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.
IACCM has released is annual survey into ‘the most negotiated terms’.
This unique study – now in its 11th year – provides an authoritative, global insight to the terms and conditions that cause the greatest angst for business-to-business negotiators. Its insights are used by companies around the world to review contracting strategies and train customer and supplier-facing staff.
All participants receive a free copy of the report and an invitation to IACCM briefings on the results. This year’s survey can be found at https://www.surveymonkey.com/s/topterms2012
In the most recent SSON newsletter, Barbara Hodge comments on ‘the contention’ that ‘afflicts so many outsourcing deals and observes: “We think it’s because the contracts are based on traditional, two-party thinking; bogged down by rules, regulations, and Statements of Work.”
I welcome Barbara’s observation, but I would suggest we need to take these ideas somewhat further. While I agree that contracts are as component of the problem, I believe they are more a symptom than a cause.
Contracts reflect a complex mix of organizational policies, procedures, functional interests, culture and business goals. Often these elements can become out of balance, or the process by which they are managed may lack the flexibility needed to adjust to changed circumstances or new business requirements. In my opinion, outsourcing is a classic example of these issues. It is relatively new and therefore few people in most organizations have extensive experience of how it should be handled. It is by its very nature disruptive to the traditional organization, which means it generates conflicts with existing rules, systems or procedures. It creates mixed emotions – some stakeholders will be adversely affected and may have limited interest in making it work. And the contract is where all these possibilities and conflicts converge – so no wonder it is a source for contention, both internal and with the potential providers.
To my mind, the real issue is that those who are the advocates and owners of outsourcing take little notice of the vehicle through which it should be transacted and enabled. Rather than grasping the contracting process and recognizing its role in delivering success, they choose largely to ignore it. It is seen as a nuiscance, as something to outsource to advisers or law firms, as bureaucratic, unwieldy, boring …. and of almost no practical benefit. So they let it happen, while they get on with the important stuff.
I say this from experience. For several years, IACCM has participated at SSON events and throughout that time, although the audience from our own members has been good, there have been few connections with the wider outsourcing community. Yet if Barbara is right that a new approach to contracting is a prerequisite for more successful outsourcing, then the leaders and project teams responsible for this activity really should be paying attention. In fact, it is in large part because of their lack of interest that things don’t change and so many outsourcing deals remain constrained by contention.
I will expand on this blog next week with a case study for a $4 billion deal that is facing precisely this hurdle – the inability of the organization to challenge its traditional cynicism towards the way that relationships can be structured and managed.
An attorney undertaking the IACCM Managed Learning program made the following observation:
“As a lawyer, when I had just began my experience in Contract Management, I thought that contracts requiring changes was a sign of their being imperfect. Now I know it is a sign of a healthy contractual relationship and a sign of efficiency in the contracting teams to have timely, complete and accurate changes to the terms and conditions.”
For many, this comment may sound surprising, or reflective of naivete. Yet if we pause for thought, we must surely admit that many contracts are drafteed in ways that fail to facilitate or accommodate change. The goal of many drafters and negotiators is to establish certainty and remove areas of doubt. This can often preclude too much thought about the future, which represents a morasse of uncertainty. When pricing a contract, we also regularly avoid the tough questions about how changes will be managed and this leads us to the frequent battles over chargeable or non-chargeable, within or outside scope.
Traditionally, there was the school that believed the contract should be assigned to the filing cabinet and change would be managed through ‘the relationship’. And indeed, if contracts are fixed items that can only be adapted through massive renegotiation, this will continue to be the case. Yet such an approach is a source of risk because it leads to a lack of structure and discipline underpinning the evolving rights and obligations of the parties.
In today’s dynamic and volatile bsuiness conditions, one of the key attributes that renders a contract ‘fit for purpose’ is the extent to which it can be easily adapted to deal with change. This means a need to incorporate improved governance terms and practices. It also requires us to think hard about traditional contract structure and form – for example, how the contents are organized and inter-relate, the way that electronic versions can be designed and managed. The legal profession is often reluctant to accept ‘ownership’ for the contracting process, yet is slow to respond to the needs for change in the way that contracts are drafted, designed and managed. I welcome the honesty of the attorney who made my opening quote; it is long overdue for the legal profession as a whole to step back and think about the practical value and effects of the contracts they produce.
Crystal Jones, from the MPower Group, wrote a blog on the subject ‘Education vs Reality‘, in which she questioned the relevance of today’s school and university education to the needs of modern business. She highlights in particular skills such as project management, teamwork, leadership or handling ‘difficult’ people.
