I spent two days last week at the inaugural meeting of the International Standard’s Organization (ISO) working group on outsourcing. The golf of the group is to develop a worldwide standard that provides guidance on managing the outsourcing life-cycle.
Outsourcing has been an increasingly prominent topic over the last 20 years and shows no sign of diminishing in the near future. Since one of its primary drivers is the possibility for cost reduction, it will remain in many cases a cross-border activity, as organizations seek low-cost sources of supply. It is this aspect that makes the ISO initiative of particular value, since it aims to create more consistency in terminology and understanding, with a view to enabling better constructed and more successful outsourced relationships.
Given its own global reach and the involvement of many of its members in outsourcing projects (including in some cases the outsourcing of their own business function), it will be no surprise that IACCM is closely involved in this initiative. Our membership has a wealth of experience to offer and it is initiatives like this that lie at the heart of IACCM’s mission ‘to increase the integrity and success of trading relationships’.
There will be some who view projects like this as threatening. While they will doubtless couch their criticism in terms of creativity or constrained competition, the truth is that standards threaten no such thing . They create a baseline that enables increased efficiency and increases the possibility for greater focus on differentiation and innovation. In fact, the only people who lose out are those who make their living based upon avoidable complexity and confusion.
As with all global standards projects, progress will take time. It will require the building of consensus and the various project groups are made up of dedicated volunteers who have full-time job responsibilities outside this project. However, the meeting was able to draw from excellent work already undertaken at a national level in various countries and this provides some initial building blocks for eh international teams now assembled.
At this point, the work is focusing on process and that means there is no plan to produce a set of model agreements or terms and conditions. The contracting process certainly will be addressed – and perhaps IACCM members will decide that there is merit in building from this to produce model contracts that could also be used as a reference guideline.
Volunteers – and ideas – are welcome!
Today I presented at a conference for Chief Procurement Officers in Milan. One of the most interesting sessions was a panel of Chief Financial Officers sharing their views and opinions about Procurement.
A recurrent theme was that they believe Procurement needs to partner with Finance to generate value and to support business strategies, not just to cut costs. Each of the CFOs expressed some disappointment in the readiness of procurement to be more rigorous, to ‘do the right thing, not just the easy thing’. They suggested some key questions that need to be asked, such as:
– is the supplier an asset to our company?
– is Procurement providing realistic budgets for supplier payments and do they understand supplier cash needs?
– is Procurement hiding behind rules and process, rathe than exercising good judgment?
One of the panel members discussed the ‘red ocean, blue ocean’ approach, where the red ocean is the ‘traditional battleground approach’ and described how his company had used the recession to better evaluate suppliers, to understand that there was no point asking them to give if they are struggling more than their customer.
The conversation highlighted the importance of Procurement looking at potential from internal efficiencies and lowering the cost structure threshold. The panel felt that CPOs must ensure increased interactions with operations ‘to achieve a quantum leap in performance’, but acknowledged that ‘Procurement has been so tactical for so long, it is a lot to ask that they suddenly become strategic, that they suddenly master the skills of reengineering and process redesign’.
The importance of relationship management was also stressed and they built on my presentation that had advocated a shift to achieving better outcomes. This change demands greater creativity and an end to ‘short-term savings’ as the primary goal. But to gain confidence from the CFO, ‘Procurement must be a better partner, we need them to develop more in-depth projects which they commit to management’. The panel urged greater investment in human capital and a readiness to developing ‘more specific savings targets which they share openly with suppliers and involve the supplier in creativity to reach those goals’.
One questioner suggested that a way forward is to appoint more financially literate CPOS, perhaps people with senior finance experience. But while the CFOs felt that some job rotation is beneficial, they did not agree with appointing senior finance executives to the CPO position. “That would simply reinforce the role’s relationship with a focus on price, with a ‘cash early, pay late’ mentality”, observed one. “What we really need is new insights, new ideas and leaders with the courage and imagination to propose new KPIs for their function.”
