A frequent question about contracts is ‘who should own them?’
More specifically, that question really means ‘who should own what?’ Because in general, different groups in an organisation want control over bits of activity. And they usually want only those bits that suit them and only when it suits them. They certainly don’t want to be viewed as responsible for the overall quality or outcomes from contracts.
Hence, Legal may insist on retaining full control over certain clauses – but not ‘the business terms’ or schedules. Engineering or project management may lay claim to service levels or statements of work. Finance will of course demand ownership of price and payment terms, while Sales or Product Development might say it must have scope, requirement definition and negotiations authority.
In such an environment, there is clearly a very real danger of an uncoordinated and poorly constructed output. Rather like building a house, it needs an overall design and a master plan within which the various trades (electricians, plumbers, bricklayers etc) can work. It also needs some form of quality control and inspection to ensure the finished product meets necessary standards.
The real issue with contracting is coherent capability. The problem with most organisations – and the reason for poor performance – is a lack of coherence and a failure in quality control.
For example, front end requirement-gathering or responsibility for negotiation are frequently grey areas over who does what. In a highly collaborative organisation, that may not matter much of the time. But in an environment where there are less cooperative practices, issues and opportunities will inevitably be missed because of the absence of relevant knowledge or expertise at key points in the design or construction.
Post-award is another area fraught with difficulties. It is still quite common for those who took the contract to the point of signature to then disappear. The business unit, Sales, Operations – someone else picks up responsibility for overseeing performance. But do they have expertise, do they have the necessary understanding, not only to implement what was agreed, but also to actively manage it? And given the weaknesses in construction, what they are given is often not what they need, or is incomplete, or has included responsibilities they cannot perform.
In an organisation that operates off highly standardised contracts, none of this matters. But for those where negotiation is necessary, it means continuous risk of failure and inevitable value leakage (operational costs and revenue).
The key phases when contracts expertise must be applied are in the initial design (do we know what is required to meet the need or opportunity?); in the event of major rework (circumstances or understandings altered, we need to re-design); and in quality assurance and hand-over (do those who must now implement have the necessary understanding and capabilities?). If you do no more than focus your efforts on achieving excellence in those three areas, you will certainly see an improvement in business results.
But don’t try to start the debate with questions of ownership, or you will most likely go nowhere. This is about skills, capabilities and process – and how they get built and deployed.
This is a question that never seems to go away – and it was posed to me again today by an IACCM Member who asked: “We are urgently looking for a high level differentiation or comparison of the differences and / or structure between the old traditional focus of a Procurement versus Commercial department (ICT focused Commercial and Contracting team).”
This member is dealing with a territorial battle between the CFO (and Procurement) versus the CIO (who owns contract and relationship management resources). Here is my answer. What would yours be?
“Perhaps a good way to look at it is whether the business is more interested in ‘inputs’ or ‘outcomes’. Traditionally, a procurement group reporting to the CFO is focused on –and by – relatively short-term measures of price. Historically, when the main IT acquisitions were bits of hardware and software, that was often a reasonable focus. But in those days, it was largely up to the CIO to have the technical skills to make all the pieces work, to gain investment for updates etc. Procurement got the components. The CIO strung them together and was responsible for the outcome.
But now, IT acquisition is very different. Much of it is about services and solutions. There is far more responsibility on the supplier to deliver results. The CIO department is far less focused on technology and far more focused on enabling business needs through technology. As such, they have to be far more aware of supplier capabilities and they have to partner far more with their suppliers to safeguard performance and business results.
The history of where ‘commercial support’ sits has transitioned several times. In the early days of IT, the IT procurement group tended to be part of the CIO organization because it was seen as a specialist area with unique knowledge. As Procurement matured, and as consolidation, compliance and ‘commoditisation’ became core principles of purchasing, it was common for the IT Procurement group to move to the (increasingly centralised) Procurement organisation (and frequently therefore reporting to the CFO, who wanted to control spiraling IT costs). Today, we are seeing some shift back towards the CIO. However, we are also often seeing a split of function; this may mean that there are IT Category Management Teams in Procurement, responsible for acquisition, and there is a Commercial or SRM team in the CIO organisation, responsible for interaction with key suppliers and for managing the contract and relationship post-award. They may also partner with the Category Team in up-front selection and negotiation.
