With Euro uncertainty showing no sign of abating, the New York Times is today forecasting that Greece will be forced to withdraw from the common European currency. The impacts are, of course, unknown, but for any international company trading with Eurozone countries, they could be severe.
A few weeks ago, an IACCM member asked us to explore the state of readiness of member companies for such an eventuality. Specifically, what contractual or commercial steps had been taken (or are being taken now) through negotiation, contract terms or mitigation measures. Our survey revealed a very mixed picture, but a majority of those responding indicated that there had been no specific steps. I suspect that in some cases this reflects a lack of awareness rather than overall inactivity.
The report outlining the various measures that have been put in place will be issued shortly. Our questionnaire also sought indications of those willing to be interviewed or wishing to join a conference call to discuss the subject in greater depth (and we are currently arranging that call).
If you have input or ideas on this subject, please share them – or let me know if you would like to contribute to the conversation.
More and more academics and business leaders are starting to highlight the need for contract management to become a core competency of the organization. With growing complexity and increased interdependency between trading partners, contracting must move from an operational to a strategic capability. The journey is to transition from contract administration (industrial era), to contract management (electronic era) and to achieve ‘relational contracting’ (global era). We need a discipline that is capable of addressing the difficult balance between compliance and added- value – essentially, tools, systems, skills and relationship models that address risk in a more holistic fashion.
Top academics from the fields of law, supply management, economics and project management have realized that weaknesses in contract management result not only in value loss, but increasingly impact the fundamental competitiveness of today’s corporations. This understanding is reflected in the increasing presence of contract and commercial management as a Board level issue. Companies as varied as Ericsson, Shell, Verizon, CSC, Invensys and HSBC see this as a priority issue, driven by a combination of the need for improved compliance and the imperative of growth.
As the leading non-profit association for those with an interest in contract and commercial management, IACCM undertakes extensive research in its own right and works with member corporations to validate findings and identify areas for improvement. This work has led to a number of important insights, of which some examples are:
- The underlying causes behind poorly performing contracts are due to weaknesses in contract and commercial management in more than 70% of cases.
- Improved contract management (buy and sell) can yield up to 9.2% improvement on bottom-line performance (cross-industry average), with significant sector variations.
- The highest performing sector (outsourcing and complex services) is also the sector to have made the most significant investments in contracting capability; this is based on their understanding that in a services business, contracts are the core asset.
- High performers achieve substantially shorter lead-times in closing business; they are more effective in ‘partnering’ with their key customers and suppliers; they benefit from a large (30%+) reduction in the frequency of claims and disputes.
Achieving these benefits depends on executive support for a strategic shift in the role of contract management and investment in the tools and resources needed to develop corporate capability. In the short term, this is typically achieved through consolidation of resources; a program of up-skilling; earlier and more active involvement with the business units; lifecycle responsibility and measurement; and a more holistic focus on risk. Each day, organizations are awakening to the need for action and the opportunity that improved contract management offers.
I have spent the last two days at the Annual Research & Innovation seminar run by ICCPM (International Center for Complex Project Management).
ICCPM and IACCM have worked closely together for several years, united by the interdependencies between project management and commercial / contract management. There is extensive research that points to the critical importance of contracts and commercial capabilities in the formation and management of complex projects – and also evidence that current contracting models and skills are not ‘fit for purpose’. Indeed, as i outlined in my presentation, contract and commercial practices frequently add to complexity and increase the risk of failure.
One key question relates to the definition of complexity. When, for example, does something migrate from being ‘complicated’ to being ‘complex’? The view at ICCP is broadly that something is complicated when it has extensive interdependencies and relies on the integration of many stakeholders and interests. Such projects become complex when there is a high level of uncertainty, either over what can be achieved or how to achieve it, or because of a high level of unpredictable change.
These characteristics call for quite different forms of contracting and funding; they demand intelligent negotiation and on-going rigor in contract and relationship governance. The contract must be adaptive and provide a framework within which the parties can operate to shared benefit. Such models are nto readily available and the right skills are rare. Yet the growth of global uncertainty and the increasing ambition of both public and private sector to drive innovation means that demand in this field will continue to grow.
