- an ability to simplify the discovery process; and
- The fact that if a company has already built a robust contract management system, it reduces the risk for a merger or acquisition partner and therefore should make the business more attractive (unless of course there are a lot of bad contracts!).
The confluence of concern about risk and demands to cut costs results in a dilemma for many contracts, procurement and legal groups. It generates the frequent question ‘How do we do more with less?’
Of course, if one is simply looking at cutting cost without substantially reducing service levels, the main solutions are to automate and / or to outsource or move some activity offshore. However, concerns about risk typically imply increased review and approval – and hence greater workload. And for smaller organizations, offshoring is not likely to be a practical solution and outsourcing may not generate any cost savings.
In my experience, any successful effort to improve the quality of service while cutting or maintaining the cost of service depends on thoughtful segmentation of the contract base. This does not mean dividing deals based on revenue, or ‘strategic importance’, or similar techniques which frequently bear no co-relation to actual risk.
I thought it might be helpful to share a couple of methods that we have used with our members at IACCM. I’d welcome other ideas or approaches so please make a comment if you have one.
- Confidentiality / NDA
- Agent / remarketer agreements (including involvement of an agent or remarketer on a specific deal)
- Teaming agreements
- Joint ventures
A lack of strong leadership frustrates many contracts, procurement and legal professionals. In the most recent IACCM survey, they indicate that functional management frequently fails to provide adequate strategy and direction – and of course, this undermines their status and their confidence about the future. Many are concerned about their career path and their organization’s ‘failure to invest in its people’.
It is findings like this that have encouraged IACCM to undertake a comprehensive study of ‘the future of contracting’. Our aim is to provide authoritative insights and ideas on how the contracts and commercial process will evolve, enabling current and future leaders to develop a more robust strategy and to ensure investment in the skills and resources for tomorrow. A two minute video describing our goals, methods and early findings can be accessed at http://www.iaccm.com/library/?id=4096
But it is not only IACCM that is focused on the future. A growing number of academics have recognized the importance of contracting and many are working in partnership with the Association to drive research and to incorporate contracts and commercial knowledge within the University and Business School curriculum. A sample of those research papers will shortly be presented at the IACCM Academic Forum, featuring content from a range of top institutions in America and Europe. The papers will also be published and made available for IACCM members. Topics include:
– Visualization: Seeing Contracts for what they are, and what they could become
– Learning in Evolving Corporate Models in the Construction Industry: A Case Study
– Contracting Capabilities in Management of Innovation Networks
– Why a contracting party may be less cooperative after having suffered a loss
– Global Sales Law: An Analysis of Recent CISG Precedents in U.S. Courts, 2004-2011
– Protecting Networked Innovations with Contracts
– User-Centered Contract Design: New Directions in the Quest for Simpler Contracting
– Public Procurement as an instrument for driving regional innovation
– The Role of Proactive Law for System Level Innovations
All of this content will be available to delegates at the IACCM Global Forum in Phoenix, Arizona on October 26th – 28th. In addition to the 2 day agenda of industry break-outs, case studies and keynote presentations, they will also have access to an outstanding series of workshops. The workshops feature inspirational leaders on the following themes:
Synergy Between Contracts & Sourcing
Finding Added Value in a Commercial Negotiation: The Creation of Trust
IMPACT! What Difference Do You Make?
Plus there will be an Executive Forum where senior management can gain early insight to the Future of Contracting study results and share in discussion about their implications.
Details about the conference can be found at www.iaccm.com/globalforum/
But if you cannot be there, don’t despair! We will ensure that all our members benefit from this wealth of information and learning. Over the coming months, we will issue reports and run webinars and expert calls. The presentations form the conference will be available in the Member Library in early November. The book of academic papers will be published that same month.
Tough economic times tend to place ethics and honesty under stress – and I am seeing growing evidence of ‘underhand behavior’ as the pressures mount.
There are perhaps three major areas where we must be watchful. One is around competitive behavior; another is around the ‘truth in bidding and negotiation’; the third is in honoring commitments.
When it comes to competitive behavior, actions can take many forms. These range from the formation of cartels designed to reduce competition in bidding, to unfair or unprincipled actions towards competitors, often designed to put them out of business. The way that patents are used is one example that I have cited in previous blogs. Deliberate misrepresentation of a competitor’s performance or capabilities is another. Using subterfuge to gather competitive information is a third.