I think the key issue related to ‘best practice’ is the need for coherent, consistent life-cycle management of contracts and relationships. Whether this is through consolidated groups within a single function, or through connected groups in different functions, is not the most important point. There are distinctions in expertise and IT acquisition and management require different skills at different points in the process. The real issue is a consistent process with clarity over expectations and measurements, management approaches that demand cooperation rather than rivalry.
It is important to recognise that IT has changed and will continue to change. The cloud, mobile apps, continuous evolution of technology, shifting demands from customers and the impact of constantly evolving regulation are going to make the delivery of effective IT solutions an extremely challenging role. Much of that delivery will be through third party partners and their effectiveness and costs will be substantially impacted by your ability to offer them clarity, consistency and appropriate interfaces.”
Earlier this year, an IACCM member asked for input on the purpose and structure of supplier councils. A number of organizations responded, with their answers reflecting some uncertainty over how best to approach this topic.
It led to the conclusion that many Supplier Councils seem to be rather general in character and without well formulated goals or objectives. They appear often to become a forum for the customer to present their goals, objectives, state of the business etc., in which suppliers largely listen. There may be some break-out sessions in which specific targets or topics are discussed, even roundtables at which ideas could be exchanged, but the measurable value often appears limited.
One response stood out for its clarity of purpose and direction, with the result that they have continued to attract senior level representatives from key suppliers and have been successful in engaging them, even across competitive boundaries.
“Ours are structured to focus on a particular objective, typically one that spans many industries. For example we have a supplier council to provide advice on how we might increase spending with diverse and women owned suppliers. We had another on environmental sustainability. Membership of the Council is usually at a senior level from companies that are representative of our supply base and geographies. Similarly membership from our company is at a senior level usually with leadership from our Purchases organization.
The Council meetings are advisory in nature. We want to come up with solutions that work well for both our company and suppliers.”
From the varied responses I received, I think this is a good approach. Otherwise, they often tend to become talking shops, and as a result the level of attendance starts to fall and they become moribund.
What is your experience – either as an organizer or as an attendee at such Councils? What do you consider represents ‘ best practice’ in formulating this type of supplier engagement?
In 2010, Harvard Business Review published an article co-written by Jeff Weiss and Jonathan Hughes of Vantage Partners. It was entitled ‘Extreme Negotiations’ and here is the synopsis (the highlighting is mine):
“Business leaders today report feeling that they must constantly negotiate to extract complex agreements from people with power over their industry or individual career. Sensing that they’re in continual danger makes them want to act fast, project control (even when they don’t have any), rely on coercion, and defuse tension at any cost.
The end result may be a compromise that fails to address the real problem or opportunity, increased resistance from the other side that makes agreement impossible, resentment that sours future negotiations, a failure to develop relationships based on mutual respect and trust, or an agreement that creates enormous exposure to future risk.
To avoid these dangers, executives can apply the same strategies used by well trained military officers in hot spots like Afghanistan and Iraq. Those in extremis negotiators solicit others’ points of view, propose multiple solutions and invite their counterparts to critique them, use facts and principles of fairness to persuade the other side, systematically build trust and commitments over time, and take steps to reshape the negotiation process as well as the outcome.”
I am sure many negotiators can relate to these statements. But it is my impression that the syndrome that Messrs. Weiss and Hughes raise in this article is far more widespread than they suggest. I do not think it is restricted to executives; I think for many it has become a symptom of organizational behavior.
Most organizations (and the employees within them) today feel under constant time pressure. They are overwhelmed by the ease – and consequent volume – of communication, which has in many cases slowed decision-making, not accelerated it. This problem is compounded by the growth of choice (opportunities are global) and the speed of change (there is always a new idea or offering just around the corner). So we are continually worried about whether we are making the right choice; will I regret my decision tomorrow? Factors such as these create tremendous stress and frustration, especially because of the difficulty in getting decisions made and making things happen. Overall, we tend to depict this in terms of ‘ever-increasing complexity’.