This is exciting news for the commercial community – yet it is also demands the emergence of leaders and professionals who share a desire to make a real difference. IACCM will be highlighting some of those when it announces the results of its Innovation Awards in October. Meantime, the collaboration between IACCM and ICCPM will continue to explore and deliver new ideas and practical approaches, with a robust research background.
There are many ways in which the fixation on cost reduction has heightened business risk. Unfortunately we lack the economic analysis to tell us whether the price paid for pursuing low cost exceeds the benefits achieved.
There have been several recent reports that illustrate this point. An article on the BBC website draws our attention to the scale of risk of natural disasters faced by Asian nations. This comes on the back of a report published this week that highlighted the relative inability of Asian nations to cope with the results of those disasters. Taken in combination, they underscore the severe issues faced by the supply chains and outsourced service centers of many corporations.
Specifically, emerging economies face a dramatic upsurge in urbanization and do not have the resources to build supporting infrastructure. In consequence, when disaster strikes, its ramifications are far more severe. As a result, companies that depend on these countries for supply of goods or services face large and often unpredictable levels of risk. In particular, the duration of lost supply is likely to far exceed that which would apply in a more developed economy.
Another example of the ‘low cost’ impact relates to the extent of competition. In a growing number of industries, it has forced supplier consolidation and a lack of investment or supply flexibility. This is becoming apparent in a growing number of sectors – oil and gas, mining, defense and (most recently) automotive. It has placed many customer organizations into a position where they are competing for supplier attention – and again, the cost impacts are rarely assessed.
Debates over the rights and wrongs of US ‘extra-territorial’ legislation continue, with the recent ‘exposure’ of Goldman Sachs for money-laundering making worldwide headlines.
In general, I presume that US lawmakers have enacted their various acts with noble motives, to encourage ethical principles. The problems arise when those laws also appear to serve self-interest, or are disproportionate to the crime or characters involved.
This entire topic has unfortunate tones of imperialism, when power is used to impose values onto others (always, of course, with the claim that it is for their own good). It is also problematic when only one country seeks to assert such global rights (though we must assume that it will not be long before others start to follow suit, with perhaps a quite different moral or ethical agenda).
The Goldman Sachs ‘exposure’ by New York regulators came at a time when supposedly the Federal authorities were still in process of investigation. Given the perception by the rest of the world that the US has been remarkably lax with the wrong-doings of its own financial services sector, it is perhaps not surprising that this action (coming close on the heels of action against HSBC) is seen by some as being more about challenging competition to New York as the world’s financial hub than it is to do with equity and justice.
Similar concerns apply to the process of extradition that the US employs in the case of hackers, leakers or whatever other form of action they deem ‘anti-US’. The fact that some US states do not like competition to their monopolistic state lotteries should not result in non-US citizens being imprisoned. It is hard to see the proportionality of pursuing an individual with Asperger’s Syndrome and a fixation of flying saucers who successfully hacked into Department of Defense computers. Maybe in this case it would be smarter to penalize the computer experts who failed to prevent such an amateurish attack.
Overall, the problem with extra-territorial legislation is that it can quickly start to look abusive and undermine the very principles for which it was introduced. The boundaries between extradition and rendition sometimes appear very blurred. The sense that there is not ‘due process’ quickly damages confidence in all aspects of the US legal system. And that is perhaps the real point. If US business wishes to be seen as true and trusted partner, it needs the rules, ethics and laws under which it operates to be seen as balanced and fair. It is not helpful when organizations from other countries fear doing business in the US, or agreeing contracts that are subject to US law.
In my view – and based on the discussions I have – I believe the use of extra-territoritorial law is damaging US interests.
There are many reasons why today’s business environment demands an integration of relationship management and contracting. I have described these in previous blogs – the speed of change, the levels of uncertainty, the increase in virtual communication, the physical distances and cultural gaps between many trading partners are just a few of the factors that make it essential to apply increased discipline to defining relationship practice and process.
