‘Partnering for performance’ was the theme of the 2011 IACCM Americas conference. And speaker after speaker confirmed the importance of contracting to overall business results – and the value that can be gained from greater collaboration.
A number of presenters highlighted the annual IACCM study of the ‘most negotiated terms’ and the terms that negotiators believe would deliver value. In the words of Craig Silliman, General Counsel at Verizon, “We don’t negotiate the things we see as important > There is a misalignment between what we do and what is important. Why is that?’
Jon Hughes, from Vantage Partners, spelled out some of the costs of adversarial negotiations. For buyers, these include likely loss of expected innovation, scope changes that lead to additional costs, higher probability of project delays or off-contract purchasing and increased quality problems.
In the opening presentation, Tim Cummins, IACCM CEO, suggested that contracts and legal staff must focus on improved risk management. This is one of the top issues on the CEO agenda and, Tim suggested, key to their demands for more creativity and less bureaucracy. He advocated that we stop worrying so much about reforming attitudes to the traditional ‘top ten’ negotiated terms, and concentrate instead on reducing the probability of bad things occurring. That could be achieved through the governance and management terms such as scope and goals, change management, communications and reporting and service levels. Tim stated that IACCM will continue its focus on researching and promoting ‘good practice’ in the construction and drafting of provisions in this area.
Kate Vitasek presented a lively counter-point in a debate over service level management. A presentation led by Claude Marais, from TPI and featuring the CIO of Walgreen’s advocated rigorous measurement s and monitoring, which could yield ‘millions of dollars a year’ in savings and credits. While acknowledging the validity of this approach, Kate suggested that it was reflective of a contracting mentality where ‘ we acquire transactions, rather than outcomes’. She advocated an approach based on objectives and value, rather than micro-management. Research at the University of Tennessee has shown such methods to bring far greater success and business contribution.
In my next posts, I will highlight some of the other major themes to come from the event.
If you like the sound of this event, don’t despair! The IACCM EMEA Conference will take place in AMsterdam in May and feature a number of the same speakers and many of the same themes. Visit http://www.iaccm.com/emea for details
We all know that most large companies would never sign their own contracts. The terms and policies they offer when selling are diametrically different from those they demand when buying.
As our understanding of the impact that terms and conditions have on business outcomes increases, more and more suppliers are advocating more collaborative and risk-sharing contract models. They point out to customers (especially those in the public sector) that creativity and innovation are closely linked with greater mutuality in key terms and that there is a joint responsibility to ensure success. All the research – from IACCM and a growing body of academics – continues to point to the validity of this conclusion.
But unfortunately, most suppliers continue to undermine the sincerity of their position because if more balanced contracts indeed result in better outcomes, why are they not applying this principle to their own procurement contracts? Why do they continue to impose burdensome terms on their supply base?
This is an important question for executives, lawyers and contracts professionals to answer. And it is something that any negotiator should be exploring as they seek to improve contract terms with their trading partners, or to understand the sincerity of their corporate culture. Addressing this hypocrisy would represent an important break-through for the integrity and quality of contracting – and a few market leaders have started to understand this point. For example, I was talking with a major service provider that is looking to eliminate the flow-through of burdensome terms from its customers, because it truly believes that this will be an important market statement and will generate new and higher levels of collaboration within and from its supply network. In the product world, SKF is a company that has similarly embarked on harmonizing its buy-side and sell-side contract principles because they are convinced that better balance results in the creation of greater value.
These are encouraging signs; but are they just aberrations? I hope that more of us will at least start asking the question. In these days where management is increasingly concerned about business integrity, reputation and value creation, should we not at least be reviewing the hypocrisy that underlies our own contracting practices?
And if you know examples of organizations that have already addressed this issue, then let’s share their names and celebrate this progress in corporate thinking.
Many customers are not capable of collaborating – and that limits their ability to innovate.
That is one of the key conclusions that came from my discussion yesterday with Jesper Langemark, seasoned IP attorney and developer of a model contract for agile software development. Jesper’s observations very closely mirror my own. A big problem is that most customer organizations lack adequate follow-through from supplier selection and negotiation, to supplier and contract management. The hand-over from pre-award to post-award is often poorly defined and the accountability for outcomes frequently confused. As a result – and I say this from experience – it is sometimes impossible to reach decisions on critical performance issues.
