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.
Lawyers and accountants can move between industries. So can procurement managers and and HR professionals. So what about contracts and commercial staff?
Earlier this week, I responded to questions about the best qualifications for a contract or commercial manager and whether contract and commercial management are cross-industry disciplines. That left one issue to tackle – the transferability of skills between industries.
In my years of heading IACCM, thee have been many communications from members about job opportunities and the absence of a clear career path. This has frequently been accompanied by a complaint that few employers deem contracts and commercial skills to be transferable across industries – a view that has a severe effect on career options, especially when a particular industry may be in crisis or decline.
How valid is that complaint?
I can certainly point to many instances of individuals who succeed in crossing industry boundaries. My own commercial career inclued switching from automotive, to aerospace to technology and services. Another IACCM member recently wrote: “? I believe that there is no industry or geographical factor involved in this particular issue. I strongly consider that skills and knowledge applicable in one industry area able to be transferred to others depending on the particular circumstances of the capabilities of the individual who is moving from one sector to the other. I was able to experience such transferability from the fishery industry to the software and IT sector, without any type of previous training, this is something that comes by nature with each individual, regardless of the industry and of the region we are talking about”.
So is the difficulty more one of personaility or presentation? Do some individuals seek to mask their own inadequacy as a candidate by blaming prejudice or narrowness of thinking in others? I am sure there is some truth in this, but I think the issue goes deeper and relates to a point I made in the earlier blogs. That is, the absence of clear and transferable professional credentials. As an employer, I need some evidence of core competence; I need to be sure that the individual I am hiring actually possesses transferable knowledge. And without any basis for objective judgment, it is far easier to hire someone who has a pedigree within my industry.
Many of the leaders in commercial and contract management make the situation worse when they position this role as something that can only be learnt ‘on the job’ and not taught. This reinforces the perspective that contracts and commercial is not a profession, since any profession has by definition an underlyign body of knowledge, which in itself supports transferability between industries.
And that, in the end, is the reason lawyers, accountants, procurement professionals and others find it easier to move betweeen industries. They possess credentials that confirm their status and knowledge. Most contracts and commercial staff do not. Yet that is a problem they can fix; IACCM certification is designed to help and, for those in the US Federal sector, they also have the option of NCMA credentials.
“Find out what your vendor is REALLY up to” screams the headline in my in-box. Upon opening the email, I find that I can consult with an executive who “got a wealth of insider vendor experience working at companies such as IBM and Candle Corporation” and who will “share this “insider information” about what vendors are up to on their side of the table”.
I find this type of hyperbole somewhat depressing. It plays on the fears – and conspiracy theories – that seem to permeate far too many procurement groups and which their trainers and (to some extent) professional associations seem determined to perpetuate. To my mind, all that this achieves is an underlying sense of mistrust that in turn undermines relationships and the potential for successful outcomes.
Having spent most of my career on the sales side of the business (including many years at IBM, including a period on Corporate Marketing staff), i must admit that a) I was never aware of any grand scheme to mislead customers and b) I never worked in an organization sufficiently competent to develop and implement such coherent behavior as this headline suggests. Indeed, it strikes me that any half-rational Procurement professional should stand back and think about their own organization (yes, I can guarantee that most work in companies that actually sell things as well as buying them). On balance, do they feel that their corporate management and the sales organization are clever and efficient enough to devise master plans to trick their customers?
In society as a whole, we are moving away from these scare tactics, from setting up ‘them and us’ environments. We have grasped that such tactics are in fact frequently designed by people who want power, who want to exercise control by establishing a mythical enemy. And to my mind, that is exactly what is going on here.
We all benefit from greater transparency and collaboration. It lies at the heart of human progress and economic wealth. So it is time to push back on these myths and focus on the real issues, including the selection of trading partners who share our culture and values.
Yesterday I responded to a comment regarding the most appropriate background for a contracts professional. The IACCM member who asked that question also sought opinions on whether contract management is a cross-industry discipline, or industry specific.
There are two aspects to this question; one is whether dedicated contract management resources are required in all industries; the other is whether the skills and knowledge applicable in one industry are transportable to others.
