Yesterday I caught up with Tyrone Pitsis, who is Director of the MBA program at Newcastle University in the UK and an international expert on organization and collaboration.
It has been several years since Tyrone and I last spoke and in that time we have each added substantially to our range of experience and research. Inevitably, our conversation focused on topics related to contracting and trading relationships, with much of it centered on decision-making and adaptation.
A topic of particular interest to Tyrone has been improvisation – an ability that has arguably become of increasing importance in a world of ever-increasing complexity and speed of change and which of course depends on some level of organization and collaboration for its success. He explained that improvisation is sometimes confused with concepts such as ‘gut feel’, in that both may be a response to situations in which there is a high level of uncertainty (often linked to a need for speed). Yet he emphasized that both in fact draw on a base of relevant experience and that improvisation frequently depends on highly experienced practitioners who are equipped to improvise because of their knowledge (e.g. Jazz musicians).
These comparisons reminded me of many business situations where there is often a feeling that executives make decisions based on ‘gut feel’, leaving contracts and commercial experts to ‘improvise’ in creating an appropriate framework. Tyrone highlighted how the need for improvisation has grown (heightened levels of uncertainty), yet is being undertaken in an environment that has become more complex (a greater number of stakeholders need to be considered). He described this stakeholder issue in terms of the growing numbers of people who ‘have a voice’. Specifically, the advent of social media, of Twitter, Facebook and the rest has meant that almost everyone today can express an opinion. And it is this, he suggests, that has made contracting especially complex.
As any good commercial specialist knows, stakeholder analysis is key to good contracting. And top practitioners are not just thinking about views and attitudes at the moment of negotiation or signature, but are trying to understand how these might shift over time. They want their agreement to prove sustainable, to operate with sufficient flexibility and to be adaptive to shifting circumstances. Tyrone expressed this in the following way: “A contract is about a type of business relational experience. To work well, you need to understand not only what you want that relational experience to be at the outset, but also what you may want it to become.”
In some instances, this need for greater adaptability has led to increased questioning over the use of formal contracts, since they are seen as too constraining. In addition, their negotiation simply takes too long, not least because of all the ‘what ifs’ they tend to take into account. In cases where there is no contract, organizations depend on their abilities to set common goals and targets and to improvise in achieving them. Their agreements are informal and depend on collaborative expert teams for execution.
It is clear that such loosely-bound, adaptive frameworks are unlikely to become the norm for trading relationships, in part because they depend on very clear goals and also because they demand sustained focus by senior management. However, those of us who deem ourselves ‘experts’ at contracting and commercial management should take this trend seriously. First, we need to understand that it is an acceptable alternative to a formal contract and we must consider it part of the ‘relational portfolio’ of commercial arrangements. Second, we must learn from these approaches to ensure that other types of agreement incorporate some of the adaptive, flexible characteristics demanded by today’s business environment. And third, we must ensure that our professional community develops the skills and techniques to anticipate widening stakeholder involvement and to improvise in the face of continuous change and uncertainty in business conditions. Without these shifts, we place our own relevance in peril.
In a blog, acknowledged drafting guru Ken Adams floats the idea of a certifiable standard for contract drafting – and suggests that IACCM might provide the certification.
Ken highlights a continuing weakness in drafting skills and style. I think he is right to suggest that today’s complex business environment demands far greater clarity in the way contracts are constructed and expressed.
In an age when specialisms and credentials continue to develop, the idea of certification is certainly not unreasonable. Given the importance of contracts and their need for clarity of intent, Ken’s suggestion seems timely. The recent IACCM study on ‘The Future of Contracting’ has highlighted useability of contracts as one of the pressing issues. By this, it means a need for greater ease of understanding by the many stakeholders involved in both the creation and performance of the contract.
Based on this, my inclination is in fact to go somewhat further than Ken’s suggestion. I think he is right to suggest a formal test for excellence in drafting, but perhaps we should also be teaching skills in design and communication techniques that would support effective execution of the agreed terms and obligations. From different quarters, I have received requests for IACCM to offer a ‘quality kitemark’ for contracts that satisfy various criteria – such as clarity, design and encouraging collaboration.
Traditional drafting of contracts through the use of words is not always adequate to ensure proper communication, especially when concepts are complex. That complexity may not be due to the terms themselves, but can arise from unfamiliarity with language, legal systems or business culture. Good contracts are not about tricking people or catching them out when they fail; they are about reducing the probability of failure. And to achieve this, they must be structured and expressed in ways that minimize the chances of misunderstanding by all those involved in their execution and performance.
Ken’s idea is that individuals could gain a Certificate of Proficiency for drafting and that this might then spread to organizations becoming certified if they implement good practices across their portfolio of contract templates. I support that idea – but the key question is whether practitioners feel the same.
