I am delighted to be working on a new book with Kate Vitasek (author of Vested Outsourcing) and colleagues Jeanette Nyden and Jacqui Crawford. Our theme is ‘Getting to We’ – an update on the thinking and methods that need to surround today’s negotiations. Between us, we will be posting a number of blogs that underlie some of our core thinking. Here is a brief background on why it is time for us to start thinking – and acting – differently.
Most of today’s business leaders have received negotiation training, yet most of that training was rooted in a different era. It was based in a world where face-to-face negotiation was the norm, where most relationships were local or within a single country, where the use of contracts was far more variable and the portfolio of risks far smaller.
Today we operate in a networked world, in which many relationships cross cultures, languages and jurisdictions, where concepts such as commoditization, compliance and contracts are the norm. Much negotiation is undertaken through virtual means – email, teleconferences, webcasts, e-auctions – and in an environment of complex regulation, superficially similar across countries or regions, yet quite different in reality. And the risks have multiplied, as social, political and economic expectations have grown and the opportunities for high-exposure failure have increased.
| “In 2009, the net income of the Global 2000 declined by 30.9%. In that same period, the upper quartile of companies for ‘negotiation maturity’ posted an average net income increase of 42.5%.”(IACCM / Huthwaite International study “Improving Corporate Negotiation Performance”) |
Just as the world around us has transformed, so must the way we think about, plan for and execute negotiations. As most executives know, the ability to negotiate makes a difference, but quite what constitutes that ability remains rather vague. So we will be looking at the characteristics of ‘best practice’ companies – those in the top quartile of performers. As the quote above shows, companies that are good at negotiating also achieve dramatically better financial results. It would be wrong to suggest that negotiation is itself the cause of these differences, but it is a contributor and it seems to reflect a broader commitment to superior business planning and clear business goals. These organizations view negotiation as an area for strategic competence and invest accordingly.
Last week, I wrote a short post about an IACCM member question on ‘what are the things everyone in our organization should be aware of?’ This is a topic of growing interest in many organizations, as they wrestle with how to better manage risk. As sources of complexity grow (as well as the consequences of getting them wrong), they have to find more streamlined and practical ways to undertake risk assessment and management. Simply adding more and more lawyers or commercial staff is not the answer. Many are therefore seeking to raise wider awareness across the organization, to ensure that all staff understand their responsibility to protect the company and to improve the quality of decision making.
Following a number of discussions, here is the list that we developed, based on topics about which there whould be wide awareness at different phases of the contracting process. Thanks to those who contributed – and please continue to add ideas or expand on the details behind these by sharing your comments:
Initiate
Alignment with business strategy (is this opportunity consistent with what we want to do?)
Probability of win (could be overall, or from individual perspective)
Nature of required relationship (do we understand it and what it means?)
Do we want to trade with this organization? (reputational risk/ethics/market risk)
What is our history with this company, as a corporation (existing/past relationships) and also with this industry
Pursuit
Possible regulatory issues
Non-standard requirements
Is solution robustly architected? (technical and business; based on needed information)
Clarity of scope and goals
Teaming / expertise needs (who needs to be involved for assessment and negotiation)
Do we control resources we are committing (or have authority to commit)?
Do we understand risks and have mitigation strategy?
Approval path
Governance – do we have approvals to make this offer/sign this contract/at this price/on these terms?
Internal alignment – is this a cross-division / cross-country deal? Which other business units may be impacted? What’s our account management strategy?
Service Management (implement / deliver)
Clarity: who does what?
Contract – interpretation and use
Change policies and procedures
Performance review procedures and contribution
KPIs – my role in delivery
Internal knowledge management: effective handover process from deal team to delivery team? Have we communicated the deal, it’s P&L, assumptions, dependencies, obligations and milestones, to all who need to know?
Completion
Don’t extend contract without approval / in error
Record lessons learned
Understand continuing obligations
Compliance requirements
Do we have an exit plan, with defined resources allocated and an exit project manager? Have we identified goals for the exit (we may want to do business with this customer again)
I recently received a question from one of IACCM‘s public sector (Government) members regarding industry’s attitudes towards standard terms and conditions. He wanted to know the extent to which consistency and clarity in Government contracting is valued.
In my reply, I suggested that there is little question that industry generally welcomes standards and the associated predictability they offer. Today, for any substantial organization, it is unusual for them not to have standard contract terms and templates (IACCM has precise data on this point). Their prevalence clearly indicates a preference for standards, generally driven by two major considerations:
1) Standards reflect a position of business need (buy side) or capability (sell side) which is driven by a view of acceptable risk and affordability.
2) Standards also reflect today’s dominance of ERP systems, which themselves mandate certain embedded policies or process capabilities. When operating within standard terms, the contract also draws on standard tools and methods. A departure from those terms creates the need for exception handling, with consequent impact on resource, cost and risk.
