Last week, I interviewed members of the senior management team from contract management solution provider 8over8. I was interested in their perspectives because they focus on software that supports major capital projects in the oil, gas and utilities sector.
This industry sector has always dealt in relatively complex, high risk activities that require massive investments (average around $11 billion per project, according to 8over8 CEO Clare Colhoun) and are frequently in the public eye. For a range of reasons, the glare of publicity is unlikely to diminish; indeed, energy policy is set to become an even more visible issue in today’s highly interdependent global economy.
8over8 has produced a set of interesting white papers recording their recent experiences in dealing with the industry (available from their website). In our conversation, they confirmed that ‘contracting is being elevated to a higher level’ and seen as a critical ‘strategic discipline’ in managing both the risk and the economics of these major projects. ‘There is a new perception of contract management value’, commented 37-year industry veteran Bob Spence. ‘It is no more a backroom function.’
In support of these comments, there are a number of discussion points I would like to highlight (the complete one hour recording is available in the IACCM Member Library).
First, the role and importance of contracting varies depending on the nature of the service or product being acquired. While many organizations are recognizing this, some (especially on the buy-side) still tend to see contracts and associated contracting skills as a relatively minor element in a wider procurement or sales process. They may apply similar approaches to project relationships as they do to general procurement. As a result, they fail to capture and share key data across the organization. This means that contracting principles and performance indicators are frequently not used in supplier selection (resulting in either the wrong suppliers being appointed, or failure to learn from past experience).
Second, in the experience of the 8over8 team, many companies lack a team that is dedicated to supplier performance management, equipped with the tools that enable it to oversee the best measures and KPIs, undertaking analysis and feeding back into the system to assist in future selection and performance management.
Third, the trend to Global Supply Agreements can be extremely helpful – for example, such standards assist in more consistent and mutual assessment of metrics and lessons learned across a portfolio of contracts. This capability, when used well, can operate to the advantage of international suppliers – but of course it depends on the readiness of both parties to adopt collaborative behaviors and demonstrate a mutual commitment to sustained improvement.
Finally, we talked about the characteristics of ‘good relationships’. Many organizations encounter local resistance to ‘central’ policy and the imposition of global or regional ‘preferred suppliers’. The local teams argue that the tight relationships with familiar suppliers lead to more closely-knit teams, committed to high performance. The 8over8 executives confirmed that ‘local clusters (of suppliers) lead to tight relationships’, but they observe mixed impacts on risk. ‘Local relationships may override procedural relationships, resulting in a more informal approach where there is a lack of documentation and decision making can become rather opaque’.
Automation is of course only one piece in the overall development of contracting competence, but its benefits are daily more evident. However, automation for capital projects is not the same as that for general contracting. Most companies have established good transaction management systems. The key for capital projects is to find systems that assist in managing interfaces (internal and external), facilitating high quality communication and supporting management judgment and decision-making. And when things go wrong – as inevitably will sometimes be the case – it is increasingly critical to have the record of who made what decision, when, on what basis and with what expectations?
We have all seen movies where an unfortunate messenger is held accountable for the news they bring. Throughout history, communication services have been a sensitive area; in the 18th century, US colonists set up a rival to government controlled mail services because they suspected spying by the authorities.
Today, we have growing concerns about the internet, with ‘wikileaks’ prompting calls for increased controls.
It is essential to remember that communications lie at the heart of human progress. Without the ability to communicate, we would have remained in a primitive state. Each major advance brings with it a new set of challenges. The internet is the latest – and among the most dramatic – development in human communication. it creates a universality, speed and ease of information flows that is both energizing and threatening.
At the same time as wikileaks are causing angst to politicians, news comes of the son of a powerful police chief in China being brought to justice because of the same ‘power of the internet’. This individual killed a student and badly injured her companion while drunk driving. In the old world, there would have been a cover-up. The internet enabled exposure and growing public outrage that has called him to account.