Many of these actions are not illegal, but they should cause buyers to be alert. A smart buyer understands that any gain they receive from anti-competitive behavior will be short-term. First, it should alert them to the character of the company and its likely post-award behavior; and second, if it succeeds in reducing competition, prices will rapidly rise.
‘Truth in bidding’ is a topic on which IACCM has run a series of workshops. As in the post-award ‘honoring of commitments’, there are faults on both sides of the table. Measurement systems provide incentives towards acts of omission and commission when specifying needs or capabilities. Commercial staff need to operate with increased skepticism in discovering the accuracy of requirements or commitments. Unfortunately, it seems there is also a need for increased rigor in monitoring actual performance and the management of change. Hard times lead to the temptation to understate or overstate the impacts of changes (depending on which side you are on). They also lead to an increase in inaccurate billing, including such areas as overstated hours or application of the wrong charge levels.
It is nice to believe that contracting can always be used as a vehicle to create harmonious and high-value relationships. Unfortunately, we also have to remember its importance in rooting out dishonesty and unethical practices.
If you want legal advice in the UK, you will soon be able to get it at your local bank or supermarket. That is the result of reforms to make the law more accessible and cheaper.
Of course, reactions to this vary, with many lawyers and law firms strongly opposed and asserting that it will lead to a proliferation of bad advice. It certainly raises a number of questions, both in terms of the benefits it will bring and the possible consequences. Yet it is also exactly the type of initiative that led IACCM to conduct its ‘future of contracting’ study, because anyone who believes that the next few years will not bring fundamental changes is, we suggest, fooling themselves.
This ‘commoditization’ of the law must surely increase demands for easier and faster access to commercial and contractual advice. It is once more symbolic of a dual force now affecting ‘professionalism’. On the one hand, there is a growing need for more in-depth expertise; on the other, there is the imperative to make that expertise more accessible, more responsive and less costly.
Among the relevant findings in the ‘Future of Contracting’ interviews are the pressure to drive increased empowerment among user communities and also the demand for contracts themselves to become far more user-friendly. Professionalism must not involve mystique.
There are some fascinating challenges and opportunities ahead of us – not least of which is that professional associations like IACCM will most likely see a continued increase in demand for their low cost, instantly accessible advisory services.
To see more about the UK initiative to put legal services into the retail environment, visit http://www.bbc.co.uk/news/uk-15187154
Would you like to increase the status and influence that you have in your organization?
Last week, I attended a Government conference where a senior official was talking about the importance of professionalism. In his speech, he highlighted the extent to which innovation influences a profession’s status because this is the characteristic that generates real interest and respect. Capability is assumed; innovation makes us distinctive.
IACCM research shows that only 10% of those who perform contract and commercial management are innovating – which should help us understand why the perceptions and status of our role are often so mixed.
The speaker observed: “To implement new approaches, we need a profession that is committed collectively and personally to keeping up to date with emerging industry trends and with learning and development”. This comment goes to the heart of the IACCM mission. The hunger to learn and to develop new approaches is evident in some members and is also a noticeable characteristic of some organizations, but as the research cited above illustrates, not a majority.
Do you have that commitment? Do you ensure that you and your team have access to industry trends and learning and development? Are you staying abreast of innovation in contracting – its role, structures, terms and policies?
There are numerous ways this can be achieved: I wonder how many of these approaches you are using:
– The IACCM member network. Have you built a personal contact group from within IACCM’s 23,000 members?
– Ask the Expert calls. How many of these weekly calls have you or your team listened to and acted upon?
– IACCM member meetings and conferences. Have you attended a meeting? Do you offer to host or speak at meetings?
– Research projects. How many research surveys have you contributed to? Have you read the results and taken action, or alerted management? Have you ever initiated an external research survey?
– Message boards. Do you make use of message boards to gather outside opinion? Have you contributed to them?
– Learning and development. Do you and your team have structured approaches to personal and organizational learning? Do you undertake objective assessments of skills and performance, including periodic benchmarks against similar groups outside your organization?
– Advisory services. When was the last time you sent a question or made a call to IACCM to gather information or discuss an opportunity or challenge that you face?
Professionalism is something that is collective and individual. Every one of us makes a difference to how all of us are viewed. As a rising profession, we have so much opportunity before us – so long as we make the personal investment in innovating and implementing new and higher value approaches.
In the lead-up to the Contracting Excellence Summit in Australia, I was asked to comment on a paper that suggested we must have ‘absolute certainty that contract selection is ‘best for project’.