I enjoyed reading Crystal’s thoughts, although I think the challenge she highlights has existed throughout history; there are commentators in most eras who complain that formal education fails to prepare people for the future or for the roles they need to play in society of the time.
One might argue that educational basics are more about creating a framework of knowledge and a capability to learn, rather than the skills associated with deploying that learning. After all, what is the point of being a great communicator if you have nothing of substance to communicate (yes, I know, in that case you become a politician); what likelihood is there that you would be a valued member of a project team if you did not have in-depth subject matter knowledge to contribute etc.
The world could not operate with everyone being – or aspiring to be – a leader. Indeed, there are many who would argue that the US ‘problem’ (if it has one) is the inability of today’s emerging workers to subjugate themeselves to the disciplines of leadership and followership. They all believe they are great communicators and – even worse -have really interesting things to say. Their parents and the schools exhibit far too much respect for their vacuous ideas and sub-standard work because it is so important not to undermine self-esteem. And this has created a generation that is convinced about its own abilities, that there is no need to apply effort to learning, that their in-built ‘skills’ are sufficient in themselves to merit high-paying employment.
Maybe Seth Godin (whose work Crystal references) is completely wrong in his analysis that the education system is outdated. Perhaps it is the tendency to impose too little discipline, too little expectation that each individual must actually prove their merits and too little of the substantive context that allows people to flourish in the world of work.
A final point. In the past, most people wanted to join big companies or work for large local employers. Today, according to The Economist, about 65% want to be ‘entrepreneurs’. So that suggests there is in fact already a massive change in aspiration – and maybe it isn’t the education system at fault, but the wider social infrastructure that is failing to free up all that talent to communicate, lead and manage projects.
But before we leap to that conclusion, it is important to understand what they mean by the word ‘entrepreneur’. For most, it means being self-employed, working from home and not having the discipline of a regular job. So what it actually indicates is that we are perhaps raising new generations that are far more self-indulgent and wanting to work on their own terms. Quite where that is taking us, I don’t know – but it doesn’t suggest that teamwork or leadership are especially big on the agenda. As for communication, I am sure Facebook will take care of that!
Do women represent a majority in the legal and contract management profession?
That is a question raised by Ken Adams in a recent blog. Ken has just completed a series of training classes on contract drafting and observed that a majority of the students in some locations were women. He asked whether IACCM has any data on this topic.
In my reply, I had to admit that I lack empirical data and cannot even analyze our membership data for a male / female divide. However, it is clear that both contract management and law are in principle relatively open professions which attract a strong proportion of women.
However, there are some caveats. Without doubt, culture plays a part. In general, our audiences in the US are far more balanced than in most other countries (so Ken’s Swiss experience may be an aberration, or perhaps he is just overwhelmingly more appealing to women than to men!). Industry also makes a difference, as does the precise role being performed. For example, the ratio of men to women tends to increase when you focus on those whose job includes extensive negotiation (and therefore regular travel and perhaps some continuing cultural prejudice and domestic challenges).
IACCM has a large and active community of ‘women in contracting’ (I see that 3 male members have also signed up for this). We believe that contract and commercial management is an excellent career path for both men and women. Typically, each brings a different strength – though much of this may be due to perceptions. For example, historic research has suggested that women see themselves to be at some disadvantage when it comes to risk management and negotiation; men perceive a disadvantage in areas such as relational skills and emotional sensitivity. Put them together and you clearly could have a winning combination!
I am currently working with members of the IACCM team undertaking one of our regular reviews of the learning materials for the contracts and commercial community.
Our core material already consists of almost 50 separate modules. The recently published Operational Guide that accompanies this material is over 600 pages long. Yet with each review, I realize how much more we could be adding! The scope of knowledge and work required to be truly expert as a contract or commercial manager is remarkable. It goes far beyond a simple understanding of contract structures and terms and conditions; of how these may vary between industries and geographies. It requires understanding of the impacts that these terms and structures will have on business outcomes; an ability to assess and balance the financial and risk consequences of the contract or commercial approach. Today, it also involves an appreciation of the different methods through which business will be conducted – for example, virtual negotiations, the use of technology such as e-auctions, the role of contract management software and its integration with relationship or project management tools and systems.