And all this leads to exactly the scenario depicted in the first sentence of the synopsis – it causes managers to want to act fast, project control (even when they don’t have any), rely on coercion, and defuse tension at any cost. As the article points out, this is not a scenario that generates good or sustainable negotiated agreements or relationships – which is why so many of them yield disappointing results.
What do you think? Does the scenario depicted in ‘Extreme Negotiations’ strike a chord with you?
This posting comes from Paul Mallory, IACCM’s Vice President for Europe & Africa.
A working group of the International Organization for Standardization (ISO) is currently drafting an ISO guidance standard on outsourcing, and IACCM is acting as an external liaison to this group. I have spent the past two days in Paris with the group, where some fascinating debates have been taking place around what does best practice in outsourcing look like.
We are all familiar with the common stories of outsourcing deals that go wrong, and are terminated early. The statistics suggest that far too many such deals fail to deliver on executive expectations. The causes are undoubtedly many and varied, though some common patterns can be found. One example would be that some external market change meant that the deal entered into was no longer as viable as expected at the outset, and now failed to meet the original business case.
These discussions raise the interesting question of whether such a thing as best practice exists, and if so who will define ‘the standard’ and how can we have confidence in it? Listening to the many and varied experiences of the working group members in the room, from a variety of industries, countries and cultures, I was stuck not only by how it is possible to reach consensus on what a best practice is, but also on how much value is available through the diversity of views. If we’re prepared to share views, listen, compare with our own experience, and then be open to trying a new/different approach, we can identify areas for improvement in our current approaches. By comparing our performance and working standards to an external benchmark view, we are able to identify ideas to raise our game.
The working group is a great example of collaborative learning. All members of the group are learning, by recognising that we share a common issue (outsourcing deals that fail to deliver), sharing a common objective (better outsourcing deals and management of them), and being willing to both contribute our views and to listen respectfully to those of others, with a willingness to be open to new possibilities, solutions, directions.
This work will result in a guidance standard from ISO which everybody will be able to access and share the learning.
What group could you pull together today to work on a common issue and develop a better answer, raising the standard of performance for all concerned?
Contract terms can generate value, or they can destroy value.
I can cite many examples where a failure to appreciate the impact of term selection has had a heavy cost – the loss of business: the loss of innovation: the failure of major projects. On the counter side, companies with a more balanced approach have snatched business they were not expected to win, or have attracted innovative partners, or achieve a higher success rate.
In other blogs I have described specific examples, ranging from large companies such as GM, Toyota, AT&T, BP, Walmart, as well as creative approaches by small and generally unknown businesses. There have also been studies based on industries, such as construction or public sector, and how their contracting practices impact costs and performance.
Overall, I can be confident that contracting policies and practices make a substantial difference to organizational performance. So now the issue becomes one of knowledge and expertise. Specifically, whose job is it to ensure that an organization is optimizing its contracts?
And here we find that the answer in most companies is no-one. There is no accepted point of responsibility for ensuring that contracting practice, policy and strategy deliver value (or even that they prevent loss of value). Different functional power groups tend to dictate elements of the contract, frequently without understanding the business impacts of their approach.
Some organizations try to build in greater sensitivity through empowered negotiation teams, but these typically operate without the benefit of true insight to the statistical, operational or psychological impact of individual terms and conditions or commercial approaches. They are also limited in the extent to which they can ‘fix’ core policies or processes to accommodate the needs of a specific deal. What is really needed is far greater market and business intelligence about the policies and practices themselves, so that different deal types are structured appropriately. For example, if a goal is innovation, here is the best form of contract and related terms. If this is a relatively complex project, here are the key terms to consider, etc.
