Yesterday I wrote about ‘collaboration as a source of efficiency’ and I questioned the extent to which most contracts and commercial groups are truly committed to improving their business contribution.
One reason for my concern is the pitiful uptake on the use of benchmarking data. IACCM runs regular studies to generate meaningful metrics against which performance can be gauged. One would think that functional heads would be desperate for this information, to determine their relative performance and to be seen by top management as leaders of change and improvement, champions of good practice. In reality, with relatively few exceptions, little interest is shown in this data. It seems to become relevant only in response to a need. Let me offer an example.
A few weeks ago, an IACCM member asked for data on the typical number of contracts being handled per head of contract management staff. As you can imagine, the answer to that question has many dependencies, such as the role being performed, the complexity of the contract and the efficiency of the operation. Having established answers to these first two points, we were able to provide a benchmark relative to 40 other comparable contract management groups. We found that “the average is 4.9 heads per US$1bn of revenue. Within this, there is a significant range (2.8 to 6.5), with key dependencies appearing to be a) the extent of enterprise-wide process: b) timing of CM involvement; and c) the extent of automation. These factors strongly influenced collaboration and efficiency, revealed in the volume of contracts that could be handled at any one time (a range from 1.2 to 4.6 in the high to medium complexity category).”
What would you do with this data? My hope is that functional management would focus on the most efficient operation and explore what steps they could take to compete with it. But rather than asking for more information about the three dependencies, the reply I received was ‘The avergae of 4.9 means I need 10 additional heads’.
I can cite many other examples where our use of benchmarks is driven either by the need to defend a position (typically because our resources are under threat) or where someone wants to make a case for more people or more money. When used this way, we discredit the data. But more importantly, we miss the opportunity to be seen as true contributors to business performance and to raise our status and influence accordingly. I wish that more people would become proactive in their use and analysis of benchmarking, to set a vision of future possibilities that would ensure contract management had a secure and valued position on the corporate map.
One of the items discussed at the recent IACCM Board Meeting was the impact of social networking on the world of contracts.
There are some obvious questions related to the use of social network sites by contracts and commercial professionals, but these are essentially no different from those which affect other staff groups. They are the inevitable concerns over the use of networking sites such as LinkedIn or Facebook for posting discussion items and the threat to confidentiality these might entail; or the effectiveness of such sites for recruitment; or their informal use for inter-comapny communications on contract issues. Some have turned to more secure managed networks, such as that operated by professional associations like IACCM, as a way to gain ideas and suggestions, or to test new approaches, or to support organizational learning programs.
Recent research points to the importance that younger workers now place on social networking access – not only for their ability to maintain personal contacts, but also to build their professional network.
But when it comes to contracting specifically, I think we may have potential to learn rather more from the experiences of social networks. For example, today I was reading an article about the way that on-line dating sites may steadily transform partner selection. The introduction of evaluation criteria allows the creation of short-lists for potential partners, spreading far beyond the traditional limits of geographic boundaries. Monitoring the success of these relationships is starting to generate more accurate predictions of the criteria for successful matching.
It doesn’t take much imagination to see how these same principles may steadily be used to assist in supplier / customer selection. Finding the right type of partner, who not only offers the right sort of product or service but also shares similar or complementary ethical principles, cultural perspectives, appetite for risk or record for innovation, could certainly be enhanced through computer matching.
And another outstanding thought that came from IACCM’s recent interviews on ‘The Future of Contracting’ concerned the sort of techniques already being used by networking sites like Facebook. That is, based on historical preferences and behaviors, starting to predict what will appeal to the other side and clothing a product or service with the commercial terms that match their specific preferences.
These are just a couple of ideas of ways that social networking experiences may start to cross over into the world of contracting. Do you have others?
“Procurement – and especially the Procurement consultants and analysts – have blown their credibility.”
That was the verdict of an executive with whom I was talking last week. His point was that the claims of savings generated by procurement are overstated. But he went further: “The process model and methods that have been put in place are based on the retail and manufacturing industries. They do not translate to a world of complex services or projects.”