Today’s contracting expert must have not only a coherent grasp of laws and regulations, contract interpretation and drafting, but also of operational and procedural capabilities, of financial analysis and modeling, of psychology and relationship building, of relevant tools and systems, of logistics and supply, of change management and negotiation … the list is enormous. And ironically, until very recent times, almost no-one in this field received much formal training. With a few exceptions, know-how was picked up on the job, by people who came to the role with several years experience from another function and who then received ‘ad-hoc’ training on specific elements of the tasks to be performed.
Increasingly, there is understanding that good contract and commercial management demands more than this ad-hoc approach and that it needs a disciplined approach by trained professionals who use similar terminology, methods, techniques and ideas in pursuing their activities. Not only does that discipline benefit the individual, but it makes the process itself more efficient, effective and predictable.
But looking at the array of materials and comments on which we are working, I realize the scale of the task before us as we seek to continue the development and update of this enormous field of professional knowledge. Daunting, yes, but above all exciting as we discuss the many ways in which this community can and will develop in the years ahead.
I am often surprised by the lack of interest shown by many contracts and commercial managers (and in this I also include Procurement) in international markets.
Based on my experience in talking with , and developing programs for, this community, I would say that about 65% appear to consider ‘international business’ almost irrelevant, 25% consider it relevant in the sense of doing business with international markets and just 10% are engaged in the challenge of doing business in overseas markets.
My purpose is not to debate why people feel this way, but more to suggest that a much higher proportion need to adjust their thinking and outlook. There are several reasons for this – not least that globalization is challenging many of our assumption son how to do business and we need to be at the forefront of understanding and managing those changes. But perhaps most important for the established contracts and commercial experts (most of whom are today based in the traditional economies) is that so many of the future opportunities for business will be based in overseas markets.
Several items in today’s Financial Times illustrate the point. In discussing India, an analysis highlights the critical importance of a ‘much needed overhaul of the nation’s infrastructure’. It goes on to suggest that ‘for the first time, Delhi plans to share investment costs equally with business, creating a multitude of opportunities for domestic and global companies’. Another column points to the emergence of opportunities for the oil industry in Russia, suggesting that Government policy will open Arctic development opportunities to foreign firms with the expertise to deal with complex, high risk projects. And while opportunities such as these unquestionably demand high levels of technical competency, the history of project management clearly points to a similar need for commercial competence – in particular, an in-depth understanding of business culture, finance, relationship management and contract governance.
Businesses that depend on traditional contract and legal skills, or who take it for granted that their ‘cultural and business superiority’ will ensure success, are likely to be disappointed. As another article highlights, “Knowhow is needed for real-world problems’. And a letter from Rakesh Rawal, Chief Executive of +91 Europe, sums it all up when he warns of the costs associated with xenophobia. Openness, flexibility, dynamism and the welcoming of foreign capital and ideas – these are fundamental to competitive advantage for businesses and for individuals. It is time that the contracts and commercial community expanded its mind and its interests, to grasp the business needs and opportunities of tomorrow.
Managing supply chain risk depends on increased levels of partnering. Suppliers who can demonstrate their superior capabilities will have a source of competitive advantage – and two of the key ways capability is demonstrated are through the approach to negotiation and the terms and conditions on offer.
Many sell-side contracts and commercial professionals see supply chain as something that has little relevance to them. They think of it as another term for Procurement. Think again – because it lies right at the heart of your future.
Today’s commercial and contracts experts must have a grasp not only of what commitments are needed, but also whether they are sustainable. Your work is increasingly about the delivery of terms that reflect quality – the factors that build trust, gain repeat business and support greater collaboration.
Our understanding of the purpose of contracts and negotiations needs to shift from a focus on today’s limitations to an understanding of the market’s needs. Risk management must shift from being simply an analysis of the risks associated with making a commitment, to an understanding of the risks of NOT making that commitment. For example, if customer demands are for faster on-boarding, what capabilities are needed to meet that need? If inaccurate or opaque billing is a regular source of complaint, what must we do to fix this issue and avoid customer dissatisfaction? If your product or service is being commoditized, what terms and commitments are needed to distinguish your company from competition?
Each of these questions is actually a supply chain issue. Our customers think of supply chains. Your ability to win in the market and to avoid contentious contract issues depends increasingly on YOUR ability to see the world through the eyes of customers and prospects and to ensure you have the terms and contract performance capabilities that will enable you to win. And then to collaborate, in ways that keep you an important link in your customer’s supply chain.
Next week, I will write about this from a Procurement perspective – and highlight why there is often failure to address supply chain issues effectively because of mismatched behaviors and communications.
Commitment Matters 