“I would welcome joint work to look at the right KPIs”, confirmed another. “My door is open for that conversation”.
In a note of some irony, the CFOs agreed on the importance of category management and the extension of Procurement’s oversight of all spend relationships. “So do you have Procurement negotiate rates with your banks?” one delegate asked. “No”, was the universal reply. “They have some way to go before I would trust them to do that”.
The Economist (June 11th – 17th) has an interesting article acknowledging the IBM Corporation’s 100th birthday. It points out that relatively few companies survive that long – especially if they are in an innovative sector such as technology.
So what led to that success? In the end, it appears to have been adaptability; but the article points out that it wasn’t about adapting core products, but instead it was about an idea. What set IBM apart from many companies was its mission ‘to package technology for use by businesses’. It was not committed to any specific technology or concept – although a couple of times it almost fell into this trap, first with the punch card, then with mainframes.
The Economist goes on to ask which companies in the technology sector are likely to emulate IBM’s achievement – and it does not rate the chances of Dell, Cisco or Microsoft very high. But what really interested me about this article was its relevance to ‘professional associations’. I realised that the success of IBM goes a long way to explaining the growth of IACCM, which is also founded around an idea rather than a specific ‘product’.
Unlike many associations, IACCM does not seek to promote a job role (although it does equip people to perform). Its vision is built around enabling successful trading relationships – an attribute that is fundamental to human prosperity, rather like IBM’s. In doing this, it crosses traditional functional boundaries and is not (in the words of Gary Hamel) ‘held hostage by its captive audience’.
Those words of Hamel were, interestingly, uttered to John Akers, then CEO of IBM. And they were a warning about the need to move on from the highly profitable mainframe and to embrace networked technologies and services. I was fortunate to be at the center of that particular transformation at IBM – and the principles of adaptability have resonated with me ever since.
So for those who are interested in trading relationships and want to remain highly relevant to the organizations and careers of the future, IACCM has become an obvious choice. It equips them with the research and ideas to cope with the future. It makes me confident that we will be celebrating its 100th anniversary in 2099 – though I regret I won’t be able to observe it!
As we look at the future of contracting, one key consideration is the role (and future) of lawyers.
On the one hand, legal knowledge within today’s business environment is invaluable – research has shown it to be among the areas considered most important by budding executives. There is also no question that the role (and number) of lawyers advising the business have grown exponentially over the last 30 years.
But this has not translated to any noticeable improvement in the quality of the contracting process. Establishing commercial capabilities, negotiating and entering commitments and performing oversight of obligations and outcomes remain sources of weakness in most organizations. This is partly due to the complexity of contracting and the somewhat ambiguous role of the law department – often jealously guarding its ‘rights’, yet reluctant to take wider resposnibility for the quality of the process.
I understand why lawyers take the position they do – and in the end, it si the business executives who should be resolving the inadequacies in the way their trading relationships are formed and managed. But in my view, the tensions are set to increase, rather than reduce. And that is largely because of the surplus of lawyers in the market.
For years, most in-house counsel have viewed Contract or Commercial Managers as some form of para-legal (yes, there are exceptions and some recognize the very distinctive role they should play). But as contract complexity has increased, and as the growth in the number of pure legal jobs has declined, the role of contract or commercial manager has become steadily more attractive as a fall-back. Many trained attorneys have even discovered what a fascinating role it can be.
But legal knowledge is only one aspect of being a good contracts manager. And too many lawyers not only starts to skew the broader business value, it also sets up contention with the in-house counsel. Inevitably, those who are legally trained are tempted to stray into ‘opinions’ that, rightly or wrongly, are perceived as ‘legal advice’ by their business colleagues.
We are seeing increasing evidence of this tension. Sometimes it is addressed by consolidation fo the contracts or commercial organization within the law department. That can work well, so long as it does not dilute the role that the commercial group should be performing (and turn them into administrators or para-legals).