Our conversation had arisen because we were exploring IACCM’s recent research findings on the cost of poor contracting. Like others, this executive was not surprised by the results, but he made the point that it is now essential to demonstrate how those savings or revenue improvements will be tracked. “We simply can’t go to senior management any longer with abstract numbers that may or may not translate to the bottom line.”
The irony of the IACCM results is that a significant proportion of the financial benefits that flow from improved contracting are in fact the theoretical savings already claimed by Procurement. In other words, better contract management ensures disciplined implementation and on-going governance, including change management and performance management, plus ensuring that commited outcomes are in fact achieved. This discipline is especially critical in any services or project environment.
“Bringing an aggressive retail mentality to project-based industries has done a lot of damge,” we concluded. “It has undermined the loyalty and collaboration that are essential to long-term relationships and unpredictable conditions. The truth is, far from achieving savings, we have probably finished up costing the business more as a result of some of the methods and systems we introduced. They simply aren’t appropriate across all areas of spend.”
The results of IACCM’s ‘Return on Investment’ study have pointed to the areas where there is greatest financial opportunity and we are now exploring these with several corporations, to understand how best to implement and measure improved contract management.
Ken Adams first came to my attention in 2001, shortly after his first book was published. His focus was the same as it is now—how to draft contracts clearly. We worked on a project together, then we fell out of touch.
Over the years, Ken has single-mindedly continued to develop his expertise in contract language, through his books, articles, blog posts, seminars, webcasts, and his law-school teaching. (Go here for his bio.) And what he has to say has become increasingly in tune with the wishes of many contract managers, to improve the clarity and precision of contract language.
That’s why we’ve arranged with Ken for IACCM members to receive a discount to Ken’s upcoming seminars in Melbourne and Sydney, Australia (go here for information), and in Geneva, Switzerland (go here for information). And that’s why I thought it time to interview Ken on this blog.
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Tim: What keeps you relentlessly plugging away at your subject, the building blocks of contract language?
Ken: For one thing, it’s been exciting—well, a specialized sort of excitement! Contracts set the rules that govern business transactions, and English is the lingua franca of international transactions, so the world of English-language contract drafting is vast. Yet no one had thought it worthwhile to devote serious scrutiny to the components of contract language. That gives me a lot of room to play in.
Yet that wouldn’t mean much unless something were at stake. By using contracts riddled with archaisms, redundancy, misconceived usages, and other inefficiencies that characterize traditional contract drafting, most companies waste time and money, hurt their competitiveness, and unnecessarily expose themselves to risk.
Tim: Your comments reflect IACCM’s position on making contracts effective as business tools – which means greater focus on the users, rather than the drafters. So can you expand your thoughts on this?
Ken: Most template commercial contracts—even those of companies with the resources to do better—are overlong and nowhere near as clear as they might be. (The “before” and “after” examples I link to in this blog post will give you a sense of what I mean.) The result is delay and confusion at each step of the contract process. And my writings are full of examples of contract parties finding themselves in court fighting over some ostensibly minor drafting glitch.
Furthermore, defective contract language subverts grander schemes. It’s tough to bring to bear on the contract process notions of trust, collaboration, innovation, and the like when your contract are full of sludge.
Tim: Are the problems with traditional contract language a function of the idiosyncrasies of common law and associated custom and use? Won’t we start to swing more towards the principles of civil codes, where intent matters more than specific words and where relationships typically matter more than transactions?
Ken: In this 2006 blog post I discuss the differences between common-law and civil-law drafting, and they’re broadly as you describe them. The thing is, the Anglo-American style of drafting has become increasingly prevalent, perhaps simply as a by-product of use of English as the common language, and I don’t see the tide turning any time soon. But more to the point, there’s no reason why the Anglo-American system has to be so painfully inefficient.
Tim: So what should companies do?