With regard to industry needs, my view is that all industries require contracts and commercial competence. They need the ability to design, structure and manage sustainable and effective trading relationships and to do this must have people with the judgment and knowledge required to interpret market strategies, to negotiate appropriate agreements and to oversee their performance. However, the depth of this need and the way it is established varies substantially between industries and even between companies within an industry, depending on their market strategies. For example, in consumer-facing companies, there is very little need for in-depth contract management. On the sell-side, it is negligible; on the buy-side there will typically be a need for in-depth expertise to handle areas such as technology, outsourcing, real estate and logistics, but the bulk of commodity purchasing operates with little negotiation or contract flexibility.
In a sector such as technology, the picture is more variable and driven by business and market strategies. For example, the extent of b2b versus b2c will have a major impact (think Dell compared with Apple). Also, choices over routes to market will be influential (direct sales versus the use of third party channels). Another factor will relate to the extent of market dominance – is negotiation necessary, or are contracts instruments for business and market control?
In general, the more that a company offers or acquires services and solutions and the more that its primary markets and interactions are business-to-business, the greater its need for contract management resource. Similarly, project-based industries (such as oil and gas) depend on the strength of their trading relationships (especially with suppliers and sub-contractors, and also with partners in collaboration and joint ventures).
The industry scope of IACCM membership demonstrates the cross-industry mix of contract management today and also reflects relative volumes of professionals within each industry. However, I should point out that the picture is not unchanging or complete. For example, both oil and gas and financial services have seen substantial growth in demand for highly qualified contracts staff in recent times, due to industry-specific risks and performance issues. An industry such as construction has large numbers of people who perform contracts and commercial tasks, but often under an industry-specific professional umbrella, such as Quantity Surveyor. And finally, geography perhaps has even more influence than industry. Until recently, it was relatively hard to find recognizable contract or commercial management roles outside Common Law countries. Business was based far more on localized, long-term relationships for which contracts were seen as having limited relevance. This remains the case in much of Asia and Latin America, although the picture seems to be changing.
Overall, the situation is not so different for many other business disciplines. The relevance of project managers, lawyers, procurement managers, or even sales staff varies, based on similar factors.
The second part of the question relates to the transferability of skills between industries – and I will address that tomorrow.
Is it worth investing in contract management?
Whether they seek to define their value in order to gain investment, or need to respond to management demands for evidence of what they do, this is a question that taxes many contracts and commercial professionals. A majority struggle to provide credible data to support their contribution to business results. They rely upon executive sponsorship for the role – and frequently find themselves under-funded for the tasks they need to perform.
That is why IACCM research into the financial value of contract and commercial management is so important. And tomorrow, it will present a webinar in which early results will be presented. These include the impact of weaknesses in contract management on bottom-line results, plus the most frequent sources of loss and comparisons by industry and geography. Registration for this event is at https://www.iaccm.com/events/register/?id=1340
One of my recent blogs resulted in the following comment by B R Srikanth (an IACCM member from the oil and gas sector and based in the Middle East): “the more important question should be “Who is best qualified to be a Contracts Professional?” Is it someone with a law background, or Finance or technical or project management or a bit of all. “Is a Contracts Professional suitable across industries like an Accounts or Finance professional; if not, is it industry specific?”
In order to answer this question, we must address whether those in contracts and commercial management can truly be called ‘professionals’. And in my opinion, if they can only be defined in relation to other professions, the answer is no. A hallmark of professional status is a distinct body of knowledge which includes widely used techniques to undertake the diagnosis and remediation of problems. If contract managers are simply amateur lawyers, accountants, project managers or engineers, they cannot be deemed ‘a profession’. And of course, by defining the role in this way, it guarantees that it is seen as a sub-element of another functional discipline, with relatively low status and value. It also means that the role is performed inconsistently, depending on whether an individual or company sees its primary purpose as legal, financial or project-management oriented.
Of course, this is not to suggest that contract and commercial managers do not operate with professional standards – principles of ethics, integrity, a commitment to learning – but that is in no way the same as being ‘a profession’. And at this time, the contracts and commercial community remains on a journey towards professionalism because, while there are several thousand who are now certified practitioners, many are not – and therefore still define themselves in terms of a quite different professional background and qualification (or indeed have no formal qualification at all).
