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?
Following the release of the latest national rankings for innovation, Strategy+Business interviewed INSEAD professor Soumitra Dutta, who also studies corporate innovation.
Analysis of this type is always interesting, but as Professor Dutta explains, making comparisons (especially between countries) is difficult, so perhaps not too much should be read into the results. However, the rise of China into the top 30 nations is of note, as is the continuing decline of India (now 62nd).
Perhaps of greater relevance to commercial professionals are the comments Professor Dutta makes with regard to corporate innovation. As we all know, today’s markets frequently demand greater flexibility in commercial structure and business terms, often challenging the established contract models and traditional review and approval procedures. In that context, I found the following quote of particular interest and importance. It indicates the way that the contracts, legal and procurement community must start to open its mind to new ideas and ways of doing business
“Companies have to recognize that many key innovations will be coming from markets where there are large numbers of people who are becoming consumers for the first time in their lives. These new consumers have rising demands for products, and services such as education and healthcare, but at very different price points. Multinationals will have to innovate to satisfy these new demands in a sustainable and scalable manner.
At the same time, companies will be facing new competitors in these markets that may have a better understanding of the local markets’ needs. And some of these new competitors will soon be competing with the multinationals in global markets. So multinational firms face a challenge: to innovate by rapidly integrating their global knowledge with local relevance.
The whole idea that innovations can come from different places, that innovation can happen in different ways, and that it can move and travel in different directions is something that companies will have to adapt to, and prepare themselves for.”
The key questions that commercial professionals must answer are:
– When it comes to your contracting process, how effectively are you integrating your global knowledge with local relevance?
– Do you have the research and market intelligence mechanisms in place to know what your competitors (established and new) are offering to their customers and suppliers?
– Have you adapted your management and information systems to deal with a world where “innovation can happen in different ways, it can move and travel in different directions”?
IACCM has a wealth of data on contract management process and organizational performance. I continue to be surprised by how few contract groups – whether buy-side, sell-side or legal – actually seek to measure their relative performance. In many cases, I know that they do not have base-line data, yet in some areas they clearly do – for example, the headcount or the budget; and in others they certainly should be aiming to develop data – for example, cycle times or where time is spent.
This week, I ran a webinar in which we provided information on many of the measures we have taken and also illustrated the use of benchmarks through three recent case studies. The audience was far smaller than I would have expected for such an important topic (if I were running a contract management group today, i would certainly want this data at my fingertips in order to respond to management questions about our performance and value; I would also be working hard to be sure that i could demonstrate top quartile performance relative to competition). However, there were a few excellent questions. One of these asked whether there was a direct correlation between cycle time and cost – specifically, do groups with better cycle times typically also cost less?
The answer to this question turns out to be no. There is no immediate correlation between cycle time and cost.
Some groups with low cycle times have achieved this through well-designed process and high levels of automation. These obviously tend to reflect in lower costs. However, others appear to be achieving faster turn-around through higher levels of resource (reflected in lower average number of contracts per head) and these of course operate at higher cost.
There is a third group, where low costs are being achieved through high levels of delegation. This approach varies in its impact on cycle times. If delegation is accompanied by investment in templates and guidance, it can benefit cycle time without adversely impacting claims and disputes. But if the delegation was not accompanied by these investments, it often extends cycle times and/or results in higher frequency of claims and disputes.
My hope is that the contracts and commercial community will soon wake up to the importance and benefits of benchmarking. Today, far too many requests are the result of top-down pressure and represent a belated attempt to justify headcount – or in some cases, far more fundamental questions over whether the function is needed at all.
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?
Commitment Matters 