 75%. Quite the contrary, perhaps there is another contract vehicle that works for other segments. In the end, what would you rather have – a portfolio of contracts that are easily accepted by distinct customer or supplier groups, or one contract that is highly negotiated or creates significant dissatisfaction in a high percentage of your transactions?
Planning is also important. The authors write, “To be successful, they [drug companies] will need to take into account three elements of their current reality: First, the prospects for innovation; second, the right value proposition; and third, the capabilities needed to deliver on that proposition.” The same assessment must occur within your contracting organization, be it in finance, legal, or operations. One area where leaders often stumble is in assessing the organization’s capability to deliver. If you are segmenting your customer base into high value and low value, then one natural outcome will be the need for increased business acumen and contracting skills for those people on your staff handling the high value contracts. Unfortunately, just wanting to deliver a good product/contract is not enough. Your team must be able and willing to produce. If you have an existing organization that might mean undergoing an assessment to analyze how close you are to being able to deliver your goals. You shouldn’t go live with a new contract or process if you won’t be successful.
Another parallel to draw is the connection between data and action. We in contracts often attend to the squeaky wheel first. We find ourselves to be firefighters going from emergency to emergency extinguishing the latest business bonfire. A better approach would be to use hard data and analytics to analyze your market before engaging it.
To be successful, “pharma companies will need to emphasize diagnostics — which, historically, has been a very different business from pharmaceuticals.” Again, does this sound familiar? Contracts personnel are often of the mindset that every contract and every negotiation is different. Every attempt to quantify or qualify is met with resistance. We need to break through this barrier once and for all. There are scores of examples of contract organizations using proper diagnostics before going to market. These must become the norm if we are to continue our climb up the value chain so we are brought in to discussions and not merely informed of decisions.
The IACCM’s research clearly shows the need for the contracting profession to not only use, but also embrace, technology and analytics. It is not that we should use technology for the sake of technology. Rather, technology and analytics enable us to truly analyze our business and offer insight that executives may not have. We can help our companies make better decisions, seize untapped opportunities, and avoid pitfalls. Through years of research, case studies, and practical application, the IACCM had developed a bevy of information that can be used within any industry.
I will leave you with two final quotes, each of which could well be applied to the contracts, legal and procurement community. First “Personalized medicine could also require changing hearts and minds because it affects the character of an enterprise.” And, “many of these innovations must overcome the medical community’s profound resistance to change.” Inertia is a powerful force and the more data you have, the more likely you are to move your organization.
Research shows that good Contract Development and Management could improve profitability by the equivalent of massive 9% of annual revenue*
Research by the independent International Association for Contract & Commercial Management (IACCM) indicates that companies struggling to maintain stakeholder returns and profitability in harsh economic times could well be missing a trick. A massive boost to bottom line figures can well be achieved by focusing on an often neglected discipline: Contract Management.
IACCM notes that without ongoing diligence contracts can ‘leak’ value. Leakage can be directly financial (out of date pricing schedules for example), or indirect (misunderstandings and a breakdown in relationships might lead to poor or late delivery for example).
IACCM identifies the major areas of contract and management weaknesses leading to leakage as:
- Disagreement over contract scope
- Weaknesses in contract change management
- Performance failures due to over-commitment
- Performance issues due to disagreement over what was committed
- Inappropriate contract structures
- Disputes over pricing
- Issues with subcontractors
Of those contracts that leak revenues, the losses commonly manifest themselves in several ways. Indeed these manifestations can be inter-related and impact each other, or lead to consequential loss such as non-renewal or failure to expand the contract through additional business or innovation (and it shoudl be noted that the average 9% losses do not include the effect of these missed opportunities).
In a recent study, almost 77% of IACCM member companies indicated that project delays or cost overrruns represent a regular source of loss; a further 53% highlighted claim and dispute settlements, with 26% experiencing losses and delays from contract cancellation and a similar percentage facing revenue leakage from liquidated damages. Importantly, these issues are predominantly due to non-technical causes – such as those identified above.
IACCM Conclusions
Ultimately, contracting is all about performance. Trading relationships are formed in order to enhance results. It is based upon those contracts that organizations claim savings, revenue or enhanced capabilities.
Yet many contracts do not deliver against forecast or expectations – and it is this under-performance (causing a potential impact on the bottom line equivalent to 9% of annual revenue) that is gaining increased management attention. There will be growing focus on the causes of failure and contract risk analysis will be expanded to better understand why things go wrong and how they can be remedied.
The evidence suggests that two key stages need attention:
A) A solid contractual position: relies heavily on both parties showing a readiness to build alignment that supports performance. Key to this is qulaity of communication and recognition that today’s fast changing environment generates inevitable uncertainty and a need for flexibility. Organizations must also become more creative in their use of external benchmark and performance data. IACCM points to deep concerns that the process to a solid contract can be compromised by the development of the wrong partnerships, driven by incomplete or inappropriate selection criteria. Much of this is a result of functional performance measures that undermine good judgment and decision making – for example, sales compensation paid on deal closure or procurements measured by claimed savings at the point of contract signature.
B) On-going contract management: here IACCM encourages future contract processes to be driven by a better integration of internal management and measurement systems. Given this solid structure Contract Management skills post award will play a key and fundamental part in identifying possible risk of ‘leakage’. Contract Management needs to become not just a functional discipline, but a business competence.
Finally, IACCM observes that many organizations have fallen into the trap of believing that contract and commercial discipline is achieved through rigorous compliance management. In fact, this approach simply serves to blind management to key aspects of business and market intelligence, resulting in terms and processes that accelerate the level of loss. The IACCM research found a direct correlation between the level of loss being experienced and the nature of investment in contract management capability.
* Figures based on independent market research carried out by IACCM in 2011/12. 9% represents an average which varies significantly between companies and industries (contact IACCM at info@iaccm.com for more precise information).
The IACCM Operational Guide to Contract & Commercial Management sets out the underlying body of knowledge for this discipline – see http://www.vanharen.net/9789087536275/contract-and-commercial-management-the-operational-guide?filter_name=6275
Commitment Matters 