It is understandable that Governments are concerned about security. The decision by the House Intelligence Committee that US Government agencies should be barred from doing business with the Chinese companies Huawei and ZTE will not be a surprise to many – but does it make sense?
In “There is an I in Team”, author Mark de Rond poses an interesting challenge to the current push in business towards greater collaboration, co-working and co-creation.
The point he makes is that today’s focus is on teaming and that this has resulted in a search for people with qualities of likeability, trust and empathy – often at the expense of individual skill. Through analogies with the world of sport, the book suggests that individuals are frequently game-changers and teams can be built around them. By seeking to suppress individuality in the interests of team harmony, managers may in fact be driving out the very success they are attempting to achieve.
“When teams work well, it is because, and not in spite, of individual differences”, de Rond correctly observes. Yet the obverse is also true, so there is clearly a balance that needs to be struck in management oversight. The concern that the book raises is that we could be misled into thinking that team harmony is an end in itself – that all we need to do is create a collaborative working environment and success will automatically follow. That is not true; we need to maintain a degree of tension and real clarity over goals and objectives. In the past, IACCM has observed that all healthy and productive relationships operate with a degree of contention. The question is whether that contention is creative or destructive.
And in another important observation, de Rond observes that ‘a settled and happy team is the result of success rather than its cause’. All of which implies that to be successful, there is a need for clarity, rigor and effective oversight of performance, together with encouragement of individual aspiration to be distinctive and a high-achiever.
In recent weeks I have encountered a growing number of conversations about project financing and the links between funding and contracts.
There is more and more discussion in many industries about new and alternative contracting models. In particular, there is wider acceptance that traditional approaches to negotiation and contract risk allocation are counter-productive and that they undermine outcomes. This leads to the conclusion that greater collaboration and a more appropriate and balanced allocation of risk and reward is needed – and that this must be reflected in how we develop terms and conditions and post-award governance principles.
However, such models fly in the face of long-established principles in which risk consequences are (at least in theory) well-defined and apportioned. The new multi-party arrangements are designed with risk prevention in mind and depend on a readiness by the parties to share information and techniques in pursuit of shared goals and benefits. For the financing community – whether it be banks or some of the other sources of funding – this is unfamiliar territory and they do not know how to assess the relative riskiness of differing contract models. ‘Behavioral impact’ is not a concept with which they are familiar.
At a recent conference, a banker sought o describe ‘what makes a project bankable?’ He made an analogy to a glass of water. If it is clear water, we drink it, but as it shows signs of cloudiness, we become steadily more hesitant. For a project to appear ‘clear and clean’, the technology must appear sound, the contracting parties must appear stable and have good balance sheets, the business plan must be clear, cash flows reliable etc. In many of today’s projects, there are high degrees of ‘murkiness’, in large part due to underlying uncertainties or pressures of change – new technologies, new regulation, new competition, industry consolidation, riskiness of other projects for the balance sheet etc. In this environment an unfamiliar contracting model tends to cause concern.
The conclusion from these discussions is interesting:
- Banks will welcome a growth of contract standardization and also be more prepared to invest when the key participants show evidence that they learn from the lessons of the past
- Banks expect to see commercial intelligence being applied. Specifically, the parties should reflect the uncertainties of change by making appropriate contingencies in their project plan
- Banks understand the concept that complex projects depend on consensus building and collaborative communication, but need evidence to support this contention.
Overall, funding for projects is available, but in today’s risk environment those applying for support must illustrate they have effective understanding and appropriate project controls. Contracts that involve shared responsibility and collaborative approaches to issue and problem resolution sound like a good idea, but time must be taken to educate the financing industry and also to show there has been road-testing of these models that demonstrates success.
For the contracts and commercial community, this raises the question of how well we are coordinating and communicating with the finance community – not just externally, but within our own organization. We need to ensure our senior Finance executives similarly understand this link between project models and terms and the challenges of project financing.
I have spoken recently with a few seasoned negotiators who work on large outsourcing and managed services deals. Their comments regarding the quality of contracts and commercial staff they encounter can be summarized in one word – ‘underwhelming’.
