Yesterday I spent a couple of hours with the head of contracts and the CEO of a services company. We were reviewing their business strategy and in particular the impact on their contracting methods and forms.
The company is in process of making a significant shift in the risk it takes on when working with customers. They had undertaken analysis of many of the bad things that could happen to them – the incremental liabilities, the liquidated damages, the risks of termination etc. Extensive work had been undertaken to assess the potential to insure against these risks. And as a result, they were focusing on questions such as ‘How can we persuade customers to reduce the risks they place on us?’ and ‘How can we get our sub-contractors and suppliers to accept back-to-back liability?’
As is so often the case, there had been no broader assessment of the issues that are most likely to cause failure to occur and which, through their mitigation, would reduce the probability of things going wrong. All the focus had been on consequence and how that might be reduced (which, with powerful customers and relatively small suppliers, it probably cannot).
So while we talked about a couple of innovative terms, we mostly talked about reducing probabilities. For example, we explored commercial awareness training and techniques for client teams and project managers. We discussed the governance and relational aspects of the contract which could help mitigate or avoid performance issues: what data or access, what frequency of reviews, what interfaces and interactions with user groups, what escalation procedures, what post-award resource and skill commitments might assist? We also reviewed the way that requirements are analyzed and the quality of opportunity and change management. The focus, in other words, switched from fears about non-performance to safeguarding of performance.
Our next step is to visit a law firm and to work together on the new model agreements. It is a firm I respect for their forward-thinking, collaborative forms of agreement and I am sure we will develop a good model. It will need to be supplemented by some internal training and far more sophisticated risk lists and analysis. But it was great to have this conversation and to confirm that CEOs really are interested in contracting when they hear about practical solutions to their strategic needs, rather than a litany of the problems and the risks that their direction entails.
As we prepare for the IACCM Global Forum in October, we pulled together some samples of research reports, audio recordings and articles. They offer quite extensive commentary on the current challenges facing contract management, together with some case studies and ‘best practice’ tips and guidance.
I thought readers of this blog might enjoy access to these resources – so you can find them at http://iaccm.com/globalforum/library.php
Lax accountability, poor planning, inadequate competition – and $30bn of waste in contracts. Those are the findings of a commission that will shortly report to the US Congress on spending in Iraq and Afghanistan.
The US has invested more than any other country in having a uniform approach to contracting and has poured millions of dollars into training and process standardization. They even have a ‘professional association’ that safeguards these standards and supposedly unites the government Contract Management resources with those of suppliers …..
So does this suggest that contract management is itself a waste of time and effort – or is it that Federal Contracting rules, practices and organization are at fault?
IACCM sees plenty of evidence that contract management can deliver considerable value. The fact that contracting remains poor in many organizations is mostly due to either a lack of rigor or the view that contract management is more about process than it is about judgment. In some organizations, it is transactional and inconsistent. There is no clear definition of role, responsibilities or enterprise process and strategy. In others, there is clear definition, but the role is focused on compliance and ensuring adherence to the rules.
Where contract management flourishes is in organizations that have understood it is not just about implementing rules, but is also about exercising judgment. That is where ‘commercialism’ comes in – good contracting is about doing more than implementing instructions in accordance with the rule book; it is also about making sure those instructions make sense and are sustainable. Of course, Contract Managers won’t make the decisions; but they should be raising the right challenges and forcing the executives and experts to think about what they are doing.
We must hope that this report prompts the Administration to consider fundamental reform in its approach to contract management. It should avoid the temptation to add further to the bureaucracy of review and approval. It should not hire hundreds more ‘contract professionals’ to oversee the outdated and ineffective FARS and DFARS. That is not the answer. In fact, it is arguably the extent of current review and approval that stifles good judgment. It renders every individual feeling powerless and insignificant. If any organization wants better results from its contracts, it should think about how to increase accountability for producing good contracting instruments and procedures. It should also ensure someone owns the development of contracting competence and has the tools to oversee its implementation and practice.
One in six major IT projects exceed anticipated costs by an average of 200%, according to research conducted by Oxford University and McKinsey.
Not surprisingly, this calls into question the quality of risk analysis and management, especially in the IT sector. It also suggests that the much-publicized failures in Government and public sector – and the associated implications of specific public sector incompetence – may be rather unfair. The report suggests that many businesses suffer similar overruns, but are much more likely to keep them private.
It is in this context that ‘Risk Management Failures’, a blog by Sonia Jaspal, is worth reading. In it, she summarizes and comments on a recent paper highlighting risk management good practice – but also pointing out some of the weaknesses. In particular, there is the problem that risk managers are often (rightly) seen as too negative, or ready to highlight problems while leaving others to think up solutions. Risk management can also be far too siloed, with a failure to see the interconnections between risks. Also, maintianing oversight and updating the risks during the life-cycle of a project often seems to be overlooked.