What is see in many organizations is an environment that stifles and prevents the growth of this expertise. Powerful groups claim an ownership of contracts and related terms, often in the name of compliance and risk avoidance, with no accompanying measurements or accountability for the actual impact they are having. Alternatively, they may not actually claim ownership, but they take steps to oppose anyone else stepping into the role.
I spent the last two days in Amsterdam, participating in the SSON conference, along with a variety of other meetings.
The week has been very much oriented towards discussions with Procurement – and has yielded further evidence of a strong trend towards contract and relationship management skills. It began with a negotiations workshop, in which I was highlighting the things that typically go wrong in business relationships and the fact that many of these ‘problem areas’ do not make the risk register, and therefore are inadequately addressed in the contract. The group was not large, but there was lively discussion and wide recognition that the focus of negotiation needs to shift in order to drive better results. We explored subjects such as the timing of involvement, the definition of scope and goals, approaches to change management and communications.
Contracts must better support the uncertainties and volatility of business needs and market conditions. Essentially, they need to move from the rigidity of being a red ‘stop’ light, to offering clearer routes to the management of alternative routes. This was further reinforced by a number of other discussions, in particular with a representative of the Dutch public sector, who emphasized that contracts and relationships should reflect the need for greater transparency and the ability to adjust to shifts in user requirements. He cited examples of the unexpected adjustments that are needed due to changes in operating conditions or public expectations; our contracts and negotiations ought to make improved allowance for these. I will cover a number of these interesting challenges in detail in further blogs this week.
Yesterday saw two sell-out meetings of IACCM members, one in Melbourne, Australia, the other in Toronto, Canada. Despite modern transport capabilities, I only managed to be at the one in Toronto!
Of course it is gratifying to see the sustained growth of IACCM, but more important than the numbers is the steady adoption of the message. It is the realization by many individuals that their role and contribution is enhanced when they step outside the narrow perspectives of traditional functional thought.
Professionals in Procurement and practitioners in sales contracting and Legal have been taught that ‘the other side’ (customer or supplier) cannot be trusted and that their role is to to anticipate and prevent their nasty tricks. This leads to one sided contracts and constrained negotiations, which in turn contribute to poorly structured on-going relationships. Professional associations and consultants on the Procurement side in particular generally stoke these fears and highlight the danger of allowing suppliers access, or the frequency of wrong invoicing, or the (horror of horrors) fact that suppliers are there to SELL things!
The message that comes increasingly from those who attend the IACCM events is that they truly welcome the chance to be in a balanced forum representing both buy and sell. It is through these events that they form an understanding of each other that reduces the fears, identifies better solutions and results in more productive contracts and relationships. Of course they must always remember that they represent the interests of their respective organizations, but that is never going to be achieved by an environment of animosity and suspicion.
Last week’ s edition of The Economist exhorts us to ‘simplify and repeat’ . It suggests that the growth of complexity threatens to overwhelm many businesses and render them unable to fulfill market demands and their own customer commitments.
Anyone in the world of contracts and commercial management will be familiar with this challenge. We are frequently at the forefront of complexity, seeking to balance internal policies and practices with external needs and requirements. Indeed, so many of those issues come together when we are forming contracts or handling negotiations that we are oftten seen as a cause of this complexity. It almost seems like those mandates from Legal, or the rules imposed by regulators, or the pricing or charging principles established by Finance, are somehow seen as our fault.
And the truth is, in some respects, they are our fault. We have so many insights to the issues surrounding and causing complexity, yet rarely do enough to challenge them, update them, make them simpler. In fact, we often glory in the complexity because it has become confused with our sense of value. Sorting all the confusion and making sense of it has become our role.
That is wrong and it is very short-sighted. The Economist is right – survival depends on making complexity simple. So our goals should be to do precisely that. We must monitor the things that cause delay, the things that result in commitments not being met, the things that disappoint our customers and suppliers; we must then propose or lead work to achieve improvements. And because complexity will not go away, the task before us is not only extremely valuable, but also unending.
How much better to be seen as a person or a function that is making things better than to be seen as someone who is a representative of the complexity that everyone wishes would disappear.
Commitment Matters 