Do you think this is a good idea? Is it an initiative you would welcome?
In an excellent contribution, Ian Heptinstall commented on my recent blog ‘Getting the organization to care about contracts‘.
Ian observed that the blog “highlights one of our core dilemmas – that there is a strong view that you can’t have both carrot and stick in a business relationship”. He rightly goes on to question that view, while acknowledging “to give the naysayers their due, they have often had experience where so-called partnerships have failed and/or exploited the client”.
Thinking back through my own career, and the many stories we hear at IACCM, there is indeed truth to this comment about ‘exploitation’. In most cases, whether as individuals or businesses, I don’t think we enter into agreements with anything other than honest intent. At the time, we believe we can meet our commitments and we feel a sense of optimism about the outcome. In these circumstances, we feel offended if the other side pushes for onerous consequences for failure – it is seen as questioning our integrity or good faith. (Of course there are exceptions. As good skeptics, those of us who review Sales commitments may often question the quality or accuracy of the proposal being made and in that case, we may well be resisting liabilities for a very good reason. For the buyer, it is of course hard to know which scenario is driving our behavior).
But even if our intentions at the outset are entirely honorable, both as individuals and as organizations we have a tremendous ability to perceive ourselves as innocent and without fault. So when things go wrong, we are quite capable of telling ourselves that it was somehow the fault of the other side, or that mitigating factors mean we really should not be held to account. I think here of the case of a small software company that banked its future on a deal where an large technology provider was planning the software in a world-beating retail solution …. that unfortunately they never got around to marketing. Or the aerospace company that ordered a new engine to be developed, but then abandoned the new aircraft to which it was going to be fitted. Rather than compensate the manufacturer for the $ multi-million development work, they exercised a delay clause and never actually cancelled ….
Hence Ian is right that good contracts need carrots and they need sticks. Our memories are often imperfect and our moral standards are frequently subjective. But as good contracts or commercial experts, we should be able to build agreements that reflect the most appropriate carrots and sticks. For example, our options are quite different if this is a first time relationship, rather than a long-term strategic partnership. They are different if it is with someone committed to our industry, versus a new or bit-player. The reason for this is leverage. Long-term relationships with multiple sub-components are likely to cause both parties to operate with greater balance in their judgment because they have more to lose than just one deal. Similarly, a serious player within an industry is going to be conscious of the reputational damage that could occur in the event of default. So in those cases, the need for ‘sticks’ based on onerous liability clauses, indemnities and liquidated damages may be rather less.
On the other side, I believe that commercial experts need to become far more skilled at devising ‘carrots’ and in part that is about creating a strong relational frameworks in which both sides can feel secure and informed. To avoid making this blog too long, I will come back to that subject another time and outline a few thoughts on how those relational frameworks should be created.
Today I was at the AribaLive event in Las Vegas where I participated in a panel discussion about IACCM’s research into the future of contracting. Joining me on the panel were Bill Huber, a partner at ISG (formerly TPI) and Michel Gahard, Assistant General Counsel at Microsoft.
Panel moderator Dan Ashton, of Ariba, led with a question about whether the future would be most driven by process, skills or tools. The panel was united in the view that all three would be significant in effecting the change and n=moving contracting to a more strategic discipline. Our research has indicated that contracting must evolve into being a process, rather than a series of relatively disjointed activities that do not serve the business well.
The report of our studies will shortly be available through the IACCM or the Ariba websites. What I found especially interesting about today’s session was the level of interest and the extent of audience participation. Traditionally, contract management sessions at the Ariba events have drawn a respectable audience, but they have not exactly been animated. Today, it was standing room only and people were – quite literally – being turned away at the door. In addition, the audience was animated and highly engaged. They clearly believe that things are changing and that contracting is indeed becoming a discipline of real significance to their business.
A couple of weeks ago I wrote a blog on the topic of whether women are starting to dominate the fields of law and contract management. This was in response to a question raised by Ken Adams and my reply was that I think the position varies significantly between countries and also between roles. For example, it seems to me that there are relatively fewer women in the jobs where there is extensive negotiation and travel.
Something that I did not mention was the relatively low proportion of women who step forward when it comes to elections for the IACCM Board or for speaker roles at our conference. We are very sensitive to the issue of diversity and – as a multi-cultural association – encourage participation regardless of nationality or gender. Yet achieving a balance remains challenging.
I was reminded of this today when I read an article in The Economist “The Scarcer Sex”. It examined ‘the reluctance of women to enter politics’ in the US and drew from a study by academics Jennifer Lawless and Richard Fox which confirmed that the issue is no longer one of relative opportunity, but rather one of choice.