Each of them has observed the trend among major providers to consolidate their Legal and Contract / Commercial Management teams. As a result, they ‘seem to have taken the worst characteristics of lawyers and trained commercial managers to do their job’, was one observation. “Contracts and commercial staff seem to have become cheap surrogates for lawyers,” commented another. ‘They don’t understand the deal, how what they do affects the financials. It is all about checking, wordsmithing, document handling and processing. No real value.”
The concern is that providers have suppressed judgment in favor of compliance. “they have created people who are a counterpart to Procurement. It is a process rather than understanding vlaue. People sell the wrong thing, buy the wrong thing – and then get frustrated by the result.” A compliance mentality blinds organizations to actual risks, their potential impact or probability. Contracting becomes a box-ticking exercise and there is no counter-balance to teh subject-matter experts (or ‘subject idiots’ in the words of one negotiator) who can easily delay or derail deals because of their narrow perspectives.
Organizations seem to have lost sight of their need for people with broader and more rounded skills and understanding, who can coordinate across the stakeholders and manage the inevitable contention that arises in any complex deal. When discussing this concern with several of the major providers, they acknowledged the problem, attributing it in part to the pressures of the regulatory environment and in part to the behavior of buyers and their distorted view of compliance and risk allocation.
Added to these factors, I think there is also the problem that most contracts and commercial groups have failed to make a compelling business case for their independence. In an era of cost reduction and pressure for added-value, they have struggled to explain their precise contribution, or what will be lost without them. The benefits of ‘talented dealmakers’ are typically visible only after they have gone. Groups that are flourishing are those which are working to deliver strategic capability. They are consolidating their learning and understanding to equip the organization with the the right contracting models, updated commercial policies, empowered business units. Their role and purpose is not static, but adaptive to changing business conditions.
The recent IACCM Innovation Award entries reflect this stark contrast between those who are driving change and those who are stuck in a downward spiral. For Commercial Management to survive, it must itself grasp the fundamental of commercialism – and be ready to update itself.
Last year, Apple and Google spent more on patent lawsuits and patent purchases than they did on research and development of new products. Over the last two years, in the smartphone industry alone, some $20 billion has been spent on patent litigation and patent purchases. For major companies today, patents are not about innovation; they are about competitive weapons.
Why is it that the patent system seems to work for most industries, but in the technology sector has resulted in endless high-profile litigation and threats that frequently put small and innovative companies out of business?
According to an article in the New York Times “Unlike patents for new drug formulas, patents on software often effectively grant ownership of concepts, rather than tangible creations. Today, the patent office routinely approves patents that describe vague algorithms or business methods, like a software system for calculating online prices, without patent examiners demanding specifics about how those calculations occur or how the software operates”. The result, of course is that the biggest players with the deepest pockets can frequently bully others into submission.
A major reason why the current system is so damaging is that companies now file patents for ideas in which they made no investment and which they may never pursue. The article outlines this in the case of Apple, but they are by no means alone. And for those who argue that current patent protection is necessary to protect investment in innovation, it is pointed out that Apple’s monthly profits of $3bn+ are by many considered excessive. Such high margins would typically attract competitors – but the patent system makes any investor wary.
Some ideas being discussed to improve the system include a reduction in the duration of proection. Another might be to create different classes of patent, or to limit the way in which they can be used.
The America Invents Act has made things worse by changing the principle of protection from first to prototype to first to file. This again favors the large and sophisticated companies who can often spot someone else’s new idea and then rush to filing. Indeed, it is a real issue for many inventors who perhaps wish to gain funding and cannot do so without sharing their ideas and prototypes with potential investors, who may then quite simply steal their idea.
For those in the world of contracts, there is sadly little we can do at thsi time, except remain aware of this potential threat and ensure we understand it in the context of provisions relating to intellectual property, confidentiality and indemnity clauses. And perhaps, when there is an opportunity, we might add our voice to those who campaign for change.
I was on a panel last week where we were discussing some of the findings from IACCM’s ‘Future of Contracting’ study. One of my co-panellists (the COO of a major insurance company) gave her observations and experiences, especially in the context of outsourcing.