Ken: First, you analyze thoroughly the costs and benefits of overhauling your contract process. If you decide that the benefits of change outweigh the costs, you take the following steps: You adopt a style guide for your contract language, to get away from regurgitation and improvisation. You train your lawyers and your contract-management personnel so they know how to draft and review contracts consistent with the style guide. You redraft your templates so they’re consistent with the style guide. And if you have sufficient contract volume, you automate your templates using document-assembly software, so that drafting a contract becomes a matter of completing an online questionnaire. Taking these steps would make the process so much more efficient for all involved.
Tim: That sounds simple — so what are the obstacles?
Ken: In my experience, the resources required to take those steps isn’t the problem—it’s not that difficult a process. Instead, the issues are cultural.
For one thing, you can’t expect those who oversee a suboptimal set of templates to welcome scrutiny. Don’t be surprised if you encounter defensiveness and bluster—“I’ve been doing this for fifteen years!” Any decision to overhaul your contract process would likely have to come from higher up the food chain.
Even if your company decides to review its contract process, your personnel probably won’t be equipped to retool your templates if all they know is traditional contract language. They may regard themselves as expert drafters, but it’s easy to think you’re something special when you haven’t been required to comply with rigorous drafting standards and your drafting hasn’t been subjected to any real scrutiny.
And drafting by committee can be deadly, with those taking part championing their pet usages. It drags on, and often the result is a mushy compromise. It’s far better to put in charge of the drafting process someone with a legitimate claim to drafting expertise.
Tim: What role might contract-management personnel play in any overhaul?
Ken: I suspect that at many companies, lawyers act as gatekeepers of the templates, with contract-management personnel having little or no say. There’s no reason why that should be the case—as I noted in this blog post, when it comes to doing deals, there’s relatively little that’s best left to lawyers as opposed to reasonably well-informed nonlawyers.
And lawyers are adept at blowing smoke. They’ll routinely trot out misguided conventional wisdom, deflecting questions by saying that a given approach is standard, or is required by law. Or they might say—this is the clincher—“That’s the way we’ve always done it.” Reading my stuff would help you to call them on it.
More generally, I encourage your members to recognize that in contract drafting, usually there’s one most efficient way to accomplish a given goal and a bunch of less-efficient ways, and that life would be simpler if everyone were to stick with the most efficient way. Only through rigorous research, analysis, and writing can you figure out and disseminate what’s most efficient, and that’s what I’m trying to do. Less conducive to enlightenment is trading information, and disinformation, around the online water-cooler, as I noted in this blog post.
Tim: But aren’t you letting lawyers off the hook? Shouldn’t they be responsible mitigating risk, including the risk that arises when you create contracts that are clear as mud? “Legalese” is a source of risk; if I hire a lawyer, I expect them to reduce my risks, not to increase them.
Ken: I share your indignation, but you’re not going to get clear contracts just by asking for them. You have to engage in relentless quality control and make sure that those who are responsible for your contracts, whether they be lawyers or contract-management personnel, aren’t engaged in regurgitating dysfunctional contract language and misconceived conventional wisdom simply because it’s all they know.
And by the way, outside counsel get blamed for clogging up the works and being resistant to change, but I’ve found that in-house personnel can cling to the status quo just as tenaciously.
Tim: How rapidly do you think we can make progress?
Ken: I’ve learned to be realistic. I like to think that I’m helping to change people’s expectations regarding contract language, that we’re moving from chaos to acceptance of a set of standards. Many individuals have already made that leap, and I’m hopeful that institutions will follow suit in due course. After all, what’s great about contract drafting is that the drafter can call the shots. If you think a given approach will offer better results, you can go with it rather than following the herd.
A few weeks ago, I was asked by an IACCM member company to review their approach to assessing contract risk. It was a sell-side organization and I discovered a fairly standard listing of the risk factors that they assessed when dealing with their customers.
Like many companies, this organization was finding it increasingly hard to sell on their terms. So they had developed a standard check-list of the contract provisions that needed review. The content will come as no surprise to any of us – it had several categories of liability, indemnities, warranty clauses, performance undertakings, IP rights, liquidated damages, governing law …. in other words, all the things that could represent risk when things went wrong.
