The last few weeks have seen a lot written about the impacts of coronavirus on supply chains. The fear of supply shortages and consequent disruption to production underlies many of the predictions of a global economic slowdown. How worried should we be?
A black swan?
Among the opinion leaders, a few have challenged whether the latest health emergency represents a ‘black swan’ event or, in the words of one, is it ‘a lame duck’? They argue that industry learnt from past crises and made extensive investments in developing supply chain resilience. This, they say, will limit the impact.
Are they right? IACCM conducts regular research among its members and has gathered extensive data that helps us better understand current events. First, a report released in February shows that insight to the ultimate sources of supply remains highly variable and in most cases quite limited. These findings suggest that many organizations simply don’t know the precise scale or nature of potential shortages and many are scrambling to find out.
A second study, conducted over the last few days and with results due this week, shows that the impact to date is actually quite limited. While there is again variability by industry, very few are at this stage indicating severe shortages, though many are taking or exploring defensive actions. In part, these are driven by the recognition that their insight to extended supply chains is currently too restricted and that this represents an unacceptable level of risk.
The situation could of course become far worse and not necessarily due to production issues. For example, one industry reporting above average impact is transport and logistics.
So what’s the truth?
The massive sell-off in global stock markets appears to be more driven by uncertainty than by hard data. It may also be that coronavirus is Simply the trigger for a more fundamental reassessment of current trading patterns and relationships. The IACCM survey results suggest that a significant proportion of businesses are evaluating their current supply sources and considering future alternatives. The risk off-sets and core economics of the last 25 years may have changed. Hence the real impact of coronavirus could be a fundamental refocusing and realignment of supply chains.
So what should we do?
The results of IACCM research and their implications for contracts and trading relationships will be discussed in a webinar on Friday March 6th and subsequently in a series of virtual roundtables. Visit www.iaccm.com/events for details and to register.
Last year’s IACCM Academic Symposiums were sell-out events – and this year promises to be no different! There is broad consensus that contract and commercial management are critical competencies for managing and making sense of today’s turbulent markets, so driving and disseminating relevant research is of tremendous importance to business and society more generally.
Fundamental issues such as sustainability and social value are rising up the agenda, and must be reconciled with the continuing need for business to generate profit and deliver innovation. These demand the cross-disciplinary perspectives and integration offered by the IACCM Symposiums. These unique events bring together a fascinating array of academics with senior practitioners from business and government. Their highly interactive format enables sharing of the latest research, together with stimulating debate that generates a whole new set of ideas for future investigation.
What can participants expect this year?
Our sessions will address important questions, such as:‘
What is the role of contracts, contracting, and the commercial community in delivering balance between the needs of organizations and the needs of society?
How will contracts evolve to meet these needs and what obstacles must be overcome? ’
What role is Artificial Intelligence playing in both operational delivery and analytics of contracts?
The 2020 Agenda
This year, we are partnering with three top universities and issuing our call for papers to both academics and practitioners with the umbrella theme of ‘Contract & Commercial Management: A Force for Disruption & Change’. Our schedule is:
University of Leeds (UK) – June 23rd
NorthWestern University School of Law (Chicago, US) – October 1st
Queensland University of Technology Business School (Brisbane, Australia) – November 12th
Interested in contributing?
To discover more and view our initial ‘Call for Papers’, please visit this link. To register your interest or to discuss presenting / submitting a paper (whether as an academic or a practitioner), please contact either Tim Cummins (tcummins@iaccm.com) or Nevena Jevremovic (njevremovic@iaccm.com).
The decision by the UK Appeal Court to block development of a third runway at London Heathrow may at first sight have little to do with coronavirus. But in fact, are we starting to see a convergence of forces that will fundamentally reshape social values and the global economy?
Much is being written about the extent to which the Heathrow decision undermines Britain’s claims to being at the forefront of the global economy. But in fact, the reverse may very well be true. Does the UK actually need this expansion and, if so, does it need to be at Heathrow?
Fundamental questions
As coronavirus proves, ’the environment’ is about much more than our physical surroundings. This, together with the growing urgency of reducing climate change, potentially represent ground breaking shifts in public opinion and behavior. Among them will be a review of existing supply chains and a questioning of the need for so much travel.
One possible consequence is that capacity increases at Heathrow will quite simply be unnecessary and the Appeal Court may have saved the UK from major disruption and expense. But even if extra capacity is needed, the push for economic regeneration outside London suggests Heathrow is the last place it should be built. What about Birmingham, to take advantage of the investment in high speed rail? In fact, anywhere but the already congested and transport constrained South East of England.
Events sometimes move fast and in unexpected directions. They offer opportunities to step back and think in fundamentally different ways. It may be that we are at this juncture right now – and it points to the need for critical reassessment of major commercial decisions and the core framework of today’s patterns and methods of trade.