I recommend that anyone involved in project contracting should review Sonia’s summary and consider its applicability in the context of their own organization. See http://soniajaspal.wordpress.com/2011/08/24/risk-management-failures/#comment-3665
Do you have a contracting strategy – not just in the context of specific transactions, but in terms of planning for future offerings, contract terms, required skills? Does your contract management process anticipate change, or react to it?
Recent IACCM research revealed that 92% of organizations cannot answer ‘yes’ to these questions. While they may have developed a robust process and skilled practitioners, contracting and commercial practices remain tactical, responding to market conditions rather than helping to shape them.
To change this situation – and to raise the status of contract and commercial management – IACCM realized that the contracts and legal community must develop a vision, a clear sense of the changes that will be impacting this key business capability over the next few years. Equipped with this information, the association’s members will be far better positioned to influence and contribute to business strategy. Therefore, IACCM has been undertaking a worldwide study to explore the forces that will impact contracting practices, terms and skills in the coming years and to forecast the impacts they will have upon us.
- In addition to in-depth interviews, IACCM has conducted discussion forums and surveys (to submit your input, please visit https://www.surveymonkey.com/s/futurecontracts).
- It is also planning a series of events to share and build on these results. The first opportunity is a discussion of the early findings on an Ask The Expert call to be held on September 1st(see https://www.iaccm.com/events/register/?id=1181 for details and to register).
- Then IACCM will be holding an Executive Forum, as part of its Global Forum for Contract & Commercial Management – see http://www.iaccm.com/globalforum for details.
Early Findings From the Research
IACCM members expect fundamental changes to the way contracts are formed and managed in the next few years. Driven by the speed of change, the volatility of economic conditions and the re-balancing of global trade, there will be substantial shifts of focus in supplier selection, negotiation and contract management:
- 80% expect more focus on innovation
- 65% expect more focus on agility and flexibility
- 60% expect more collaborative planning and negotiation – internal and external
- 52% expect an increase in performance-based contracting
Perhaps these thoughts are predictable – though how well prepared are you to meet the demands they represent? And what about some of the other expectations:
- more than 50% expect the need for more flexibility over jurisdiction
- almost 30% see contracts becoming less relevant and being replaced by improved relationship management techniques
- 26% believe that emerging markets will have major impact on traditional contracts and terms, challenging the domination of ‘common law’ in international business
- Over 80% believe the ability to manage change will be the critical role of the contracts professional
This is just a small sample of the fascinating findings from IACCM’s study ‘The Future of Contracting’. In addition to member surveys, it has also been interviewing a wide array of executives and thought-leaders – business managers, academics and consultants from around the world.
Over the coming months, IACCM will offer members many opportunities to engage and share insights to the future of contracting. This will include local meetings, research reports and the chance of custom webinars for individual organizations.
So if you want to be confident that you have a strategy, if you want to influence your business, if you want to get ahead of the wave of change – get in touch and get involved in this unique project.
This morning I was reading an excellent article on alliances and collaborative relationships. Quite early on, it referenced the ‘price pressures being generated by today’s economic conditions’ and observed how these were causing strains on relationships. It then moved on to look at causes of failure in collaborative relationships.
Based on all the work we do at IACCM, I have come to realize that there is an automatic conflict created when contracting parties start to focus on (or even talk about) price. The paper highlights ‘price pressures’ – but these are in fact a symptom of the real issue and focus on price cannot be reconciled with partnering or value. If price is everything, then corner-cutting and performance failures follow not far behind.
The real issue – and the ‘best practice’ focus – is cost. Organizations can partner around overall project cost and how to optimize value within a budget. But price focus is akin to risk focus – it becomes a debate about the allocation of relative pain, not a discussion about collaborating to achieve shared benefit.
Often, we use the word price quite casually, as if price and cost are interchangeable terms. But they are not. ‘Price’ and ‘cost’ are very different and generate quite distinct emotions. This is something that no contract negotiator should ever forget.
In an excellent blog, Michael Koplov of Software Advice examines the business impact of the Japanese earthquake and tsunami. Specifically, he has explored ‘who has recovered fastest and how?’
As Micheal observes, the lean supply chains that have driven such efficiency become a source of immediate risk when there is a major disruptive event. But as he then illustrates, many large corporations have recovered from the disaster in Japan much faster than expected. In part, this may be due to the tendency in the aftermath of most disasters to exaggerate the consequences. However, it is also clear that those who recovered fastest did so through collaborative behavior. In some instances, it was due to maintaining ‘redundant’ capacity through additional supply relationships; in others, it was a result of selecting suppliers with diverse production facilities; and some achieved recovery because they are part of an innately collaborative culture.
