Last week, a series of events confirmed the scale of the challenge and opportunity facing the contracts and commercial community. Each day, I had meetings which reinforced the importance of equipping organizations with increased commercial acumen, at both a tactical and strategic level. They also illustrated the scale of the task facing IACCM, as it is increasingly looked upon as the association that can offer leadership in supporting today’s business needs.
My week began with a UK member meeting in London. I have already reported on the excellent presentation by Srini Krishna, who described Microsoft’s outsourcing of finance back-office operations. At the same meeting, Ross McKean and Dave Halliday (partners at law firm Baker & McKenzie) built on IACCM’s annual research of the most negotiated terms and conditions with results from a study they undertook on the key issues in outsourcing contracts – I will write more about that later this week.
On Tuesday, the latest IACCM Executive Roundtable was held at the UK’s National Audit Office. In recent years, the NAO has issued a number of reports which highlighted the absence of commercial skills within the public sector and the impact this has on project and contract outcomes. This meeting focused on the issue of skills and sought to address the question ‘how do you overcome a risk environment which results in an inefficient use of capital?’ The resulting conversation led to a lively debate over the differences between ‘contract management ‘ and ‘commercial management’ (an old chestnut), resolving that in essence ‘doing contracts’ can be an excellent foundation for ‘being commercial’. It was suggested that there are really three tiers to progression, with the Foundation level being about technical competency, understanding standards and compliance, developing analytical skills; the Mid-tier is a time to develop softer skills of relationship management, communication, and business judgment, combined with greater depth of financial awareness and modelling, often applied in a deal-making environment; and the Advanced tier is when a true commercial expert can set the environment for top management, either in terms of commercial policies and strategies (eg for a business or product line), as well as handling the most complex market opportunities.
The week progressed with some excellent discussions with Achilles – a name not yet well known to the sell-side contracts community, yet it should be. There is potential for their work on supplier compliance and selection to have a major impact on our commercial work and contract terms. This conversation once more illustrated the importance of the contracts community stepping back and exerting more influence over its environment. Achilles represents a tremendous opportunity to eliminate much of the low-value redundancy from negotiations and bidding. Why aren’t we on top of things like this?
That afternoon, I met with the Chief Procurement Officers of two large international corporations, representing a group of CPOs who are determined to tackle the skill issues that they face within their organizations. They perceive a major gap in the ability of today’s procurement staff and training to respond to the value needs of their business. Leadership, relationship management, analysis, commercial judgment – these are the types of capabilities urgently needed. They also feel that external professional bodies must be far more effective at addressing the demands of rapid change and responding to the pressures of global markets. Exciting stuff for IACCM, because these needs go to the heart of our purpose and activities.
Thursday included a lively session with the UK Cabinet Office, where we had a group of IACCM members acting as ‘the voice of the supplier’ and offering constructive input to the significant efforts that UK Government is making to improve public sector acquisition. The thoughtful discussion reflected well on the approach being taken by commercial leaders as they seek to influence both the buyers and their own management in developing more robust and transparent trading terms and relationships. Again, I will share more details in a later blog.
And on Friday, I had been invited to present to yet another group of CPOs, this time in Brussels at the Procurement Leadership Council. Once more we had a lively discussion, the focus this time being on the future Procurement ROI (return on investment) and how to generate greater support for an end-to-end process role, including supplier relationship management.
As with so many weeks, there is so much to write about. The themes for both buyers and sellers are so similar; the opportunities for shared learning and action are so great; and the prize to be won from increased harmonization are so large. As the week goes on, I will expand on the issues I have touched on in this blog and share my excitement over the growing momentum and all that it offers to the contracts and commercial community.
I received an interesting note from Prof Rob Handfield (Poole School of Management, NCSU) today. In it, he said:
“A recent Hackett Group study found that supply chain management functions in organizations polled are working concurrently on nearly 10 initiatives deemed as “critical” or “strategic” to the enterprise. As such, people with Project/Program management skills, solid business acumen, analytical capabilities, and an ability to manage relationships are in short supply. To drive any transformation initiative, it is imperative that companies keep their staff engaged in those areas that are resource intensive and value-added in nature. This means not only retaining the people who are key in leading these initiatives, but also building a pipeline of talent that will fill the emerging gaps in capabilities that are starting to appear in the organization. Establishing the right mix of new talent, seasoned veterans, and mid-career hires is a delicate balancing act that must be aligned with the right HR strategies to support this effort.”
These observations are certainly reflected in a growing number of meetings and in discussions I am having with senior management. Of course, part of their challenge is how to balance the volume of operational workload with these more strategic initiatives, but increasingly there is concern that their existing staff has simply been taught the wrong things. This includes a growing frustration with traditional procurement training and certification specifically, a feeling that existing professional bodies are out of touch.