These days, organizations invest heavily in compliance. It’s important, but done the wrong way can have disastrous results.
Compliance is a big deal, especially for many of those who work in commercial roles. Ensuring and monitoring adherence to rules and standards is a major part of their job and they perceive it to be of tremendous value.
Can others be trusted?
It is easy for this focus on protecting business interests to turn into a belief that others, even within our own organization, are less concerned or diligent. We have all heard the stories about those mavericks in Sales or the program managers who agree changes without proper approvals. Over time, it is common for skepticism to turn to mistrust – an assumption that our colleagues will behave irresponsibly unless they are carefully controlled and monitored.
An example of this mentality is frequently evident in the handling of contracts, where changes of any sort are subject to onerous review and approval. Ultimately, this may send the message ‘Not only don’t we trust you, but we don’t even think you are competent’.
Enable or control?
A recent article in Strategy+Business highlights the negative effect of such a message. It undermines collaboration; it is demotivating; it stifles new ideas and transparency. The best organizations are those that care about compliance, but assume their employees can be trusted and make every effort to equip them with the knowledge or tools that they need to be compliant. They also ensure strong feedback loops so that the rules and standards can be challenged, reviewed and updated.
So how do you approach compliance: are you a controller who assumes the worst in others, or an enabler who facilitates the right business decisions?
Let’s face it, professions are both good and bad. They create standards and promote integrity. But they also introduce restrictions and delays.
Professions have a long history and they exist in part to protect the public interest. However, professions were also formed to protect their own interests – to limit competition, to hoard know-how or expertise.
In the business world, professions have been supplemented by functions and specialisms. Each of them in turn brings the benefit of deep knowledge, and the challenge of protectionism. Research suggests that many of these specialisms will be replaced by automation and artificial intelligence systems. That research also points to the emergence of ‘the integrator’ – a role long espoused by IACCM and at the heart of its training programs.
Why does it matter?
A consequence of specialism is complexity. Business decisions mostly require multi-dimensional input. It becomes challenging to gather that input when it is scattered across multiple expert groups, each of which often has its own systems and data which only they can access or understand. And even when the input has been gathered, it must be reconciled – for example, how do the views of sales, legal, finance, engineering, supply chain etc. stack up against the business requirement or market need?
Recinciliation of stakeholder views and needs lies at the core of commercial management. It is the disciplined process through which a need or opportunity is evaluated. As such, it is an integrationist role, supporting decision-making on matters of policy and practice and in the context of individual projects or contracts.
But it doesn’t exist
It is true to say that this integrationist role is largely absent in many organizations. And that is why so many executives feel challenged by uncertainty and disruption. Modern business desperately needs the emergence of individuals who have the competence to orchestrate across specialisms and develop commercially viable solutions. They must be adaptive, risk aware, opportunity focused, committed to continuous personal development and focused on enabling others, rather than competing with them.
So if training is required, isn’t Commercial Management just another profession in the making? Perhaps; but I think of it more as a discipline because it is a field that welcomes entrants from many backgrounds and perspectives. It is a broad and inclusive community that embraces change and encourages new ideas. And this is what makes it a disruptive force, challenging the long-held beliefs and practices of established professions.
CEOs and CFOs don’t want more professions and specialists; they want people and systems who cut across and make sense of them.
At the time of the Global Financial Crisis, the Force Majeure clause briefly rose to second place in the annual study of the most negotiated terms. Those buyers and suppliers who had sufficient power to drive changes sought to reshape the clause in ways that would work to their advantage.
Now, the outbreak of the Coronavirus and its fast-emerging impact on world trade has once again elevated the importance of Force Majeure clauses and many are asking how it will impact obligations of contract performance.
Finding the contract
It is at times like this that many organizations wish that they had better control and insight into their contracts. In order to establish the likely impact of this health emergency, they firstly need to be able to find their contracts and secondly they need to analyze what they say. A fortunate few will have robust and searchable repositories and have also deployed the sort of AI or NLP tools that support rapid analysis and review of the relevant terms.
But beyond this, is the nature of the emergency now declared by the World Health Organization likely to qualify as a Force Majeure event? In order to qualify as a public health emergency, it must (i) be extraordinary; (ii) constitute a public health risk to other States through the international spread of disease; and (iii) potentially require a coordinated international response. These factors clearly indicate the seriousness of the event, but in themselves do not of course generate the basis for a claim of Force Majeure.
Determination of applicability will always depend on the specifics of the clause and how it is written. But there are other factors to be taken into account in any adjudication relating to the applicability of Force Majeure. Among the critical factors are likely to be industry custom, whether or not the event in question was unforeseeable, and whether adequate efforts have been made to mitigate the consequences.