I agree that a contract must be ‘fit for purpose’, but of course this also means that organizational capabilities within both buyer and seller must match the commitments and obligations contained in that ‘best for project’ contract.
There is no question that the role of the contract is becoming more important in business to business relationships and major projects. There are numerous factors behind this, but among the most significant are the impacts of globalisation (many relationships cross borders, languages and are quite simply more remote); economic volatility; technology innovation; and the speed of change. Overall, these combine to create increased levels of risk and increased probability of misalignment between the contracting parties.
As a result, the role of the contract is shifting from being primarily an instrument for risk allocation, to becoming an instrument for relationship governance, communication and performance management – including, of course, managing the dynamics of change.
So the hypothesis of the paper is correct in highlighting the importance of ensuring that the contract structure and terms are ‘fit for purpose’ relative to the specific project or sub-project. Indeed, as we look at the causes for project failures or overruns, it is increasingly clear that these are rarely due to technical problems, but primarily to commercial or relationship issues.
There are a number of key principles which the contract owner should ensure are followed, because these appear to be among the most frequent causes of poor performance.
- Don’t expect the supplier to subsidise or suffer from your inefficiencies. Reducing cost is important to all businesses. But the up-front price negotiation is only one source of reduction. The costs and risks for both are substantially affected by the efficiency of the contract owner and their application of resources and procedures that are focused on outcome delivery. Without these, not only are true costs increased for both parties, but the supplier must build a buffer into their price to allow for this expense (or will engage in post-award pricing actions to protect margin).
- Change is inevitable and increasingly frequent. Having the right change provisions in the contract is important. But it is also essential to have the systems in place to manage and negotiate change. The old game of suppliers trying to charge for everything and the customer claiming that everything is in scope are unproductive and must be addressed if the outcome is to be successful.
- Contracts must be considered in the context of relationships. A relationship may offer leverage which an individual contract lacks, yet in many projects, it is forgotten that there may in fact be a much wider context to resolve issues and problems. This interconnection should be a key aspect of supplier selection and contracting strategy.
- Agility is about more than flexibility. Often these two characteristics are confused – and it si common for the contract owner to see them as a supplier responsibility. Agility is key to managing performance – by both parties. It is about both speed and flexibility, a readiness to review and reengineer the contract as needed by shifting conditions or needs. It must be mutual or it will not happen.
- Ambiguity and uncertainty are sometimes unavoidable. Many contract specialists rightly complain that requirements are often vague or imprecise. They are right – and this is a common source of dispute. However, the answer is not to demand greater precision as a pre-condition to contract. There are times when the contract must be designed around the uncertainty – and that calls for a different structure, appropriate milestones and perhaps phased releases of budget.
- Improve analysis and learn from experience. Discrete projects rarely lend themselves to collective learning – and that is a bad mistake and results in regular repetition of the same problems. As a simple example, the causes of claim and dispute remain remarkably similar across a portfolio of projects. If we really care about risk reduction, we must consolidate information and take remedial steps. And the top causes of claims and disputes are virtually all connected with commercial and contracting issues.
It was about two weeks before final exams in High School. I recall my mother looking increasingly concerned, until one day she said:”Don’t you think it is time you started to revise?” My reply was: “It’s too early. I have to wait until I get a sense of urgency.”
I often think of that conversation (perhaps because my mother loved to tell the story) whenever there is discussion about the importance of planning. What effect did my last-minute approach have on the results I achieved? In my mind, I justified delay on the fact that if I started to revise early, I would have forgotten most things by the day of the exam. I needed time pressure to raise my performance and stimulate my mind.
In business, there is a regular call for improved planning. This is especially true in the field of negotiations, where consultants and trainers frequently emphasize the impact of poor planning on the results achieved. We automatically tend to associate this with a need to engage earlier and spend extensive time practicing, revising and preparing for ‘the big day’.
Despite these calls for more planning, nothing much seems to change. In most cases, that is because they fly in the face of business realities. Until the day is imminent, there just isn’t the required ‘sense of urgency’ to engage people’s minds. And of course, ‘good plnning’ does not necessarily mean lots of it, nor that it has to start way in advance. In fact, with the volatility of today’s markets, it may well be desirable to wait for the last moment and ensure the plans reflect current conditions.
So in this context, ‘good planning’ may mean developing a streamlined process that supports a ‘just in time’ approach to negotiation.
Commitment Matters 