She mentioned that her company, like most organizations, had allowed outsourcing to develop without strong central controls or coordination. While there were rigorous approval processes, individual deals and relationships were typically implemented by a project owner. Over time, it became evident that outsourcers were a key part of the business fabric; indeed, internal research revealed that a total of 153 outsource agreements had ’emerged’ over the past 10 years.
This had led to realize that they needed a focus on how to make such relationships work better; how to ensure coordinated priorities; how to create an improved balance of rewards and penalties to generate the right behaviors. There were several revelations when it came to contracts and the contracting process:
- Contract discussions must occur early in the process. This should be to ensure the right shape to the deal and also to validate needs and capabilities.
- ‘Storing away the contract is storing away problems’. Contracts must be living instruments of governance and relationship management.
- The contract is central to relationships and conversations. A failure to keep it updated causes renegotiation to be a major event that occurs when everyone has become unhappy.
In a fantastic analogy, mty fellow panellist described the contract as being ‘like the skeleton of a fish – it holds everything together and without it, the fish would simply flop around and go nowhere’.
Are you by nature suspicious, incisive, critical, exacting, organized and of high standards?
According to an expert writing in Workforce, these are traits often associated with people who have strong analytical skills. These skills are widely considered to be of increasing importance. In part that is because routine jobs can be automated; and it is in part because automation itself enables more analysis since it generates so much additional data. Those in contract and commercial management are not immune from this trend. Indeed, creative professionals have always needed strong analytical skills in order to resolve problems. That need is growing and the potential we have to analyze contract content, performance, the inhibitors to good relationships, the factors that damage value delivery are all potentially there for the taking.
One of the major distinctions within our community has been between three classes of practitioner:
- the administrator – people who simply follow the process, monitor and report, oversee compliance
- the reviewer – people who are able to check, validate and identify problems for others to take action
- the solution provider – people who examine the problems and identify ways they can be fixed or turned to advantage
It isn’t hard to guess which of these categories is most valued. But a challenge for recruiters is how to identify the people who are either in, or have the potential to join, that class of ‘solution provider’. How do you identify analytical capabilities? The article provides some useful ideas. For example, you might ask:
• Describe a situation when you anticipated a problem. What, if anything, did you do about it?
• Give an example of when your diagnosis of a problem proved to be correct. What approach did you take to diagnose the problem? What was the outcome?
• Describe the most difficult work problem you’ve ever encountered. What made it difficult? What solution was implemented and how successful was it in solving the problem?
• What steps do you take toward developing a solution?
• What factors do you consider in evaluating solutions?
As a more extreme, but perhaps more revealing approach, I recall having dinner with Seth Godin some years ago. He described an interview approach where he asked candidates to tell him how many gas stations there are in the US. Of course he did not expect them to knwo the answer. He was simply interested in their reaction. Most professed to ignorance and would not even venture a guess. A couple were so upset that they either walked out or burst into tears. Just a few sat back and though through an answer. It was those few who wereof course of interest to him; and his next question was to understand the process they had gone through in reaching an answer.
If you want analytical skills, it probably isn’t a bad way to assess them. What do you think?
Yesterday I participated on a panel at the ISG EMEA Sourcing Conference. One of the ISG presenters talked about the advisory firm’s experiences in reviewing supplier bid submissions, highlighting a number of easily avoidable errors. I thought it would be interesting to share the list and to add my opinions on what this means to contract management and legal teams.
- Lack of insight: sales teams often display a limited view of opportunities, which means a consequent lack of planning, failure to understand the real reasons behind client need (instead they sell to stated reasons) – and as a result answer the wrong questions. This will be a familiar syndrome to many contracts and commercial teams, which often sense the sales opportunities that are purely speculative (often cast as ‘strategically important’). If Sales cannot answer basic questions, or refuse to engage in discussions around value-add that goes beyond the scope of the obvious, there should be alarm bells ringing – and generally these ‘opportunities’ are a waste of scarce resources.