Not surprisingly, the contracts group was struggling to make much impression. Armed with this list, every negotiation became confrontational and a battle over risk allocations. Contract closures were delayed. There were frequent internal escalations because almost every situation resulted in a risk profile that was outside company standards. Senior management was becoming increasingly frustrated and saw contracts (and by extension the contracts department) as a problem.
The issue in my opinion was that risk was being viewed far too narrowly and the consequence was an overall increase in risk – risks of lost business, of increased chances of failed projects, not to mention risk to internal relationships and the future of the contracts team! So we spent time expanding the risk list and thinking about a range of contract terms that often don’t make it onto the typical risk list. These included things like ‘Requirements definition’ and ‘Documented scope’. We added ‘Client resources’, ‘Sources of funding’, ‘Cash flow’ and ‘Performance reviews’. And within these – and a host of other areas – we wrote down what standards need to be achieved to reduce the risk of contract failure. For example, lack of clear requirements is a massive risk, as is an unwillingness to ensure a properly documented scope, with mutually agreed procedures for change. If the customer is not willing to commit resources for on-going implementation or management, we have another factor that makes a positive outcome unlikely.
These additions have led to new conversations, dealing with value and how each party will contribute to success. They are topics that executives understand and can perceive a new level of value-add from the contracts team.
Ironically, our perspectives towards risky terms today often lead to the sources of risk being ignored. We become so fixated on the downstream consequences of things going wrong that we increase the likelihood that they will. It is rather like worrying about the insurance policy on our car, but never bothering to check its mechanical condition.
How good is your risk assessment? Are you managing risks or are you just dealing with limiting their consequences?
Few can have failed to notice IBM’s ‘Smarter Planet’ advertisements. For an organization with ‘Think’ as its motto, this initiative is worthy of attention. I have found many of the ‘advertorials’ of real merit and … well, thought-provoking.
Within the overall Smarter Planet concept, IBM also discusses ‘Smarter Commerce’. A few days ago, the Financial Times ran a quarter page advertisement (which unfortunately I have lost on my travels) which discussed the relative maturity of corporate capabilities at supply management, compared with sales or market management.
The IBM view is that businesses have invested heavily in building integrated supply management (i.e. sourcing) capabilities and that the maturity of these processes has far out-distanced the competence of the sell-side operations. It calls for companies to work on integrating the areas of market management in order to implement ‘smarter commerce’.
I find this perspective interesting. It sounds a bit like consultant-speak to me and perhaps a rather superficial analysis. It is certainly true that many organizations have invested massive sums in standardizing their procurement and logistics process. Much of the investment in ERP focused on integration of these areas with manufacturing and operations. They have also attracted major investments in stand-alone software to oversee compliance, spend management and – more recently – category management.
But in the end, has this actually resulted in ‘smarter commerce’? It seems to me that many investments have actually led to dumber commerce. Rigid standards. Inability to adjust to shifting market conditions. Limited insight to risk. Continuing inability to link to critical financial performance measures. So we continue to see pressure for improved analytics, greater commercial skills, better understanding and management of supply risk …..
So does this mean that IBM has got the assessment completely wrong? I don’t disagree that the sell-side has a long way to go, but I think the challenge is simply different. While buy-side investments were being made in standards and tools, the sell-side was gaining greater investment in skills. The two are fundamentally different. Winning business for the sell-side means needing to be flexible and responsive to customer demands. Much of the software developed over the last 20 years has been designed to disable these characteristics. Sales and commercial efforts have often had to be directed to overcoming the complexity created by such systems.
So my view is that buy-side and sell-side are in quite different positions, but true ‘Smarter Commerce’ demands continuing developments by both – and in each case, it is to find systems and processes that enable more flexible and collaborative relationships, based on stable commercial principles and values.
What do you think?
Commitment Matters 