The syllabus for contract management does indeed include elements of finance, law and project management. But it also incorporates elements of marketing, economics, business planning, quality management and business development. And it moulds those fields of knowledge and understanding to create unique value propositions that support successful business outcomes. Therefore the real question should be more focused on the skills and aptitudes required for excellence in this role – and there we start to focus more on communications, analysis, negotiation, time management and a range of other personal attributes that ensure effective application of the knowledge supplied through the learning syllabus.
IACCM has defined the skill and knowledge requirements for contracts and commercial professionals and developed a body of knowledge to support their work. Through this, we are steadily observing the emergence of a profession that can define itself on the basis of its unique characteristics. It is also increasingly supported by extensive research in areas that are not addressed by other functions and professions – for example, the connection between contracts and relationship management; the impact of selected terms on trading outcomes; the effect of cultural variations on approaches to contracting.
For now, the lack of undergraduate programs in contracts and commercial management means that most will come to this role with other qualifications or background experience. In that case, they should be measured on the basis of aptitude (skills) as much as they are for knowledge. And while finance, law and project management may each be relevant, none of them is in itself enough; each is a component of the syllabus for a high-performing contracts professional.
Tomorrow, I will address the second part of Budgur’s question: whether contracts and commercial is needed across all industries and whether the role is industry-specific.
My early career in contracts and commercial management included extensive involvement in channel management. In the automotive industry, distribution was primarily through agents or distributors. When I joined the technology sector, third-party engagement was just beginning, but within a few years there was a wide array of routes ot market – agents, remarketers, value added resellers, systems integrators, wholesalers, retailers, distributors …..
I have always found this area of contracting of particular interest. The balancing between channels, the creation of effective incentives, compliance with regulation, understanding of the different protections that apply between channels and between countries – all are examples of the complex environment that must be managed.
Questions from competition authorities about the effect of channel relationships arise on a periodic basis. In recent times, it has more often been the European Commission driving investigations, but now the US authorities have launched action regarding the pricing of e-books. The ‘Knowledge at Wharton’ newsletter carries an article that will interest many contracts professionals – and I hope encourage others to develop their expertise in this field. It is one that I believe will become of greater importance over the coming years, as businesses everywhere form new partnerships and alliances and seek fresh ways to reach markets and customers.
At last night’s IACCM Board Meeting, there was an interesting discussion on the accounting treatment for contract management expense. Although this was largely a sell-side debate, it revealed various differences in current approach.
For some, all contract management costs are apportioned to SG&A. Others make a distinction between pre-award (cost of sales) and post-award (cost of delivery). In some cases, contract management expense is identified up-front as part of the delivery cost and therefore assumed in pricing; in others, it is ‘sold’ to the business unit post-contract signature.
Several of those involved in the discussion have their contract management staff complete time sheets so that costs can be allocated to the appropriate deal, or split between pre and post-award activity.
Further thoughts and experiences on this topic will be welcome. What approaches do you take, or have you encountered? And what about the buy-side – where does contract management expense get identified and allocated in this case?
Chief Executive magazine carried an interesting extract from a New York Times article on competition between government entities. It suggested that more overt competition could benefit society.
“This week, The New York Times asked if governments should compete like business rivals. Competition, which is at the heart of the marketplace, is something that governments can benefit from too. If competition can help keep prices low and can incentivize continual innovation in businesses, there’s no reason that it can’t do the same for governments.
Here are some of the governance benefits of competition as listed by the Times (most examples are in relation to state and local governments as it is easier to move towns or states than it is to emigrate to another country):
- Wise use of tax dollars
- Managers remain alert
- Governments cannot exert monopoly over residents
- Taxes remain reasonable in relation to public services
Citizens can act like consumers and go elsewhere if they don’t like what they’re seeing. If you find something you need at one store, but know that you could find the same thing for less money next door, wouldn’t you go next door? The same can be said for a town’s public services and tax rates. Competition can keep your government vying for your citizenship.”
While there is some truth in this proposition, it seems to me that there are also many difficulties. For example, what happens if a particular state or authority decides that social care is an avoidable expense and it therefore wants to encourage all old people to move elsewhere? And what happens in a period of relative economic decline, when some residents find they have nowhere else to go?
In reality, there is of course some level of competition between countries and within countries even now. Tax rates, the nature of services offered, the quality of education are all examples that quite evidently result in people ‘voting with their feet’. How much further can that really go without simply adding to social inequality and creating even more extreme ghettoes of wealth and poverty?
Commitment Matters 