- Bringing the wrong sales team; failing to involve the right skills at the right time, in particular excluding subject matter experts until late in the process, failing to ensure alignment between the skills at the table from the customer with those from the supplier. This is one of the biggest complaints by contract management and Legal – ‘if only we had been involved earlier’. Well, the customer-side clearly feels the same; failure to get term and condition issues or contract structure discussed at an early stage frustrates the customer, results in extensive delays and – of course – can often result in the wrong deal.
- Spreading efforts too thin: there is a need to focus on things you can win. Qualify opportunities, don’t chase too many. Match prospects with capabilities. This obviously has some similarities with issue 1 above, but it goes further because it also addresses the point about ‘matching capabilities’. This tendency to over-commit is one of the top reasons for claims and disputes. Customers are becoming more alert to this – and thankfully they often throw out such bids. But once more, it is a waste of supplier resources and it damages reputation.
- Have a robust process – research tools, consultancy-style workshops. The mature and reliable supplier is often obvious because of the nature of the data they possess – and also for the methods they propose. For example, executive alignment sessions, requirement definition workshops, approaches such as IACCM’s ‘relational contracting’ workshop – these are things that distinguish the experienced, mature provider from the also-rans.
- Poorly prepared responses: sloppy, generic or irrelevant material. Failure to grasp and address issues. Often linked to 1 or 2 above. Many companies have a professional proposal management group – and hopefully they eliminate this problem. But in my experience, it often takes the rigor of a contract management or legal team – people who care about words, spelling, precision – to bring real discipline and quality to a proposal document. It is certainly crazy to be losing business just because you can’t produce a professional response.
GOOD PRACTICE
The presentation concluded with this advice for pursuit teams:
Listen to client objectives
Avoid prescriptive solutions
Empowered sales team – ability to make commitments through involvement of experts
Show responsiveness throughout process
Concise response that addresses issues
Getting this right is a collaborative activity. How confident are you that your organization avoids these common sources of failure?
Last week, I participated in a seminar run by the law firm Eversheds at their London offices. The topic was Contract Management and Disputes in the Energy Industry.
Having attracted around 100 attendees, there was clearly interest in the topic and the audience came from a varied functional background. The presentations reinforced IACCM’s conclusions that the importance of contracting is growing. The event had extensive input on ‘collaboration’, in particular the increased use of alliancing. However, it was evident that terms such as ‘alliancing’ and ‘partnering’ actually cover a range of contract structures or models. The real issue is that there is growing consensus about the need for a fairer balance of risk, that traditional turnkey projects are out of favor and that ‘multi-partner’ contracts are becoming the norm.
One presenter summarized alternative forms of contract to address these concerns. These were:
- To incorporate partnering and collaborative working provisions as an overlay to existing forms of contract
- Target cost contracts
- Framework agreements (to address issues of continuity, expanded timeframes for the relationship)
- Individual alliance agreements
- Project alliances, with gain/pain share
- Strategic alliance
There was also discussion about the challenges in moving to one of these models. Organizational culture was often mentioned as a potential inhibitor. Presenters also highlighted the fact that there are no contract models that fully address the industry environment (there is some use of FIDIC, LOGIC, BIMCO and the NEC model – with the NEC approach currently gaining ground due to its perceived flexibility). But whichever model is selected, multi-party contracting creates challenges:
- Dealing with multiple interfaces
- Negotiation and management of contracts
- Maintaining alignment
- Dealing with ‘known unknowns’, such as weather , supply constraints, regulatory changes etc.
- Handling claims
- Marginal project economics
In the end, a key point is that organizations must recognize the need to establish new and different governance and management behaviors if they want to develop truly collaborative relationships – and without these behaviors, collaboration will not work. This includes key issues such as senior management engagement, that both parties must commit interface resources, common methods for communication, accept accountability (eliminate blame) and work together for continuous improvement.
Like many other areas of business, the energy industry is undergoing transformation and has discovered that traditional ways of contracting are not suited to a world of rapid technological innovation, key supply shortages, regulatory uncertainty, challenges over funding and lack of clarity over roles and risk allocations. It was encouraging to see the number of people attending this event, anxious to learn and to share ideas. Given this need for change, it was disappointing to see how few of the audience came from the contracts or commercial management community; they of all people should be anxious to be at the forefront of ideas and innovation in contracting.
Commitment Matters 