As I look at the approaches being advocated to increase relationship focus, many continue to advocate a separation between ‘the contract’ and ‘the relationship’. They are perhaps reacting to the perceived dominance of legal perspectives in the formation of the contract and therefore attempting to develop a parallel process for the formation and management of the relationship. This is a big mistake. First, the contract sets the framework within which the relationship will operate and significantly influences attitudes and behaviors. So it is wrong to accept a contract structure or terms that are not fit for purpose.
Second, ‘the relationship’ and related business terms also require the discipline typically associated with the core contract terms. Indeed, if we review the areas where things go wrong, they rarely relate to the legal terms. They arise because of the failure of ‘the relationship’ to adequately define and maintain joint understanding of goals, scope, shifting requirements, key performance indicators and so on.
It is this integration that we have been working on at IACCM – and with great success. There have been several opportunities recently to work with member companies on implementing complex contracts – situations where we have facilitated discussion between customer and supplier personnel to bring real and sustainable substance to their relationship.
At one recent meeting, a General Manager from a supplier company caught me at the break: “This is exactly what we need to give meaning to collaboration,” he said. “Can we include these workshops into our customer offerings? I would like to add them to the bids we submit because this really can deliver win-win proposals”.
Last week, IACCM ran a workshop for a group of its Australian members. The topic was “Tackling project risk through improved commercial process” and the audience came exclusively from the buy side – a mix of procurement, contract management and project management professionals.
There was wide acceptance of the idea that improved management of risk depends on a more holistic and open approach by both suppliers and customers. Participants acknowledged that imbalance in risk allocation and a focus on the consequences of failure results in behaviors that undermine trust and respect between the parties, which in turn reduces the probability of a successful outcome.
We ran an exercise in which the audience identified the types of behavior needed to support a healthy and productive relationship. They listed attributes such as openness, honesty, quality of communications. When asked to rank their own organization’s performance on these attributes, there was a wide range of views, but on average these buy-side representatives felt they rated a 2.8 (on a 5 point scale, where 1 is excellent and 5 is very poor). Clearly, this indicates significant room for improvement.
We proceeded by asking the audience to evaluate average supplier performance against these same characteristics. Based on their experiences, they declared an average of 3.9 – substantially below their own performance and quite obviously nowhere near the level needed to achieve improved management of risk.
In itself, this result may not be a surprise. The exercise was designed to stimulate thinking and awareness, rather than representing a scientific study. We will repeat it with larger groups to determine the extent to which it reflects international and industry-wide sentiments. But if confirmed, we will have illustrated the urgent need to address these issues of organizational behavior in our commercial practices and evaluations. It is fairly clear that current practices fail to support trust or respect, without which any long-term relationship cannot be sustained.
Close relationships are frequently associated with a lack of rigor. They tend to prevent innovation and act as a barrier to new talent or competition. As a result, pressure builds and change, when it comes, can be violent.
To safeguard this change, the new powers introduce a period of strong controls and create methods to ensure compliance. For example, take this quote: “Trust has been replaced by contracts and the bonds of allegiance by the monitoring of behavior, backed up by the ever present threat of financial penalties”.
This could surely be a description of the last ten years, when the forces of globalization have destroyed many traditional relationships and compliance, control and commoditization have been the watch-words of corporate behavior. loyalty has been sacrificed for the cheapest source of supply. Contracts have become a weapon for financial penalties.
However, this quote comes from a history of the English king Henry VII and reflects his approach to governance in the opening years of the 16th century. It represents his determination to establish a dynasty and to accumulate the material wealth needed to ensure power and influence. Henry’s reign was disruptive to many established relationships and was followed by an era of apparent collaboration in which his ‘evil counsellors’ were sacrificed. In reality, the new order and many of its methods survived, but the leading people though which it had been established were dismissed (typically through beheading!)