This topic was raised because we were discussing agile contracts – the type of arrangement that is critical to innovation. Increasingly, it is recognized that such developments benefit from a collaborative, risk-sharing arrangement, but as Jesper highlighted, this demands committed resources and streamlined decision processes. Agile and innovative relationships will encounter challenges, issues and opportunities. And many customers – especially those in the public sector – simply do not allocate the right resources and do not ensure appropriate authorities.
The UK Government has released a highly critical report on defense procurement – and it followed up by endorsing many of the fundamental lessons that IACCM and its community have learnt and promoted in recent years.
The report found evidence of extensive waste resulting from poor contracting analysis and management. The investigated situations had generated losses of more that $12bn over recent years, and came in spite of the extensive investments Government has made in traditional procurement and project management training. These findings will come as no surprise to many who have engaged with IACCM, studied its research, or undertaken its training programs. And they will be familiar with the immediate analysis offered by the UK’s Minister of Defence in response to the report.
The Minister has highlighted the importance of more integrated relationships with suppliers. This does not mean relaxing the rigors of procurement, but it does mean questioning the secretive and adversarial behaviors that are core to many of today’s procurement practices. He highlighted the ‘culture of optimism’ that has generated unrealistic budgets and unrealistic timescales for major projects, leaving them consistently under-funded and past schedule.
An open question arising from the report is the extent to which fundamental change will occur, both in the UK Ministry of Defence and elsewhere. Key to this is whether there will be sustained focus on the skills, measurements and methods needed for positive contract outcomes. Success depends on new approaches to the management of risk, in particular a focus on reducing the probability of negative outcomes through mutual commitments to continuous improvement. It also demands fresh approaches to the way that contracts are scoped, budgeted and structured, enabling more considered and properly evaluated responses to change. There is no question that this requires a shift in the way that customer / supplier relationships are defined and the way that mutual performance is managed.
The issue of change was a fundamental theme running through this report. The Ministry was not well equipped to deal with shifting needs and priorities – and its politial masters also failed to grasp the implications of an increasingly volatile, interconnected world. In today’s fast-moving global economy, the challenge of managing change permeates every organization. It is a challenge that has ramped up the visibility and importance of contract and relationship competence – and has made this competence a very real source of business performance and reputation management. At this time, many organizations have yet to make the investments needed to safeguard their performance. On a lesser scale, the Ministry of Defence story is reflective of many of today’s project procurements; the ‘culture of optimism’ is alive and well in executive offices around the world.
2010 saw a major advance in the implementation of anti-trust and competition regulation throughout Asia.
In a region traditionally renowned for extensive joint venturees, cartels and other collaborative relationships, the speed and extent of the swing towards more open and competitive relationships has been dramatic. Hungry for economic aid, inward investment and global competitiveness, traditional business structures have been crumbling at remarkable speed.
This has a number of major impacts – not least of which is the growing importance of contracts and more rigorous commercial management. As business-to-busness relationships become increasingly arm’s length, they demand fresh approaches to their negotiation and management. This is fuelling, among other things, a growth in demand for skills development and training for commercial, contracts and procurement staff.
Among those introducing new competition laws in 2010 were Hong Kong and Malaysia. Every jurisdction in East Asia – wth the exception of North Korea and Myanmar – now has antitrust regulations in place, or has committed to their introduction. This has already started to have big effects not only on local companies, but also on multi-nationals. For example, Japan, China and Korea joined the EU in objecting to the proposed merger between BHP Billiton and Rio Tinto.
While enforcement standards still vary, fines in the region totalled $1.5 billion last year, indcating a new level of seriousness by many governments. A continuing challenge for companies operating in the region is the variability in the extent and quality of guidance. However, the overall strengthening of legislation in this area is another key milestone in the regon’s competitiveness on the world stage.
“There is discomfort when people encounter creativity.”
That is an observation by Wharton management professor Jennifer Mueller in a paper ‘Recognizing Creative Leadership’.
In her report, Mueller comments on the 2010 IBM CEO study (previously referenced in this blog) which found that ‘creativity’ is the attribute most valued for leading a large corporation in the future. Yet her research reveals that creative people are not in fact viewed as leadership material. On the contrary, they tend to be seen as ‘quirky’ or ‘unfocused. As a result, leaders tend to be selected from those who are seen as achievers and implementers, rather than people who have innovative or visionary ideas. Mueller writes: “The value that leaders have for groups is in creating common goals so the group can achieve something. And goals are better the clearer they are — you don’t want uncertainty. So leaders need to diminish uncertainty and create standards of behavior for everyone in the group. And they create those standards by conforming to them.”