The problem is real, as The Economist recently pointed out. Supply of newly trained lawyers now far exceeds demand and they are generally intelligent, assertive individuals who will find jobs of some sort – in many cases in business roles outside the law department.
IACCM has been working with a growing number of organizations where the General Counsel has wanted to resolve the interface between the law department and the business as it relates to contract negotiation and management. I have a feeling that there will be many more who start to ask questions over the next two years.
I wrote recently about the challenges created by increasing regulation and the extent to which it can affect national and international competitiveness. When last I commented, it was because of the growing competition between US states to lower regulatory burdens as a way to attract business. Today, I was alerted to the on-going challenges to offshore outsourcing and the way this might affect operational decisions.
AmEx Sued for Forfeiting Customer Rights by Outsourcing to Foreign Nationals Overseas was the headline that greeted me on a brief from Washington D.C. law firm Beins, Goldberg & Hennessey, LLP. The case gravitates around the claim that AmEx has failed to disclose to certain clients their loss of US 4th Amendement privileges as a result of outsourcing financial data management to overseas locations staffed by foreign nationals. Specifically, this means (according to the suit) that customer records become subject to seizure by the US Government, which ‘routinely seizes and searches communications that are received by or sent from foreign nationals’.
Whether or not the case proceeds, it is an illustration of the complexity being caused by the mass of regulation now impacting international trade and organizational decisions. The extra-territorial reach of much of this regulation has become a significant source of concern. I know of European financial institutions, for example, that are reluctant to do business with US companies offering data services precisely because of the considerations mentioned in this suit.
The Husdal blog reports on a paper by University of Tennessee lecturer Priscilla Wisner relating to supply chain metrics.
I commend this as important reading for any commercial professional, whether dealing with procuremnt or customer relationships. The reasons are that it illustrates the extent of the connection between business performance and contracted relationships; the overall impact of supply chain efficiency on financial results; and, most importantly, it confirms that ‘the supply chain’ is a holistic area that links both selling and buying activities.
The vast majority of commercial and contracts staff resolutely resist seeing any connection between the work of a sales contracts negotiator or manager and the work of their counter-parts in Procurement. This article not only shows how wrong they are to make this judgment, but in my view it also demonstrates how each reduces its value as a result of that separation.
As you read the list of measurements, think about the tremendous power and influence that an integrated supply chain operation can bring to business performance – and the consequent status of the practitioners who are part of it.
Last week I participated in a meeting called by the International Centre for Complex Project Management (ICCPM).
In his introduction, Professor Mike Jackson emphasized the need for project management to embrace ‘holism’ and to “Escape reductionist thinking”. As we talked, I was struck by the similarities to contracting and commercial management – and also the interdependencies between our disciplines.
‘Holism’ is based around systems thinking and the need to synthesize, rather than analyze. It therefore seeks to avoid focus on component parts and to concentrate on the interactions needed to secure the overall desired outcome. Such an approach would – for example – place far more emphasis on the importance of sustained leadership, communication, commitment and planning to project success, and less on requirement management and individual components.
As I thought about this in the context of contracts, a number of points struck me. First, a ‘holistic’ contract is made up from many clauses and terms which exist individually, but impact outcomes cumulatively. Second, the input to contracts comes from many and varied sources, each of which may have a distinctive view of what it considers ‘success’. Third, projects (and therefore the contracts that underpin them) are ‘incomplete’ until they are finished and therefore require continuous oversight and revision to maintain ‘holism’ or integrity.
The meeting discussed the challenges faced by Project Managers. Some of these related to a lack of the skills and knowledge needed to undertake ‘holistic’ management. Others involved issues such as the timing of engagement and failure to focus on critical dependencies, such as leadership risk or cultural risk.
As I listened to the problems, it caused me to reflect on similar issues in contract and commercial management – and in particular, the question of’ ‘excellence’. It struck me that an excellent contract or commercial manager is someone who engages in holistic thinking. They see the big picture and the interdependencies. They do not allow themselves to be side-tracked into excessive debate on individual clauses and functional positions. They see their role as communicating, leading, planning and gaining commitment. To do this, they must understand individual ‘reductionist’ stakeholder views and find a way to reconcile these with the broader needs of the project. They emerge with a balanced contract which is designed to cope with change.