Picking up from this, the existence of a standard also facilitates evaluation of non-standards – what demands they may place on the business and an assessment of their impact and viability.
Although industry is accustomed to the need to undertake such evaluations, it is of course helpful when there are somewhat predictable parameters (after all, this goes the heart of the lean principles that many Government purchasing groups are themeselves adopting). The more variation they encounter (especially within the narrow time-frames of a bid process), the more difficult it is to make a thorough and reliable assessment of capability, cost and risk – hence a higher possibility that they will either feel obliged to no-bid, or that they will get it wrong.
Therefore the requirement is for some degree of certainty and predictability, within which appropriate risk assessments can be made, therefore simplifying and speeding internal reviews and bid responses and cutting the need for push-back and negotiation on important, but perhaps low value, terms.
However, while standards and their universal adoption will be welcome, this is not of course a blank check! There is an assumption of reasonableness and appropriateness. By this I mean that the assumed risk allocations are within acceptable commercial boundaries and that the allocation of responsibilities is balanced and conducive to good performance. In addition, that contract structures and terms are adaptive to the nature of the agreement or acquisition under consideration. This implies a portfolio of templates, with standardised terms and term options.
Finally, the ideal for industry would be to feel that there was room for manoeuvre within the proposed contract terms – that within the context of a specific acquisition there was a possibility for meaningful negotiation and value offsets. In the commercial world, this is sometimes achieved by inviting bidders to highlight terms that they would prefer to alter and to specify what benefit they are ready to give in return (frequently price-based). Such an approach could offer much greater insight to the cost of specific terms and policies contained in current approaches to Government procurement.
In recent times, reputation risk has increasingly featured as one of the growing areas for executive concern. Much has been written about the ned for business to guard against the type of faux-pas that will generate adverse publicity – whether it be the use of child labor, unethical marketing practices, product safety issues or allegations of bribery and corruption.
I recall various researchers – including my friend Profesor Rob Handfield – undertook analysis to show the impact of reputational risk, in particular on a company’s share price. If I recall correctly, it often took 2 years or more to recover and even then performance was often left negative to wider industry performance.
But is reputation risk actually just another fad? Has the market – and society generally – now accepted reputational issues as another feature of doing business? Perhaps we are at a point where such issues are deemed relatively normal and inevitable; and maybe the scale of actual penalties levied by the regulators (once so feared) have in practice proven quite manageable. Indeed, in many cases the benefits achieved from ‘the offence’ perhaps exceed the scale of the resultant fines.
Take the case of Walmart and its alleged activities in Mexico. When news first broke, the share price fell by almost 5%. But since then, it has actually climbed by around 12%, outpacing the performance of its main competitors. Indeed, in a recent blog, business ethics consultant Lauren Bloom observed: “According to the Wall Street Journal, Warren Buffett said that in general, someone at larger corporations is always doing something wrong, and that the company’s job is to get the issue corrected. Translation: a scandal may be embarrassing but, unless it seriously impacts a company’s profitability, investors probably won’t care about it very much.”
This attitiude is generally reflected in the priorities we discover among many supply chain and commercial staff. While they certainly are not careless about these issues, there seems to be an increasing attitude of self-insurance – it is not worth paying the premium involved in being overly zealous about reputational risk. So perhaps it is a case that familiarity has once more bred contempt.
What do you think?
I received a question today from an IACCM member that i thought might be of wider interest – because it is the sort of thing we should know, yet not something i have previously encountered.
So the question is this: “We have an executive presentation coming up at the end of this week and I’m hoping you can help with some information we need to present.
Specifically, from an industry best practice perspective, what are the key criteria or issues a large company would expect its employees to be aware of for each phase of the sales contracting lifecycle. The phases we are using are:
a) Initiate
b) Pursuit (Bid and Contract Negotiations/Execution)
c) Service Management (Transition and run and maintain)
d) Completion (e.g. Unwind as a result of expiration or termination of a contract).”
They want to put forward 3 or 4 criteria that employees who are involved in the phase (either internal or external to the Contracts Department) should be aware of and adhere to. As an example, in the Initiate phase, you might always check the credit rating and gather background information on the client, including any past performance with your company.
I will be assembling a list this week; i would welcome any input and will share the recommendations we come up with.
Those who follow IACCM already know that we are enthusiastic advocates of user-friendly contracts. That means contracts (and contracting processes) that are designed to respond to user needs – simple to execute, easy to understand, of practical help in reaching goals. Our enthusiasm is not simply because we beleive that service providers should focus on their users; it is also because it reduces risk. A user-friendly approach will gain increased adoption; and it will also ensure more use of the contract to support implementation and performance. So who could object to that?