This resonates with the challenge we face in the world of contracting. Everyone says they want more creativity and greater innovation from their trading relationships – and yet they tend to stifle it through the way that risks are allocated and that performance is measured and rewarded. We are uncomfortable with uncertainty; we value precision; we welcome standards; we monitor conformity and we measure compliance.
I suspect that the overall mix of CEOs is unlikely to change. There will be a few truly creative spirits, but they will be surrounded by strong implementers. In general, CEOs will continue to be appointed from the ranks of proven achievers – and that is probably fine, so long as they recognize and facilitate the creative innovators within the organization.
In the IBM study, many CEOs expressed a lack of confidence in their ability to take charge in times of complexity. Those leaders were ostensibly promoted “based on this prototypical perception of leadership and now find themselves in a world that has vastly changed, one that requires much more creative responses and thinking.” In IACCM studies, we observe similar insecurities among those charged with forming and managing trading relationships. Many in the world of contracts, legal and procurement sense that things need to be different, but are not sure in what way. Of course, a key role of IACCM is to provide those innovative concepts; but for them to work and be effective, each professional must increasingly be open and receptive to creative ideas. To maintain relevance andvalue, professionals must become comfortable when they encounter creativity – and must be ready to change methods, terms and practises in ways that enable the management of uncertainty through innovation.
We do not all need to be visionaries, but we must be ready to welcome. promote and adopt creative ideas. Otherwise, we are working directly against the CEO’s number one priority.
Many Contracts, Legal and Procurement professionals face the challenge of early involvement. If only people sought our advice sooner, we could add so much more value.
The issue is of course about more than timing. It is also about the quality and depth of involvement and how much time our ‘client’ will allow us, and how much we will allocate. Part of the solution (in my opinion) is that we need to raise the undersatanding and awareness of our clients in respect of what we do and how it can contribute to their success. We also need to increase their awareness of the right questions to be asking, and the types of information we will need in order to offer an intelligent and helpful response.
I came across an example this morning, when the following queston arrived in my e-mail.
I have been in communication with a friend who has some questions regarding (major project) contracts. I am writing to inquire if you have any data or advice regarding any of the items in the list below, to assist in developing the contract or advancing negotiations.
General areas of interest include:
- Basis of Payment, incentivised payments with KPIs
- Negotiations with prime contractors
- Contractual clauses used
- Cost estimating for design/build/testing
- Overall processes employed — design – build – test – acceptance
- Into-service transitioning & contract structures
Is that list long enough?!!
At ths point, I do not plan to share my reply because I am hoping you might comment with your ideas. I am sure many of you have had similar requests from business units or project managers. How do you ‘hook’ them into doing the right thing, rather than scare them away with the wrong reply, or a reply that is too late? And what is that reply – what advice should we be offering in response to question like this? (In this particular case, it is interesting that the project manager feels the need to step outside her own organization to get answers, rather than using the internal Procurement and Contract Management resources.)
Tomorrow, I will share what I said in response – and maybe by then I will also know how my reply was received! Meantime, what would you do?
Most contracting processes are highly rules-driven. The terms are dictated by a range of stakeholders from Legal, Finance, Operations, Product Management and various other functions. Contracts or commercial staff mostly have limited authority to make changes; their role is to impose standards or to reconcile and manage differences between stakeholder perspectives and market needs, negotiating within permitted boundaries. On occasion, they may develop creative commercial solutions to intractable problems.
Last week I met with Barbara Chomicka, who project managed the highly successful Mediacity development in Manchester, UK. This $500m project was at the leading edge of technology and included a complex mix of suppliers, operating under both public and private sector procurement rules. Unlike most major construction projects, it came in on time and within budget.
In addition to her project management skills, Barbara is a qualified architect and a Certified Member of IACCM. I was particularly interested to discover more about the approach she had adopted to contracting and risk management.
In common with a growing number of today’s complex projects, Mediacity involved many uncertainties. The specifications were in many areas imprecise or highly generalized – for example, that the buildings must comply with the environmental and regulatory standards applicable in 5 years time. The major certainties were the date for completion and the reputational damage that would occur in the event of failure.
At the outset, a key decision was made. It was estimated that traditional contract negotiation would take a minimum of 6 – 8 months, and that this would make the completion date unachievable. Therefore work commenced under a Memorandum of Understanding that released an initial $8m to enable start-up . Once this was exhausted, further top-up funds were released. More formal contracts were negotiated in the background while work continued.