Of course, this excellence is far from universal and many contracts groups remain tied to specific interests (for example, legal or finance) and lack the vision to expand from a focus on ‘requirements’ to a vision of ‘outcomes’. Often, there is no synthesis of the entire contract; different groups produce different parts and ‘quality’ simply means that it has been checked for inconsistencies, not that it is truly ‘fit for purpose’. As a result, project teams are given contract forms and standards that provide poor and inadequate tools for on-going management.
How might we improve? One approach will be to focus on continuing improvement in the standards of contract and commercial managers. In this regard, the growing adoption of a common perception of the role and a consistent body of knowledge is a major step. But it strikes me that a second critical aspect is the creation of collaborative relationships with others within our ‘reductionist’ universe. Functional specialism is by its nature ‘reductionist’. What all of us must do is to understand better how we fit our specialism into a holistic frame. And it may well be that commercial managers and project managers are key to creating this synergy, since each of them may have the role of harmonizing across specialist groups to ensure a level of reconciliation is achieved and maintained, to allow desired outcomes to be achieved.
This vision is not new so far as contracts and commercial management are concerned – IACCM has espoused this position from its inception. What is new is the idea that perhaps contracts and project management together lie at the core of this synthesis and success might be achieved through their willingness to coalesce and learn together.
In my last blog, I wrote about the contracting practices that sometimes undermine relationships with Chinese business. I promised also to report on the main focus of the Practical Law Company / IACCM seminar – which focused more on the rule of law.
Firstly, our experts explained that the core of Chinese law was borrowed from Japan, which had in turn been influenced by Germany. So at heart there is a civil law base, supplemented by a mix of other imports (e.g. US securities law) and local regulation. In summary, the meeting was told, there is a relatively robust body of law providing a base for contracts, but:
- some laws and regulations have not been kept adequately updated and are no longer ‘fit for purpose’
- in some situations, the issues at hand are not adequately addressed by the underlying laws and the courts exercise discretionary powers
- the quality of judges is variable and some do not understand the relevant laws
In combination, these factors have led to concerns over the quality of the underlying legal system.
Following from this is the question of enforcement. The experts confirmed the need to understand both the law and the politics, especially for any major investment. It is critical to ensure necessary licenses or permissions and wise to ensure specific knowledge and approval by relevant government authorities. Even then, legal outcomes have a degree of unpredictability. The written law is not always followed and so it is important to look for patterns in discrepancies. To some extent, laws have been drafted in ways that allow discretion.
This led to the topic of governing law, which must be used in some circumstances (e.g. joint ventures). Overall, the expert panel suggested there are no great reasons to fear Chinese law and they also pointed to the alternative of arbitration (mediation is not common). The growth of trade – and the consequential frequency of dispu.tes – has led to growing experience and precedent, which together will increase the predictability of outcomes.
For more detailed – and regular – briefings on Chinese law and contracting, I recommend http://chinalegalbrief.com/
The academic and professional rigor behind contract and commercial management continues to increase. A growing number of business schools are jumping onto this as a critical area for business competency. Government bodies are driving many of these initiatives, pushing for new standards of training and capability.
IACCM is naturally at the forefront of these developments. As the only association that has singled out these fields for development and research, it brings a wealth of undestanding and content. I thought I would share a simple example of the types of questions that students face. If you want to share your thoughts, please do so – and I will share the answers! But as you will see, the key point to this exercise is that contracts and commercial strategies and capabiliteis are key to most of the issues identified.
“The recent General Assembly of European International Contractors focused on ‘the major prerequisites for success in large infrastructure projects’. They identified the following factors: do you agree that these are the relevant issues?