Today, at a meeting in New Zealand, there was broad consensus that the procurement practices of the last few years are reaching an end. Like many others, these IACCM members believe that the unrelenting focus on negotiated savings is destroying value. It has had the effect of undermining performance and, in many industries, forced supplier consolidation to a point where there is no longer competition. Hence ‘the new regime’ seeks to be nice to suppliers and is ushering in a new period of cooperative, mutually beneficial behavior. Contracts, negotiations and relationship management practices are being adjusted accordingly.
In this new world, Procurement may be cast as the villain, the ‘evil counsellor’ that misled senior management and caused them to undermine valuable supplier relationships. Some will be sacrificed; others will happily adapt to their new role and deny that they ever agreed with that adversarial, power-based style of supplier management.
What is today’s ‘best practice’ for requirements definition?
That is a question I received yesterday. I would welcome your thoughts and comments.
There are three issues that I would highlight as critical in today’s requirement gathering process. One is volatility, one is technology, and the third is inclusiveness.
The point about volatility is that business needs and conditions are constantly changing. Therefore it is in many cases illusory that requirements will ever be complete or reach ‘steady state’. Therefore the gathering and validation process never ends and contracts must acknowledge this reality. By enabling a controlled and disciplined process to manage change, we can avoid the confusion and contention that comes with rigidity.
The point about technology is that we must recognise not only that it has dramatically affected the nature of requirements (and expectations of users), but it can also be used to streamline and bring quality to our requirement gathering and validation process. Web-based systems can simplify outreach; they enable polling and ‘crowd sourcing’ to establish both needs and priorities. And the right system can offer instant feedback on whether our initial requirements wer in fact correct and met needs.
The final point – inclusiveness – builds on the previous two. Because of rapid change and the availability of web-based tools, our process can be (indeed, must be) far more inclusive of the wide range of stakeholders. Gone are the days when Procurement can act as a barrier between user and provider. Instead, they must facilitate and manage interactions between them. The alternative is for Procurement to take complete accountability for getting requirements right – and that would mean measures that punish them each time they are wrong.
These are brief ideas which I hope will solicit your additional thoughts on how we improve the quality and accuracy of requirements definition.
Government procurement policies have often influenced private sector trends and practices. Last week, I encountered another innovation which, if it spreads, would have significant impact on those responsible for contracting.
I attended a conference where a senior Government auditor presented on emerging plans for future audits of contracts and contract management. He emphasized the growing focus in this area (something evident in a range of countries) as public sector agencies become more vigilant in their elimination of waste and efforts to improve the success of their projects and expenditure.
The auditor explained that there will be four areas on which future checks will concentrate. First, there is the question of whether the right supplier has been selected. This extends beyond simple compliance with public sector procurement rules; it also looks at wider issues of corporate social responsibility. With growing use of suppliers that have foreign connections (ownership, subsidiaries, supply base etc.), this represents a significant duty for public sector employees, though is already a familiar demand for many in the private sector.
He also highlighted that auditors will examine whether the right terms have been put in place and whether there is effective oversight of contract responsibilities. Neither of these focus areas is exceptional. It was the fourth item that caught my attention, because it relates to the overall quality of contracts and contract management in a way that I have not previously encountered, but strongly support. In future, auditors will question the staff responsible for developing and managing contracts to establish whether they are actively benchmarking external practices, to ensure that they are pursuing ‘good practice’. With this in mind, the presenter urged the audience to start working on building connections to external organizations so that they can illustrate the rationale behind the contract structure and terms they have used for any specific acquisition.
Such a move will be demanding for Government employees. Indeed, it would be demanding also for most private sector staff, because contracts and contract management remain areas where there is limited research. I know this because most of today’s research is undertaken through IACCM and we are the only organization to offer a worldwide network of practitioners capable of providing a practical, low cost and dynamic benchmarking service.
The idea of continuous improvement in contract terms, practices and process lies at the heart of the IACCM vision, Many of our members fervently believe that improvement in these areas will raise organizational performance and support the growth of world trade. Therefore, pressure by auditors to promote benchmarking and better contracting practices will be welcomed by many.
Commitment Matters 