However, we need to dig beneath this finding to examine why women may be making this choice. In part, it may well be because they do not like the ‘rules of the game’. By temperament and instinct, they may well be less aggressive, less competitive, less inclined to take risks, less willing to expose themselves to public scrutiny. But of course, those instincts may well not be wrong – so the problem is, the rules have been set by males.
In commentary on the findings of Lawless and Fox, other academics have observed that their research should be checked against the situation in other cultures – for example, Scandinavia has far higher participation by women in public office, so perhaps this gender bias can be overcome. I decided to check whether this holds true for the field of contracting. I am disappointed to report that my quick analysis of IACCM member data suggests that women in contracting in the US (around 40%) are outpacing those in Scandinavia (32%).
The attributes that turn women off politics are actually quite prevalent in the world of contracts, especially in negotiation – those are taking risks, being competitive and being convinced you are qualified to do the job. In other words, if you are full of bluster, economical with the truth and love to win, then contract negotiation is the place for you!
On the other hand, if we want better and more sustainable results from our negotiations, executives should be working to encourage far more women into the role. Perhaps that would be the fastest route to collaborative, relational contracting and put an end to the adversarial, transactional style of today.
In the wake of the 2008 collapse in financial services, I observed the connection with poor contract management. The crisis arose because of high risk commercial offerings and failures to oversee the risks inherent to contract portfolios (such as mortgages).
Even since the collapse, there have been further instances of weaknesses in contract management, ranging from the absence of adequate controls over dealmakers to the debacle over housing repossessions where the relevant contracts had been lost.
Given these problems, one might have expected urgent action to improve contract management capabilities. At last, it is clear that the industry has awoken to the need and is taking steps to better define its contracting processes and controls and to recruit contract management staff.
There are new factors driving action, in particular the growing pressures from regulators. Investment banking faces a period of continuous change, demanding far greater oversight for existing contracts and regular amendments to ensure compliance. Supply management is also a focus, with regulators demanding that the industry accepts direct risk for the performance of its suppliers, specifically in areas such as outsourcing.
Despite the wish to build contracting capability, the industry is not finding it an easy path. They struggle to grasp that risk aversion is not the same as risk management and to design effective processes. In addition, with no history of contract management, they lack the internal staff to perform the role – and are finding that the market is not overflowing with the right talent.
News reports from East Africa bring regular confirmation of substantial oil and gas deposits. Kenya, South Sudan, Uganda, Tanzania and Ethiopia are all beneficiaries of recent finds, producing understandable hopes for investment and prosperity.
Yet the challenges for those who will negotiate contracts to realize these benefits are many. Some – such as lack of local skills and infrastructure – will be familiar to oil and gas development companies. Others, such as cronyism and pressures for bribery, are also sadly familiar. But the level of political instability is probably extreme even by the standards of this industry. And the extent of competition for development contracts, combined with the intrusion by regulatory authorities and NGOs, continues to make life harder for the established US and European oil firms.
Western firms have been the source of most of the recent discoveries, placing them in prime position to win the resulting contracts. Yet any negotiator will find they are in a difficult position, especially if they weigh the short term goal of winning the contract against its longer term consequences for their company.
Consider for a moment some of the key stakeholders in this game. The political leadership in most of the region perceives power as a route to amassing personal and family wealth. They tend to favor particular tribes or supporters when it comes to wealth distribution. These actions create high levels of instability and fertile ground for armed opposition movements – certain to grow when there is so much additional wealth to fight over and certainly not averse to attacking oil and gas installations or those who work at them. Disparities in national income are also likely to inflame regional and cross-border conflicts, which might range from obstacles to transportation to all-out war.
As if these local considerations are not enough, there are also the international factors to consider. Domestic and international regulatory authorities, especially in the US and the UK, will presumably be watching closely to ensure that bribery and corruption play no part in contract awards. Alongside them, a range of NGOs will be only too eager to reveal any perceived mis-step by the oil and gas giants (especially if they are from the West). And behind the scenes are the government-backed firms from China, already upset that they did not undertake much of the discovery work and now anxious to win large chunks of development. Alongside them there are large international players such as Russia’s Gazprom, which also plays under a somewhat different rule book.
So as a negotiator, what would you do? Establishing a sustainable project would suggest you should push for an ethical agreement – free of corruption, ensuring balanced benefits for the local population, engaging regional authorities on which success depends. Clearly you do not want to win the contract only to find that development work is constantly undermined by conflicts, disputes and adverse publicity. Yet your noble instincts must be undermined by the knowledge that key decision makers are unlikely to share your personal or corporate values and that if you are not willing to satisfy their personal ambitions, your competition will.