Further considerations
Thoughts on this topic do not simply end with the question of whether Force Majeure applies (and in many cases I suspect it will). There are also factors such as termination rights to be considered, This will most likely depend on the duration of the event – so right now, not something we can forecast.
There are also likely to be related terms to consider. For example, if Force Majeure applies, what consequence does it have on things such as an extension of time, or future obligations on supply, or possible recovery of additional costs. Also, are losses in any way recoverable under insurance?
Finally, what about a situation where there is no Force Majeure clause – does this mean an obligation to perform? the answer is not necessarily, because the concept of ‘frustration’ may apply.
To survive, suppliers must win bids and make money. Customers appreciate this point – most of them are supply organizations themselves. But how much money should suppliers make and how should they make it? That’s where disagreements start to arise and where the potential for contention begins.
While modern procurement acknowledges the need for profit, it is the primary function charged with achieving cost reduction. It isn’t easy to find the right balance so, in competitive markets, it is tempting to base supplier selection on the lowest price. In order to make things even simpler, the methods behind strategic sourcing sought to limit the impact of long term relationships (where loyalty or friendships might influence decisions) and to deconstruct acquisitions into component parts so that they could be ‘commoditized’.
In principle, all of these steps made sense, especially in an era when global markets and constant innovation were creating a fast-changing competitive landscape. They allowed massive simplification and large-scale automation of procurement decisions. Many supply relationships became arm’s length and ‘success’ was measured on a combination of negotiated savings and compliance with bid and contract terms.
In other words, concepts of value, reliability and broader business judgment were largely eliminated by these new scientific and objective methods. And it is certainly the case that input prices in general fell.
But it’s all different now …
At this point, there are many who will say that the environment I describe is a thing of the past, that today Procurement has a renewed focus on performance and outcomes, a spirit of collaboration and relationship management. And I have no doubt that this is sometimes true, but I also know that many of those who believe in such change frequently find themselves swimming against the tide of traditional thinking and embedded systems.
i say this based on numerous factors, and will cite two of them;
- the experience of suppliers. I talk with suppliers every working day. In general, their experiences have not changed. Procurement decisions continue to be driven by the same measurements and procurement professionals are not open to exploring broader sources of value, or to examine the potentially negative impacts of rigid compliance.
- recent IACCM research (December 2019) shows that approximately 70% of negotiations today are virtual – the parties never meet. Even worse, a high proportion of those negotiations are undertaken through email – hardly conducive to deep and meaningful conversation, or examination of ideas or success criteria.
What is the impact?
In a previous blog, I highlighted the issue of supplier honesty – in particular the frequent disconnect between the claims made by Sales and Marketing and the limitations expressed in the contract. This is clearly contrary to society’s growing demand for openness and transparency and many of those commenting on my blog decried the continuing dishonesty of suppliers.
But several made the valid point that ‘As a supplier, if we are honest, we lose the bid’. And I have many examples where that is true. So those in sales contracting and commercial management who espouse honest dealings are quickly shut down by their experience in the market. Of course this does not excuse deliberate misrepresentation or lying. I am talking here about having open conversation about risks and uncertainties, factors that could derail the desired result or outcome. and which can be effectively addressed or avoided only if they are discussed up-front.
Cooperation, collaboration, honesty – none of these is a unilateral activity. It requires change by both (or all) parties. Since they are the ones who control the purse strings, it is Procurement who have the power to drive this change. Without it, we have to accept a lack of transparency and with it, a continuation of sub-optimal results and the loss of both economic and social value.
Contract redesign is an exciting and massively beneficial movement. Digitization has enabled new thinking in both the form and the purpose of contracts. We have entered an era where trading relationships are not just proliferating, but also need to be adaptive to shifting values, volatile markets and constant innovation. To support these demanding conditions, contracts are assuming a new and dynamic role, facilitating understanding and performance – which means design for users and clarity of communication.
These are not the attributes associated with traditional contracts and their related documents which, with few exceptions, are designed by lawyers, for lawyers. In the background, obscure structures and terminology are justified by the overhanging threat of litigation and legal precedent. In reality, a tiny fraction of contracts are litigated and there is no evidence to support the contention that judges cannot cope with documents designed to provide clarity. Indeed, it is the very lack of clarity that contributes to disagreement and dispute.
Momentum for change is rapidly increasing as businesses and governments start to recognize the massive savings and performance improvements to be achieved through redesign of contracts as a driver for digital services.
User-design AND usability
However, in shifting to a new and different form, it is essential that we do not overlook the core purpose of contracts and their need to interface with not only people, but also systems. A contract is not a work of art and we run the risk that we replace the artisanal approach of legal drafting with an equally artisanal approach of innovative design. Contracts have a practical purpose in defining and driving performance and to do this in a practical, affordable way depends on data interoperability.
