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.
It has been encouraging and eye-opening to read the entries submitted for the IACCM Innovation Awards.
The contest closed last week with a total of 45 submissions. The judging panel (of which I am one) has been marking and assessing; those short-listed for an award will be informed in the next few days.
There are many nuggets to extract from the entries we received. They cover innovation in contracting or commercial management and there are four categories of award (strategic, operational, individual and service provider). It is gratifying to observe the growing frequency with which strategic improvement in this field is recognized as important to overall business performance. Across industries and geographies, functional leaders and top management are grasping the extent to which simpler, faster and more balanced approaches to contracting contribute to competitive performance.
At an operational level, the entries are more often related to a specific initiative, often a creative response to a particular problem or opportunity. These represent inspirational ideas and demonstrate the importance of commercial creativity. A hesitation I have with some of them is the extent to which there are plans for replication, or to ensure organizational learning.
Across the span of entries, one thing that I noticed is the frequency with which the initiative is being driven either by Legal or by ‘revitalized’ Procurement groups. There is a relatively low proportion of entries from stand-alone Contract or Commercial Management teams. Some possible explanations for this emerge from the entries:
- Most Legal teams are under heavy workload pressures. They need to simplify and avoid low-value or repetitive work; they also need to take action so that they do not represent a barrier to getting business closed. Simplifying contracts, facilitating faster response times and re-thinking attitudes to risk come high on the list of drivers for improvement.
- ‘Revitalized’ Procurement is a term I use to describe groups that have grasped the need to expand their role and contribution. They take far more responsibility for outcomes from supplier relationships and they understand the fundamental role and value of contracts and of appropriate commercial policy and practice. Such groups tend to form strong alliances with Legal, rather than viewing each other with mutual suspicion and hostility, or seeing contracts as having little relevance.
- Procurement and Legal tend to have the internal influence needed to gain executive attention and to push forward with significant change agendas. This appears less true of dedicated Contracts or Commercial Management functions, where the focus is more tactical and deal-based. In these cases, improvement appears highly dependent on a dedicated individual who takes on a personal leadership mission.
My hope – and IACCM’s objective in launching these global awards – is that we can inspire many more with a belief in change and the benefits that can flow to their business, their function and themselves as individuals. That is why you will be hearing much more about the program and about the various entries over coming weeks.
I recently participated in a meeting organized by ICCPM (the International Centre for Complex Project Management). One of the speakers was Dr. Ed Hoffman, Chief Knowledge Officer at NASA.
Dr. Hoffman presented an interesting summary of the differences in approach between a ‘functional organization’ (good at managing standard and repetitive tasks) and a complex project-based organization (good at managing uncertainty and change).
He contrasted their characteristics and attitudes to specific issues or relationships in the following way:
Complex project Functional
Problems Novel Routine
Technology New / invented Improved, more efficient
Team Global, multi-disciplinary Local, homogenous
Cost Life-cycle Unit
Schedule Project completion Productivity rate
Customer Part of team Involved at point of sale
Survival skill Adaptation Control/ stability
These contrasts are important, not least because many organizations today actually need both capabilities and achieving this is demanding.
Dr. Hoffman went on to comment that his research shows that many organizations are good at managing technical risk (interfaces, technical development requirements, interdependencies between technologies), but are not good at organizational or strategic risk (how we work together, managing partners / suppliers, operating as distributed or virtual teams, handling decentralized authority).
These thoughts tally once more with the data IACCM has assembled, pointing to the fact that projects primarily underperform or fail due to commercial issues. Technical assurance disciplines are not mirrored by commercial assurance. There tends to be an assumption that commercial and ‘people’ issues can be fixed and as a result, they are not captured or recorded and arise again and again.
As one example of this, Dr. Hoffman mentioned the growing dependency in most major projects on international partnerships and how ill-prepared many organizations are to manage the organizational and strategic complexity that these imply. That example certainly mirrors my experience. Many contracts and commercial practitioners still don’t see ‘international’ as either relevant, or as requiring any particular incremental skills or knowledge.
Yesterday I led a webinar for Revitas in which we reviewed some of the pressing issues facing those responsible for sales contracting. The program focused on three areas:
- pricing
- mobility
- analytics
Today’s competitive landscape demands a contracting process that delivers speed, intelligence, flexibility and control. We are seeing corporations increasingly focused on building from underlying systems that deliver control to a focus on competitive advantage – hence the selection of the three areas above.
Our recent work on ‘the future of contracting’ identified the growing importance of technology to improve contracting and commercial capability. The webinar expanded on this by looking at some specific themes. For example, among the issues on pricing, we discussed integration with CRM for value pricing; performance -based contracts; P&L management at the account or contract level; and improved trade-off between negotiated terms and price. The topic of mobility included contract related ‘apps’; customer self-service and ‘optioneering; and real-time review through electronic contracting. In discussing the potential from analytics, we focused on data that can aid simplification, the management of risk, improved customer relationships and business innovation.
A lively Q&A session expanded on many of these themes, to provide further examples and insights to the priorities for Sales Contracting in 2013.
I will be happy to provide anyone interested with a copy of the charts. To view a recording of the webinar, you should visit the Revitas website (www.revitasinc.com).
The pressure for increased innovation in contracting and contract practices continues to grow. Business cannot afford to be constrained by slow, out-dated processes and unresponsive or inflexible terms and conditions. Increasingly, they must consider ways in which contract and commercial policies can bestow competitive advantage, both strategically and operationally.