An extreme situation? Perhaps. but as I have highlighted in other recent blogs, the growth of business opportunities in emerging and unfamiliar markets is becoming increasingly the norm. That means contract and negotiation professionals must start preparing their knowledge and refining their skills to grapple with such complex scenarios. So now is a good time to start. What approach would you take in this situation?
Last week, I wrote on the topic ‘If contracts are so important, why do so few people care?‘
Although my focus was on outsourcing deals, the comment could equally well apply to contracts as a whole. Essentially, my point was that although there is wide acceptance within organizations that a contract is necessary, there is limited consensus over its exact purpose and few considerations over its broader business impact. This general lack of interest is reflected in IACCM’s 2011 research finding that only 8% of organizations see themselves as having a strategy for contracting.
In my previous article, I observed that one of the consequences of this situation is that contracts (and those who are charged with their creation and management) are viewed by many in a relatively negative light. They are seen primarily as instruments for risk allocation, often indulging in lengthy and apparently obtuse points of law and the apportionment of pain when things go wrong. This attitude tends to have rather self-fulfilling consequences; in particular, contracts and legal personnel are often not involved sufficiently early in the process and the resultant contracts may be poorly structured, hastily negotiated or incomplete.
As a brief case-study, I am currently involved in a contract worth some $4 billion. IACCM has been asked to run a ‘relational contracting workshop’ to assist the parties in establishing a governance and management framework that generates more collaborative behaviors. I spoke recently with the project owner to discuss objectives and approach. During the conversation, he warned me that one challenge – perhaps the biggest – would be to overcome the opposition of many stakeholders, who believe that the contract and its management should be all about ‘wielding a stick’. He went on to explain that his reason for asking IACCM to conduct the workshop is because he believes we are the only people with the ‘compelling research and examples’ that can help him overcome these attitudes.
The point behind this story is that it is not of course the contract that is causing contention. It is the people within the organization who see suppliers (and often customers) as ‘the enemy’ and then seek to use the contract and the contracting process as a weapon. Their dismissal of the idea that collaboration is necessary and their refusal to consider contract terms and structures that focus on value delivery and positive incentives ultimately condemns us to many deals and projects that either fail or yield disappointing results.
Of course, the nice thing with that disappointment is that it confirms the cynicism that was actually its cause and adds to the resistance to change.
So what should be done? In my opinion, senior management from around the business must start to revisit the question ‘what is the purpose of contracts?’ and from there, they need to consider a strategy for contracting that aligns with their wider business goals. Without this, contracts will continue to undermine business opportunities and deliver less than optimal results.
IACCM member Gregg Barrett forwarded an article that features a story of corporate espionage and a commentary on the scale of intellectual property theft by Chinese firms.
There can be few who are unaware of the threats to IP that arise when doing business with China. The aspect that makes it especially worrying is the feeling that, far from condemning such espionage or IP theft, the state authorities actively condone it. In the case featured within the article, the CEO of the US victim had taken steps to look beyond the contract and, in his opinion, developed a strong and trusting relationship with his Chinese counterparts. We must wait to see whether the Chinese courts take meaningful action in what appears to be a clear-cut case of theft.
However, before leaping to judgment, I believe we must also place IP protection into an historical context. First, it is important to remember that the entire concept is relatively recent – less than 300 years. Second, we must acknowledge that emerging countries have rarely paid great respect to the concept of intellectual property rights. As nations seek to improve their economic wealth, there is always a delicate balance between collaboration and aggressive competition in their international dealings. While on the one hand there is recognition of the benefits of trade, on the other there is a hunger to equal or better the position of rival nations. Even in established economies, this friction remains – for example, the debates over free trade or protectionism.
If we go back to the 1800’s, there are certainly many examples of US entrepreneurs ‘borrowing’ ideas from elsewhere. In those days, it could take years before the original owner was even aware that their IP had been stolen and the chances of them launching a successful prosecution were few. The acceptance of IP principles tends to come only when a country has passed a point of equilibrium – when it has more to lose than it has to gain. This comes about in two ways. One is through the development of its own inventions and the other is through its hunger to export and trade in foreign markets. In the first case, having its own inventions creates a desire for protection (both domestic and foreign) and therefore a more effective legal system. In the second case, the wish to export creates an exposure to action in foreign courts which may not share the benign view of their Chinese counterparts.
Since the chances of concerted world action against China seem remote, it appears that companies must in large part rely on themselves for handling the threat of IP loss. They must carefully consider the extent and nature of their trade with China. They must think of ways to limit access to the full specification of their products. They must increase vigilance over employee hiring and loyalty. And they must continue to invest in security products that prevent access an create alerts against attempted IP theft. Perhaps most of all they must hope that China soon reaches that point of equilibrium where it starts to share the view that IP should be respected.
Commitment Matters 