Well, of course, many contracts professionals find a myriad of reasons why such a radical change could be undesirable. But perhaps the biggest objection is that it is unfamiliar and may demand skills that we, as a community, do not currently possess.
Today I was once again in Finland where we held a member meeting and one of our sessions focused on the usability of contracts.. It was led by Helena Haapio and Stefania Passera. Here is a brief summary of their presentation:
“User-centeredness is a fundamental principle in the design of artifacts. What designer deliberately makes their product hard to use?
Today, contracts are designed primarily with lawyers and courts in mind. Yet lawyers and courts are secondary users; by designing for them, we increase the probability that they need to be involved – is that really our goal?
New collaborative, networked and service-based businesses need new models that are not based on the old industrial world, so it is time to re-think the way we go about contracting.
Stefania reported on a test involving a traditional contract and new form of contract, using graphics and simplified terms. The terms themselves were the same. They were provided to groups from Sales, Legal and Sourcing, with half receiving the traditional agreement and half the new agreement. They were then given a questionnaire to test their understanding of the agreement.
- The percentage giving correct answers was 72 v 60%
- The time taken to answer was 146 v 224 seconds average
- The frequency of skipped questions (unable to answer) was 1 v 4
You can probably guess which version of the contract achieved the better result.
This topic is a significant one in our recent study on ‘the future of contracting’. In fact, I have realized that the issue is in some ways less about reforming the contract itself and more about inserting term selection into front-end requirement and bid processes. If we could have the deal or relationship owner making more intelligent selection up-front, then the whole contracting process would benefit and become quicker, more accurate and more valued. So as user-friendly professionals, I think we should be embedding charts, graphics, flow diagrams into the bidding or RFP process so that users select the type of termination provisions, price models, performance criteria that they want to include.
Even if we then feel compelled to draft these into a formal contract, we can re-use the relevant graphics when we move to implementation – and it means the users at both inception and delivery gain a very different experience and one that is relevant and useful to their needs.
Today I am in Finland and among the meetings I had been asked to present to the Scandinavian offices of an international law firm on the subject of benchmarking.
In the context of contracts, benchmarking is not a topic to which I had previously applied a great deal of attention. Of course I am familiar with the use of benchmarks, especially related to pricing, but have never really applied much thought to its wider context, application or impact.
In the presentation, we discussed the fact that benchmarks can be used at three quite distinct levels – one being to drive general improvement relative to past performance, another to check competitiveness by comparison with others, and the third to achieve transformation by setting a vision or goal and benchmarking progress towards it.
Each of these is quite different in its impact and in the actions necessary to support measurement. Yet in my research, it became clear that many of today’s benchmarking clauses are in the contract due to habit, rather than with any specific purpose. Frequently they have little correlation to key performance indicators or business priorities; typically, they are designed to provide leverage over the supplier, rather than being a statement of shared goals and value.
So I discovered that benchmarking today is often ineffective and just another source of contention. Yet used properly, it could be so different. A shared benchmark could provide the basis for joint working and problem solving. Benchmarks that focus on achievable data can provide an objective insight to performance. For high quality suppliers, they can illustrate the benefits of their offerings or services relative to competition.
We also explored the extent to which networked technologies allow the collection of a far wider range of benchmark information (through low cost, targeted research); and we looked at the extent to which a benchmark against the supplier’s own internal data might reveal some excellent insights. For example, if the supplier is competitive in the market, why would we not request periodic benchmarks of their pricing for winning bids over the last 90 days? Or perhaps a benchmark of performance – for example, the percentage of wrong invoices that they issued to us versus those to other customers for the same services.
Overall, the research for the presentation and the discussion that ensued suggest that benchmarks have a valuable place in contracting, but that today they are not being approached in a practical way. Often the measures or the base data are impractical, misleading or unachievable; the incentives that result from them are negative; and their practical benefit is therefore extremely limited. It is time for contracts experts to step back and look at a more effective and beneficial approach.
A copy of the Benchmarking presentation is available in the IACCM Library at www.iaccm.com
Every 2 years, IBM interviews hundreds of CEOs to compile its Global CEO study.
In 2010, the big issue was complexity – the struggle that CEOs were having in making sense of increasingly global interconnections and interdependencies. They were seeking employees who showed leadership, especially in driving simplification, introducing innovation and forming and managing better customer relationships. The opportunities – and challenges – for those in the field of contracting were clear – and in many cases transformational.
In 2012, many of those challenges remain, but IBM has once again provided us with exciting additions to the agenda. This year , their study focuses strongly on technology – a field for regular emphasis by IACCM. Indeed, we saw the use of technology as key to achieving the leadership that was demanded in 2010 – and it remains an area of fundamental weakness for most contracts and legal groups. Simplification, innovation and relationships depend on improved analytics, a more holistic understanding of risk and improved integration between contracting and relationship management. The contracting community needs not only effective applications in its own right, but also integration with other business applications to support data gathering, to aid collaboration and to promote simplification. Many have still to make these investments and therefore remain severely constrained in the value they can offer the business.