To give an example, emojis and pictorial representations certainly make contracts more user-friendly. But in the business world, if my use of emojis or pictures is not the same as yours, I have simply created confusion and probable misunderstanding. In this example, I have replaced standardized legal convention (which is at least understandable among those with legal training, even if obscure to others) with a non-conventional approach that is subject to misinterpretation by everyone. At an extreme, it is rather like everyone inventing their own language and then becoming frustrated because no one else can understand them!
The process of exchange
Contracts do not operate in isolation. They are one component in an exchange process and must assist in making exchanges more reliable. This means that there is a need for conventions and avoiding a situation where the exciting prospects of redesign become an artistic free-for-all. That is why IACCM has invested heavily in building a contract design library that is in large part free to access and which welcomes continued contribution of new ideas and proposed conventions. And it is also why technology firms are steadily adopting a set of standardized conventions within their software that will support the expression and performance of contracts.
I would like to acknowledge the contribution of Professor Oliver Goodenough, who identified the importance of developing ‘conventions’, rather than potentially more rigid ‘standards’.
Disruption. Apparently that is the number one issue facing CEOs. But what does it mean – both for them and for you?
The challenge for a business leader today goes far deeper than just the nature of competition, the speed of change or the need for agility. Those are symptoms of a much greater challenge of control – of having the time and the data to make good decisions.
So what has changed?
The Economist (Feb 8th, 2020) makes reference to this issue of disruption and provides an excellent outline of what it means in an article ‘Meet the new boss’. Encouragingly, the message it offers is essentially the same as that which IACCM has delivered to its members for several years – the need to adjust to intangibles (for example, services rather than products), to tackle fragmented data flows, to develop stronger and more collaborative inter-organizational relationships and to pay greater attention to social impact and alternative measures of value.
These are demanding changes, but they are precisely what high-performing commercial and contract management is about. Grasping the commercial impact of a shift from products to services; designing technology platforms that capture and disseminate commercial data without a need to replace existing application architecture; changing measurement systems and performance management to drive the right commercial behaviors; rethinking market relationships and selection criteria to demonstrate ethical standards and values.
Preventism has had its day
Last year, IACCM research showed that most contract and commercial practitioners see their role as ‘preventist’ – that is, preventing bad things from happening. While that’s important, it isn’t enough. And indeed, if we are not focused on the key issues highlighted above, we will rapidly become of marginal importance. Already, many in the commercial community complain that they aren’t sufficiently valued. It’s time to wake up and start focusing on the things that business leaders really care about. ‘Preventism’ is inevitably focused on the past, about not repeating mistakes or omissions. CEOs need people who equip them for today and the future, who focus on delivering success.
Recent IACCM research and tools supporting these changes include work on servitization, relational contracting and economics, uncertainty management, impacts of new technology and relationship resource planning (RRP). They are all focus topics at the 2020 IACCM conference series – see dates and details at www.iaccm.com/events
Conventional wisdom is that Sales and Marketing should extol the benefits of a product or service and avoid mention of any possible drawbacks or negatives. Those aspects are covered by the contract, typically in the form of limitations with regard to performance or use, but also in terms of potential recourse. In other words, we all know that sales people and marketing materials tell only part of the story and the contract often conveys a very different message.
Is this approach actually smart or effective? Especially in today’s environment of increased openness, would more overt honesty and transparency be a much better policy? It seems obvious that this might at least lead to higher levels of trust and might reduce the amount of time spent on negotiation, but at what cost? For example, does complete honesty deter potential buyers or cause them to switch to a less transparent competitor?
Recent research published in the Harvard Business School working papers suggests that Sales and Marketing may have got it all wrong and that honesty has multiple benefits – more business, faster business and greater customer loyalty. The paper describes large-scale experiments where a business set out the benefits of their product or service, but also explained the limits or trade-offs. This meant that potential customers were much better informed in making their decision and no longer had to scour the small print in a contract to understand the offering or its limits.
How far can this extend? Right now, the research appears only to relate to consumer and small business markets, but might there be similar benefits in larger scale business-to-business contracts? Recent IACCM research into ‘as-a-Service’ contracting certainly suggests that there could be. IACCM discovered that offerings such as Cloud computing suffer significant delays in adoption due to a lack of clear understanding and unrealistic customer expectations. The advantages of lower prices, greater flexibility and reduced investment require customers to accept some loss of control and very little flexibility in negotiating terms. Perhaps explaining these trade-offs in the initial sales materials would similarly result in faster and better informed decisions as well as greater respect and trust in a supplier’s integrity.
Commitment Matters 