In all these cases, it appears that the winners were not driven by a sense of unbridled competitin and voracious cost-cutting. The findings suggest that these rapid recoveries were achieved by organizations that understand the value of good relationships, not just low-cost transactions. And the point here for suppliers is that many customers do understand value – so long as the supplier can explain distinctive capabilities that truly benefit their customers.
In the end, the thing I find especially interesting about this analysis is that it once again illustrates that businesses do not go backwards. No one is seriously talking about eliminating ‘lean’ or reversing global relationships. The answer to problems is rarely to revert to a former approach, but is rather to identify new solutions and fixes. In this instance, it is very much about suppliers and customers thinking more broadly about the capabilities they offer or need in order to overcome supply risk. The solution is in part to ensure diversity of supply, but also – as Michael’s article clearly illustrates – to adopt more collaborative approaches that encourage collective problem-solving.
There is increasing mention of ‘relational contracting’. It implies a higher level of collaboration, a greater commitment to partnership and innovation. Hence it is very much a ‘theme of our times’.
But what is it? As with so many expressions, it is, for many, precisely that – an undefined concept. So given the interest, I thought it would be helpful to provide a summary of my views on this topic – and I hope readers of this blog will add their own thoughts and ideas.
First, I should be clear that many traditional relationships have been deemed to supplant the need for contracts. In major parts of the world, this remains the case. Typically, there will of course be some documentation and if push came to shove, I imagine it would have legal significance, but the parties don’t tend to think that way.
From my perspective, the extent to which there is a formal ‘contract’ is entirely optional, but the parties should mutually agree their contracting strategy – in other words, what level of formaility do they intend to have, what aspects need to be documented and how will these be maintained?
Moving on from there, let us assume that a high proportion of relationships today will in fact be accompanied by a contract. In that case, what form should it take?
My view is that there are three distinct aspects to the overall contracting process that leads to a collaborative relationship:
Selection. Do you understand your own organization and how it will behave? What characteristics are needed from the supplier or the customer for a ‘cultural fit’? How do these get evaluated and to what extent do they form part of the selection or bidding process? For example, we see a growing number of cases where suppliers are provided with ‘scenarios’ as part of the selection process, and invited to describe how they would respond to such situations. Customers increasingly review a supplier’s past performance (with them and others) to see whether collaboration and innovation are actually part of their DNA. A supplier should undertake similar reviews of their prospective customers. Finally, I recommend that each side explores the organizational structure of the other – in particular, how the relationship will be managed and by who (not a name, but the relevant team and job titles). If there are no resources, or they are strongly ‘compliance oriented’, collaboration will be hard to achieve.
- Negotiation and contract. ‘Enforced’ collaboration and innovation are unlikely to work; similarly, if there is no sense of shared risk and joint commitment to results. I believe strongly that negotiations today focus on the wrong areas – and there is a lot more on this topic within this blog or at the IACCM website (see IACCM’s annual report on the Most Frequently Negotiated Terms). The number one challenge in many contracts appears to be clarity over the true requirements. If they are not clear, it doesn’t mean inevitable disaster – but it should affect the way the contract is structured and how funds are released. If there is inconsistency or lack of clarity in the transition from scope, to goals, to selection criteria, to performance measurement, to change management, then it is probable that there will be disputes rather than collaboration. So contract terms must reflect the extent to which a) requirements are fully understood and b) the likelihood of substantial change during the life of the contract. In practical terms, there must be real thought given to areas such as IP rights, liquidated damages, termination rights and consequences, change management procedures, performance reviews, communications and reporting, escalation and resolution process, price and price changes, rights of audit, data protection.
- Governance and management. I make these separate because I am looking at ‘governance’ as the area that relates to the relationship and ‘management’ to the more operational aspects of day-to-day contract oversight. The people and process required for performance management are mostly not the same as those who need to be involved in periodic relationship (and innovation) reviews.
In general, the best relationships are those that have greater depth than a single deal. The ability to offer flexibility, for example, is far greater when there are potential ‘trades’ during the relationship. But this can be challenging to many client organizations because they are rarely set up to see relationships as a portfolio – the internal operations and especially the motivations of Procurement are to make everything about specific contracts and transactions. So the fundamental challenge is often whether the client is ready to think through the operational changes they must make in order to be collaborative; and for the supplier to behave in a way that earns trust and dispels fears that ‘relationships’ undermine competitiveness.
It is three years since I wrote the original blog that sought to answer the question ‘What is the role of a contract manager?’ Since then, more than 50,000 people have read either this, or the sequel that I wrote in 2009.