As we look at the list of critical issues for 2012, we find once more that the commercial community has much to contribute, if it will rouse itself. Here is the list: I will write more on individual elements over coming weeks, highlighting examples where IACCM members are leading a response to these issues:
• The sudden convergence of digital, social, and mobile spheres is putting pressure on companies to adapt, while creating opportunities to innovate.
• Technology now tops the list of external factors impacting organizations and expected to drive organizational change.
• To attract top talent, CEOs are looking for individuals who can collaborate and are creating more open, collaborative cultures.
• Companies are investing to build analytical muscle.
• Extensive partnering is being used to drive innovation.
Based on these findings, IBM sees three imperatives that are essential for outperformance:
• Empowering employees through values.
• Engaging customers as individuals.
• Amplifying innovation through partnerships.
On the Human Resources blog, Jeff Davidson has written an excellent article about the challenges we face in mastering new technologies. He outlines the disruptive nature of these technologies and how they have intruded into our personal and work-life. At the same time, he points out that this is not a new phenomenon; he cites as an example the impact of the automobile at the beginning of the last century.
As I visit and talk with IACCM members the world over, I encounter people who feel that their workload is ever increasing and is more and more out of control. They are overwhelmed by the volume of mail, the scale of intrusions into their planned activities, the difficulty in scheduling their day. These problems are evident in so many ways. For example, our willingness to turn up for meetings; our ability to focus once there; the extent to which we feel obliged to continually check for new mail, or to answer phone calls. On one level, we have simply become much ruder; on another, we somehow seem unable to prioritize, or those who ‘intrude’ increasingly expect instant attention and answers.
Jeff Davidson makes the point that we must remember who is in control (it is us, not the technology) and it is our responsibility to work out how to manage it more effectively. If we fail to do so, our productivity and contribution will decline and we will be victims of tools that should in fact be assisting us.
Read the article. How should we be handling this dilemma?
For those who wonder whether contract and commercial management really make a difference, current research by IACCM is revealing interesting trends in the outsourcing and IT / telecoms services sector. These developments will be of interest to the wider contracts and legal community.
Across the industry, there has been significant growth in the resources applied to contract and commercial management. In recent times, the relationship between Legal and Commercial resources has also clarified within the provider community, though remains less clear for many buyers. This reflects the growing appreciation by executive management in supply-side organisations that the contract and its effective management are critical to business performance. Similar understanding of the need for investment on the buy-side is often lacking, with a greater readiness to assume that the supplier is responsible for performance and that existing resources will somehow be adequate. This is reflected also in the buy-side reliance on external law and advisory firms.
However, the nature of the investments made – and the way resources are deployed – show significant variations. For example:
- Industry leaders have been developing a more coordinated approach to shared services within both Legal and Commercial / Contract Management. These include growing use of offshore resources, with some outsourcing, but a general preference for captive centres.
- Technology and systems tools are playing a much larger role in the management process. This has moved beyond the creation of contract repositories and obligation management tools and is increasingly reflected in investments in applications such as Sharepoint and others offering advanced risk management analysis. For some, there is growing integration with relationship management software to support improved proposals and better focused negotiation.
- The role of Legal and Commercial Management pre-award has become far better defined; smoothing the transition to post-award delivery teams remains an area for focus. On average, pre-award Commercial resources outnumber those in Legal by approximately 2:1. The post-award organisational model varies, but across the industry it outnumbers pre-award resources by a substantial margin.
- There is growing alignment between Commercial teams and the finance and risk organisations, with the focus of negotiations reflecting this improved balance of interests.
- However, in several of the poorer performing providers, contract management remains fragmented or is seen as primarily an operational resource focused on compliance, administration or risk containment. This results in higher levels of inefficiency (e.g. up to 20% more time expended on contract / commercial issues by sales and delivery teams, more frequent disputes etc.) and increased ‘value leakage’ (up to 30% more claims, higher proportion of under-performing contracts).
In terms of funding, the high performers are typically spending approximately 1.5% of revenue on their contracts and related legal services. This represents a significant increase over the last 5 years and also a widening gap between the companies that have been growing and those which are generally struggling to maintain market share. This divide reflects in other data assembled by IACCM relating to the ROI (return on investment) from contract and commercial capability. Overall, the data provides a compelling business case for top management – and of course, it is data such as this that we will be sharing and discussing at the IACCM regional conferences this year, as well as at our many local memebr meetings around the world (see https://www.iaccm.com/events/ for those which are currently scheduled).
Commitment Matters 