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.
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.
Commitment Matters 