- The owner’s role in managing the project, including the setting up of a clear allocation of authority and responsibility. The importance of a clear and balanced risk allocation
- The role of partnership, cooperation and trust
- The formulation of an unambiguous contract with clear requirements
- Mechanisms for early conflict resolution
- The selection of the appropriate delivery method suitable under the circumstances
- The role of sufficient financing (reserves) in the face of uncertainty
Considering these items, discuss the role of the contract and contracting process in their delivery.
Based on these discussions, which of the factors do you deem most important (select your top 2). (Following selection, we will share the top 2 selected by the General Assembly participants and review differences).”
Most Procurement functions have steadfastly resisted building competency in contracting. For years, many of them accepted the supplier’s standard terms, supplemented by their own purchase orders. The more powerful organizations (including those from Government) developed standard terms of their own , which were either imposed or resulted in a ‘battle of the forms’. Frequently they were inappropriate to the specific acquisition, but the average buyer appeared not to know and not to care – their job was simply to tick the box that the standard terms were in place.
This reflected an era in which Procurement felt little responsibility for outcomes. Their task was to select a supplier for price, quality and delivery. What happened next was the responsibility of the relevant business unit and the supplier. The increased power of the buyer in recent years has not helped; as IACCM studies show, the incidence of buyer-imposed standard terms has increased, with strong focus on risk allocation to the supplier.
To be fair, in-house legal groups contributed to this situation. They saw little merit in negotiating with most suppliers and felt little confidence in the ability of Procurement to handle contract variations. To the business units, the message appeared to be that contracts were of little importance – it was the word rather than the spirit that mattered. Hence they would find short-cuts around renewals, and changes or amendments frequently went unrecorded. There were in any case no formal systems to capture changes, claims or other contractual matters.
Software providers – especially in ERP and spend management – created systems that reflected this dismissal of formal contracts. They presumed a transactional approach that was based on standard purchase order terms; exceptions were to be viewed as ‘non-compliance’ and therefore avoided.
Some organizations did not fall victim to this syndrome; others have awoken to the weaknesses (and missed opportunities) that it represents. We have seen an increasing number turning to IACCM for advice, training and benchmark information. But this rigidity and absence of substantive skills or systems remains prevalent and represents a continuing source of buyer-supplier friction, buyer- business unit tension, and value leakage. Increasingly, we also see specific disagreements between Procurement and Legal over roles, authority and the allocation / ownership of resources.
There are several factors that are causing this awakening; specific drivers vary somewhat between organizations.
- Weaknesses in oversight are causing unacceptable business exposures, ranging from inability to pursue claims, to inadequate management reporting, to specific regulatory compliance risks.
- An absence of formal contract management leaves the buyer exposed to supplier actions (or inactions) and results in erosion of expected performance and bottom-line savings.
- Inappropriate contract terms and poor governance leave the business weakened in its efforts to cope with market volatility and change, or to handle the regular supply chain disruptions that affect our increasingly global supply networks.
Business continuity and resilience, as well as cost-effective operations, depend on discipline, clarity of roles and responsibilities and the quality of relationships. When developed and used appropriately, these are features of good contracting practices and process. Contracts are management tools and provide a core mechanism to ensure good communications and consistency of understanding – internal and external. Those who see them purely as instruments of risk allocation are missing the point – and are in fact generating risk for their business.
The supply-side is generally far ahead in its development of contract and negotiation skills and resources. In part this is because they recognize the importance to revenue protection and obligation performance; but it has also been a direct consequence of the move towards service and solution offerings (where outcomes are decisive) and the increasingly aggressive behavior of many customers. On one level, suppliers may not welcome increased professionalism in their customers’ contract management (it removes the opportunistic margin improvements that many achieve). But in general, I believe they welcome a trend that a) should result in more intelligent up-front negotiation and agreement of scope and terms; and b) will raise post-award efficiency, reduce costs and eliminate many of the causes of contention and claims.
So Procurement’s awakening is excellent news; though at this point, many remain asleep. Let’s hope they read this article!
Commitment Matters 