But there are questions in many minds over whether this need is translating into action; and if so, where are the examples, who are the leaders?
It was an understanding of these questions that led IACCM earlier this year to initiate a series of awards for innovation in contracting and commercial management. The winners will be announced at the IACCM Americas Conference in Houston, Texas in October. When the program was first announced, there was a level of cynicism about whether it would attract entries. There was a feeling that perhaps there was little innovation occuring, or that those who had good ideas would not wish to share them.
That cynicism has been dispelled by both the quality and quantity of entries received. When the submission date closed this last Sunday, there were 42 entrants, representing organizations large and small, from around the world. They came from legal, contract management and sourcing organizations, each anxious to share its achievements and gain recognition for the contribution it is making. Many top international corporations are among those who have decided to participate. And our panel of judges faces a difficult process in determining who the winners will be.
This contest is excellent news for all who are involved in the world of contracting and commercial management. It is yet another step in building recognition of their work and inspiring the entire community in a belief of its value. The results will be featured through interviews, articles and webinars over the coming weeks, generating opportunities for increased executive awareness and understanding of the value to be gained from improved approaches to contracting and commercial practices.
What is the difference between a role and a practice? A lot, when it comes to value, status and rewards.
Professions have driven the development of consistent methods, practices and terminology. In many areas of the business world, professional credentials are a pre-requisite to practice or to gain recognition. Professionals have a clear sense of their mission – they provide a recognised service, often with a high degree of specialism. In general, users understand the work they perform and when it is appropriate to involve and employ them.
That lack of clarity continues to undermine the contracts and commercial practitioner. Non-practitioners are not sure what we stand for. Indeed, their confusion frequently stems from their interactions with practitioners, since they themselves are highly variable in how they see their role and responsibilities. One of the questions I receive most often is ‘what is the value of a contract manager?’ (Yes, I will accept amusing answers to that one!).
IACCM continues its work to define the contribution of commercial practice and within that, the body of knowledge required for its performance. To do that, we need wide acceptance of the principle that competency must be defined at both the professional and institutional level, with standards of excellence in training and institutions that sustain a profession. Those standards of competency must be international in scope and accompanied by clear indicators of value.
To me, the value proposition relates to our work in developing and sustaining healthy and profitable trading relationships. To achieve this, we need some simple approaches to prevention, diagnostics and cure. A good place to start is in the area of risk – since this is one of the few things on which all contracts and commercial staff agree they have a role. Inspired by work undertaken within two member companies, IACCM will be promoting discussion around commercial assurance and the development of associated commercial risk dashboards. It is a good place to start because we believe that through this approach we can make our work immediately relevant and intelligible to senior management – especially at a time of such dramatically increased risk sensitivity.
Watch out for up-coming webinars where we will discuss our plans and put forward ideas. And if this is a topic on which you have views or would like to contribute, please let me know.
The publication of a global web index offers useful insights to the world of trade and contracts.
The study evaluated the maturity of the web, using the following criteria:
– communications infrastructure
– the state and availability of web-enabling infrastructure; institutional infrastructure
– education, laws, regulation and censorship; web content
– what relevant and useful content is available; web use
– the extent to which the web is used in a country; political impact; economic impact and social impact.
Some countries – such as Ireland – have built much of their business capability on the explosion of networkd capability. In some countries, the driver appears more about social connectivity, in others it has been pushed by business and economic interests. But the extent of connectivity today, and the potential it offers for a country to prosper in global business, are clearly major factors in competitiveness and pontential wealth. The quality and extent of web services and availability impact potential for education, employability, flexible working and many other attributes that are becoming essential in today’s business environment.
In an article last week, the Financial Times once more raised questions over the ability of the public sector to effectively place and manage outsourcing contracts. Citing a report produced by a UK think-tank, it highlighted questions over both the skills and the drivers behind Government policy.
The report mirrors a series of findings by the UK’s National Audit Office and replicated in investigations in countries such as the US, Australia and Canada, which concluded that the public sector does not have adequate commercial and contract management skills. It also raises the question whether selection of suppliers is too heavily weighted to those who promise short-term savings, versus those who have the capability for longer-term value.
But is any of this really surprising? First, it seems somewhat disingenous to suggest that people who chose the public sector as a career should have the commercial understanding of those who selected the private sector. There is a very real difference between public service and the pursuit of profit – and that starts at the uppermost reaches of management and the principles under which both politicians and their immediate staff operate.
Second, is there evidence that the private sector actually manages outsourcing any better? There are certainly success stories, but there are also success stories in Government. There are many disgruntled customers in the corporate world and many consultants suggest that up to 70% of contracts fail or underperform.
Based on IACCM’s experience and research, the problems discussed in this article are generic. Many outsourcing contracts are negotiated in a spirit of limited trust and consequent adversarial behavior (especially when third party negotiators are involved). Many buyers claim they want value, but in fact drive to cheap. And few customers commit the resources and skills needed for effective commissioning and governance of the outsourced relationship.
Certainly there is plenty of room for improvement in the way that Government selects and manages outsourced relationships. But the problems are generic and it is organizations as a whole that have yet to grasp the commercial realities of extensive outsourcing, especially for the provision of services. There are small glimmers of improvement, especially with the development of supplier relationship management and, more importantly, an evolution towards relational contracting. These are both areas where IACCM has invested heavily to raise understanding and skills among its members.
Commitment Matters 