Is this level of interest a good thing? On one level, it can be taken as disappointing that there is apparently such uncertainty over what a contract manager does. But it is also possible to view this level of interest as a positive development – and inded something that is fundamental to the status of the role.
Within any organization, there are always battles over precise areas of ownership and responsibility, but in general, the fundamentals are understood. Lawyers deal with law, finance professionals do accounting, pricing, financial analysis, procurement does purchasing, engineers do engineering …. and contract managers ‘do contracts’. But whereas people are clear about where they go when they have a legal issue or a question on pricing, it is not so clear when and if to involve a contract manager. And it is this, I think, that lies at the heart of why so many continue to ask the question about our role.
There is no question that organizations need specialist professional groups, or access to external expert advisors. These experts provide counsel on critical aspects of business strategy and policy, and in some cases are the drivers of product or service innovation or business capability. But no organization exists in isolation, so no matter how talented those experts may be, at some point their ideas and their policies must translate into tangible commitments and requirements that are intelligible to the market. And since those commitments and requirements are often complex and subject to change, they require expertise not only in their initial formation, but also during on-going oversight and management.
Contract management is a discipline that continues to grow and evolve. Rather like project management, it exists because interrelationships and interdependencies have become more complex. The nuances of commercial relationships today stretch far beyond the knowledge base of functional experts such as lawyers or finance managers. This is not to crtiticise those experts in any way – it is merely to point out that the roles are different. Just because vets are knowledgeable about animals, it does not mean that they are experts at farming. Yet certainly farmers depend for their success on the existence of vets.
The extent to which a business needs contract managers varies. In organizations that have market power, or in economies where the tradition is more relational, it is rare to find people with the title of contract or commercial manager. But as I have explained in other blogs, many of those traditional factors are breafking down. The duration of competitive advantage continues to reduce; the extent to which relational economies are exposed to the external world continues to increase.
Contracts began as simple instruments to record needs, commitments and obligations. Over time, the nature of the relationships that organizations form has become steadily more complex and this has translated into long negotiations and the need for processes and people who can reconcile a multitude of viewpoints, capabilities, requirements and principles, to ensure that the parties understand what they will provide or receive and then to oversee performance.
It seems probable that the need for contract management will continue to increase and the role of the contract manager will continue to evolve. Perhaps the most important aspect of this is the need for the contracts professional to ensure that others in the organization understand and appreciate the value they bring. Critically, this means they must focus on supporting and enabling others to be more self-sufficient in contract management – and they must absolutely avoid being seen as a control point or barrier to getting business done.
Many of us live in a society that constantly demands more for less. Materialism has driven a commoditization culture – an expectation that prices will fall and however much we pay is too much.
Many of us understand the confrontation this has caused between buyers and sellers. Every day, we see competitive bidding destroying long-established trading relationships. We see trust and loyalty sacrificed in the name of short-term savings.
In our hearts, we know that many of the ‘savings’ we achieve are illusory. The cost of a bad relationship or poor service far outweighs the extra we pay to have a good one. Yet this retail mentality persists, embedded in procurement performance metrics that encourage a short-term cost-cutting mentality. at the expense of any longer term value measurements.
And so it is increasingly with Government. We are so determined to pay less tax, to have more commodities, that we forget about the value of the quality of life and society. As I look at the alienation of youth in the UK, I am forced to reflect on how we place so little value on relationships and so much on achieving ‘cheapness’. Riots are the price we pay for this fixation on ever-lower prices and the jobs and opportunities it destroys.
When the UK Government wanted to eliminate ‘waste’, it brought in a retail supremo to develop procurement policy. Not surprisingly, he suggested the economics of the foodstore as a way to reduce costs. But at what longer term price to social cohesion? And as we look at the way Purchasing professionals are being trained today, they too are measured and motivated towards value destruction and the economics of Tesco or Walmart.
In our quest for ‘cheap’, we have driven decisions that outsource jobs and create mass unemployment for young people. Even today, rather than build local capability (a Government policy that I admire), in practice we are forcing local government to dismiss staff and find low-cost routes to service delivery – often overseas or via automation. We then have to run expensive social programs, pay for extra policing, deal with the consequences of drug abuse to manage a generation that feels it is ignored and dismissed by the political and business leaders.
Just as it was the leader into industrialization, the UK may well be the leader into the post-industrial age of social breakdown. The US appears to be not far behind. Is this the model we all wish to follow?
Surely it is time to ask whether commoditization really is a good idea. Do we actually understand the cost of our current policies and practices? Just as this makes little sense for society, the same is true for business. It is time to re-think our priorities and our measurement systems. Alienation and the loss of trust is not a price worth paying for ‘cheap’ and ‘plenty’.
Commitment Matters 