IACCM has been fortunate that it was formed during the internet age and on the premise that many of the skills raised in Rob’s note were becoming critical to management in the global networked world – project and relationship management, business and commercial judgment, analytical skills – and these lie at the heart of our value-driven training and research.
But the transition remains hard to make. Even on the sell-side, where many staff have greater business acumen, deploying resources onto the areas of strategic value is proving beyond many functional leaders. In part, I think there remains too great a tendency to re-invent the wheel. One thing that leaders must learn is to make greater use of benchmarking and opportunities to network more effectively. This power of shared knowledge and information also lies at the heart of IACCM training programs – but it is remarkably hard to get people to move beyond the idea that they must do everything themselves, or that their network is constrained by who they happen to know.
“If we don’t trust our partner. we should recognize that the problem lies in our selection process”. That was one of the observations delivered by Srini Krishna, Director of Global Supplier Management at Microsoft, when he spoke at this week’s IACCM Member Meeting in London.
Srini has a leadership role in managing the outsourcing of Microsoft’s finance operations. This global project started from a base of confusion, in that there was no common process in place. It had all the hallmarks of a potential outsourcing disaster, yet has proven to be extremely successful.
Key to the turn-round was the readiness of both Microsoft and Accenture, their supplier, to come together and work constructively on the program. Srini outlined five core principles which lie at the heart of success:
- clarity on outcomes – a simple definition of the goals.
- a focus on ‘what’ not ‘how’ – resisting the temptation to dictate the detailed process, even when things are going wrong.
- ensuring that the outcomes are not only well defined, bu also measurable – and that measurements are kept few in number and appropriate to the goals.
- a pricing method that is simple to operate and allows focus on improvement and innovation.
- a robust governance system that delivers insight, not arguments.
As an example, Srini highlighted how traditional pricing and budget models tend to make every change an item for negotiation. “We designed an approach that is capable of dealing with change without always forcing negotiation.” He also commented on the need fror greater clarity over roles and skills. “We quickly realized that there was a disconnect between the internal business manager who was trying to deliver services and the vendor manager who saw their task as periodically beating up the supplier. There had to be far better communication, different communication.”
The outcome sought by Microsoft became a very simple statement – they wanted transformation of financial operations. Measurements of success were also simple – for example, to achieve top quartile benchmarked performance over the lifetime of the contract, as measured by an independent third party. Quarterly reporting to senior management also ensured continued focus and a senior attention that meant issues and opportunities were quickly addressed at the right decision-making level.
“Sound governance is the key to it all”, concluded Srini. It sets the tone for the relationship, drives accountability and clarity of roles and responsibilities, and ensures transparency, a common view of the truth.
With these ingredients in place, it became possible to deal with the complexity of the program, which was subject to massive variations between countries in process scope and maturity, the need to cope with global change and volatility, the introduction of new products and commercial models and a multitude of stakeholders and users.
Srini paid tribute to the thinking introduced by Vested Outsourcing and the simple model this offers for handling complex situations. His presentation should certainly be viewed by anyone who wants to ensure success in their outsourcing operations – and I will be asking him to share it with a much wider audience.
I held a teleconference last week to gain insight to ‘the voice of the supplier’, for a meeting this week with a national Government agency.
I wil share various of the findings in a later blog, but one interesting element to emerge was the preference for contract standards and model terms. This particular agency has recently withdrawn its standards and the result has been far greater autonomy for individual departments and purchasing groups. The experience has caused the supply base to push for a return to the (often maligned) standards of the past.
Their point is that at least those standards were predictable and they could understand and assess their risks. In this new environment, they find they are subject to arbitrary terms which take far longer to review and often result in unknown or unacceptable levels of risk.
We often call for flexibility, but must remember that it is not always going to operate in our favor – and it also carries hidden costs. A consistent baseline is a good thing to have, so long as it is not applied with too much rigidity and has the ability to adjust to shifting needs or market conditions.
My colleague Mark Heminway has caught the contract management bug to such an extent that his viewing of the Oscars was affected by some of the key messages that IACCM is delivering. He wrote to me with the following observations:
“When watching the Oscars last night, the one thing that struck me is how hard the producers of the show worked to show that “Hollywood” is a global business. “Hollywood” may be located in California, but it also may be the best example of a global business we have. Just looking at some of those who were nominated points to this. The Actors and Actresses came from different countries. The winning song was actually written in New Zealand. Shots from around the country and globe come together to make a movie. And everyone appreciated it all in the finished product, and of course the movies themselves are distributed and watched around the world.
It also may be the best representation of outsourcing and collaboration that is visible. Many of the winners from the same product, the film, worked for different companies, doing their best work to enrich the overall experience. Not one of the major movies was done solely by one company. But a great movie was successful only because of great collaboration.”