Another strategic decision related to the criteria for supplier selection. Given the many uncertainties, it was obvious that individual price estimates would have limited meaning and that the key to delivering within budget would be the combination of experience and attitude. In appointing suppliers, the contractor was looking for evidence of collaborative working and a sense of shared ownership for problems.
This spirit also influenced the approach to risk management. There was no formal risk register. The integrated project team operated on principles of openness and transparency. When issues arose, they were immediately communicated across the team to enable resolution or mitigation.
In combination, these approaches add up to a contracting strategy. They broke many of the rules associated with traditional contracting, yet they led to a successful outcome. Certainly I am not suggesting that they represent a model for every project or relationship, but they illustrate the need for contracts and commercial professionals to exercise judgment and to develop flexible approaches to their work. It is the ability to understand when the rules do NOT apply that is the essence of good judgment in every profession. In the world of contracts and commercial, we need more people who exhibit this courage and understanding.
Barbara Chomicka is presenting at the IACCM EMEA conference in Amsterdam May 9th – 11th – see http://www.iaccm.com/emea for details.
Are many new outsourcing deals on hold until we have a better mousetrap? Has the adverse publicity regarding disappointing – and failed – outcomes resulted in many executives questioning the whole principle of outsourcing as a way to run their business?
These were among the questions that were addressed during my recent conversation with Brad Peterson, partner at law firm Mayer Brown and a widely recognized expert on outsourcing. Early in our discussion, Brad described how the market today is far more driven by renegotiation of existing contracts than by new deals. The surge in outsourcing that was expected as a result of the economic downturn simply has not happened.
Quite clearly, many business leaders remain strongly focused on reducing costs; and outsourcing is still widely perceived as a route to cost reduction. So why wouldn’t volumes be soaring? The answer seems to be two-fold. First, cost reductions are not always proving sustainable. Second, many relationships are proving inflexible in the face of rapidly changing market conditions. Hence there is more concern right now about restructuring what is already in place, than there is about adding to the portfolio.
The interview explored the reasons why current outsourcing deals struggle to deliver to their value potential. And much of the problem seems to lie in the unilateral focus on up-front cost and the failure to think through the true value sources and priorities. This means that far too many contracts are awarded on the wrong principles and the wrong terms and conditions. Resulting relationships not only lack harmony, but are often dysfunctional from the outset.
One key point to emerge during our discussion – which picks up on a theme from a number of my recent blogs – is that renegotiation is perhaps becoming ‘the new normal’. One major learning from recent outsourcing experience must be that long-term (3+year) contracts are inevitably subject to change – not just once and not just minor. Change must therefore be facilitated through appropriate performance monitoring and through clear change procedures. Establishing these begs a number of questions regarding the underlying economics of the deal and may well require new thinking about the scale and source of investment. In Brad’s experience, this issue is becoming better understood, but is not yet adequately addressed in most contracts, except that the right for the customer to terminate early, with a specified termination fee, is becoming more common.
We also discussed a recent report from EquaTerra that suggested contracts are becoming longer and that negotiations are becoming more confrontational. Brad agreed with both findings and commented: “Before the recession, there was more talk about partnering and collaboration. The downturn switched customers back to an unrelenting focus on cost; this has forced suppliers to cut corners, to find sources of saving. Overall, this makes things more adversarial”. And when it comes to contract length, Brad sees increased regulation as the major culprit. He cited as an example the ‘virtual doubling’ of privacy and data protection rules in the last 3 years.
The full interview is available to IACCM members on the website at www.iaccm.com.
For any regular reader of this blog, you will be familiar with my general theme of ‘change’ (or often, my concerns over its apparent absence!).
A good example of our changing world is reflected in the findings of a recent UK court case, in which the judge has determined that a string of emails was sufficient to constitute a binding contract – and awarded damages in excess of $50m for non-performance.
Among the key points are the fact that there was no single document that represented ‘the agreement’ and there was no signature. In his summing up, the judge observed: “As to commercial good sense, it seems to me highly desirable that the law should give effect to agreements made by a series of e-mail communications which follow, more clearly than many negotiations between men of business, the sequence of offer, counter offer, and final acceptance, by which, classically, the law determines whether a contract has been made”.
Although the judge went on to say that he had been influenced by the fact that guarantees within the particular industry “are often negotiated and concluded by the sort of e-mail exchange seen in this case”, it is clear that negotiators and business-people must take increasing care to ensure that their true intent and extent of commitment is clear. With data suggesting that more than 80% of business-to-business contracts are now developed and communicated on-line, the potential for similar findings can only increase.
Commitment Matters 