And of course, the key to this success was a shared vision and the commitment to work hard for a significnat reward. Binding the whole production together is a series of contracts that ensure the roles, responsibilities and rewards are well-defined and lead towards an excellent outcome.
Next year, perhaps we can introduce an Oscar for ‘Best Contract’, then Mark will really be on the edge of his seat!
People, businesses and societies struggle with the reality of win-win thinking. While the concept may be attractive, the reality suggests a level of compromise and trust that often proves threatening.
In many ways, this is most evident at the macro-economic level. While nations believe in trade, their commitment to free trade is highly variable and the mechanisms to calculate true economic benefits are largely missing. Outsourcing is a good example. When based on relative ability to perform, it is clearly beneficial. When based solely on labor arbitrage, it probably is not. At the political level, economics is frequently depicted as a war, a battle between ‘economic units’ (or nations). Society is led to perceive the economy as a battleground in which there are winners or losers. Yet economics is potentially about expanding benefits for all.
This same mentality has expanded into the world of contracts and their negotiation. Given they are primarily economic instruments, that is probably not surprising – but of course it influences and undermines results. The winning mentality creates tensions that make cooperation difficult and often sets the scene for long-term ‘revenge’. Cultures in which collaboration to mutual benefit remains more common are in concept better placed to drive economic benefit, yet history suggests the actual winners are those who grasp the opportunities for themselves.
So will win-win ever in fact be allowed to flourish and get beyond a nice theory that is occasionally seen in practice?
A trend that will be of increasing significance to those responsible for business commitments is the steady shift in regulatory requirements. In particular, regulatory authorities worldwide are pushing companies to be responsible for the quality and integrity of their supply chains.
This results in a variety of shifts in current practices. For example, it will force supplier selection criteria to be far more focused on the reliability of the supplier.But this raises the question of how customers will evaluate their supply alternatives. For example, will each independently evaluate the supply base, or will third parties step into this gap? And, given the reluctance of the regulatory authorities to be precise about their requirements, what standards will be used to determine compliance?
Suppliers must think about ways they will demonstrate their adherence to the regulatory standard. For established majors, they may claim that their reputational risk is an adequate guarantee of compliance. They will be reluctant to share details of their approaches to cyber-security or disaster recovery, citing both competitive advantage and the need for complete confidentiality. But will this be accepted? And does it mean that smaller companies or start-ups are squeezed out of the market?
And if more and more aspects of commercial capability are covered by regulation, where exactly does that leave flexibility? What terms will remain negotiable in an increasingly regulated and standardized world?
This may not surprise you: Business leaders tend to be optimists – and in many cases over-optimistic.
An article by Daniel Kahneman highlights this tendency and also the negative consequences that often come from this optimistic outlook. In particular, there is a tendency to overlook or discount risks, an over-confidence in the ability to secure a successful outcome.
Many in the world of contracts will not be surprised by these findings. We often struggle with the realities of the deals that our executives promote. But this optimism has specific bi-products for those in the world of contracting. One is that the reluctance to consider risks leads to incomplete analysis of them. It also leads to a mentality that ‘we can fix problems when they arise’, which goes a long way to explaining why requirements and scope are frequently incomplete or poorly defined.
Looking for precision or completeness, wanting to discuss risk issues – these are seen as ‘negativity’ or being unduly worried. And a direct consequence of this, according to Kahneman: “people and companies reward the providers of misleading information more than they reward truth tellers. An unbiased appreciation of uncertainty is a cornerstone of rationality — but it isn’t what organizations want. Acting on pretended knowledge is often the preferred approach. People and companies reward the providers of misleading information more than they reward truth tellers’.
A further result of this preference for optimism is that optimists tend to stick together – or at least, ‘the inner circle’ is formed of those who do not challenge this rosy view of the world. People who raise uncomfortable questions are generally excluded from the team or the conversation.
None of this will come as a great surprise to many in the contracts, commercial or legal space. We often think of this in the sense of feeling under-valued or under-appreciated. So is there nothing we can do about it? Does the nature of our role – as responsible advisers, people who tell the truth – mean that we are condemned to be at the margins?
I don’t think so. I believe it is a matter of how well we communicate and how selective we are in doing it. Certainly it is a bad idea to always be connected with failure, bad news or negative issues. So one thing is to focus on delivering positive messages – approach situations with solutions, not problems. Another is to be selective. Do not weigh people down with a laundry-list of issues – just highlight the things that really matter. And take responsibility and ownership. Team players are those who are ready to work on finding a fix to the problems, not simply putting them on the table and walking away.
Despite the conclusions of this thought-provoking article, there are many in the contracts and commercial community who do become valued advisers to senior management. If you are not among them, you should first look at yourself – and maybe a bit more optimism about your own contribution and potential would not be a bad place to start!
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.
Commitment Matters 