When people discovered speech, printing and mass mail services, they soon learnt that these new capabilities must be handled with care. There were boundaries in what should be said or written. Controls depended on a combination of laws (for example, slander and libel) and control (maintaining secrecy). But increasd communication has also always had the effect of holding people – even powerful people – to greater scrutiny and account.
All previous communication methods were to a large extent localized. The immediacy and the global penetration of the internet has changed the rules. It will require all of us to think about how, when and what we communicate. Over time, it should lead to increased global standards over legitimate use and content. But most of all, it will hopefully result in new levels of honesty and truth – because these are fundamental to our peaceful development and to the conduct of trade and commerce.
And that, of course, is why all of us in the world of contracts and negotiation should be fasscinated about the internet and its impact on how we do our job. As with the world at large, we are at the beginnning of this particular voyage of discovery.
“Sustained success is largely a matter of focusing regularly on the right things and making a lot of uncelebrated little improvements every day.” This quote from Theodore Levitt appears in an article in this week’s Economist magazine.
The article examines the success of the German economy, which has been sustained even in today’s challenging markets. It suggests that a significant factor in Germany’s continued strength is the resilience of its mid-market firms, or Mittelstand. These firms tend to operate in very specifc and targetted niches. What is especially interesting is that they have focused on core expertise, often producing items of little apparent interest (castors for beds, shaving brushes, car license plates, snuff, cleaning products). They have not sought mass expansion through acquisitions or development into new market sectors – indeed, it is said that they deliberately avoid competition with global giants (‘Don’t dance where the elephants play’). Some 90% operate in the business-to-business market and most have achieved sustained growth over many years.
So is globalization a threat to these companies? Apparently not; in fact , the reverse is true. On average, they now have sales and support operations in 24 countries and for many, Germany represents a relatively small share of their income. In other words, they have grasped the opportunities presented by global markets and flourished within them.
What are the secrets of success? There are four consistent characteristics, none revolutionary, but of great effect when combined:
- They constantly innovate to stay ahead of potential rivals.
- They are relentless about customer service.
- Their salespeople are passionate about their products.
- They are dogged in their determination to open up new markets.
Niche opportuinities can become very attractive in a global context. This appears to be a message especially understood in Germany and Scandinavia – the article reveals that 80% of the world’s medium-sized market leaders are based in Germany and Scandinavia. But to win in that global context requires a readiness to develop offerings that are differentiated. Typically, that means attention to overall quality. It is interesting that many of the Mittelstand are now driven by service revenue, rather than the previous product-based income. They also tend to think far more in terms of their commercial offering, rather than the terms of contract. They are not risk averse; but by understanding their product, researching their markets and ensuring high quality, they manage their risk through performance, not through the legal terms of a contract.
It is, in fact, a story of “focusing regularly on the right things and making a lot of uncelebrated little improvements every day”. Not a bad philosophy for how we run our operations. Perhaps, as we enter 2011, it might be worth encouraging such an approach within your organization – maybe even building a documented record of achievements to which all are contributing. For those in Legal, Procurement, Contract and Commercial Management, let’s make it a year in which we exhibit those winning characteristics – innovation, service quality and passion for our products!
At a recent roundtable discussion, I was explaining IACCM’s annual study of the most frequently negotiated terms to a group of senior in-house counsel. One of them very intelligently raised the question ‘What terms lie at the heart of most disputes?’
Now this is a prespective we have never directly researched. Each year, we agree that the focus of many negotiations tends to be negative and risk-averse. We have established the areas that should receive more attention. But we have not directly tackled the question of how many contracts go wrong, and what is in dispute when they do. So this year, we have set about fixing that deficiency with some new questions.
IACCM is currently in the process of collecting data for its latest ‘most negotiated’ study and has inserted questions relating to the frequency and source of claims and disputes. (You can see / respond to the survey at https://www.surveymonkey.com/s/topterms2012). While there is a long way to go before the final results (the study was only launched a week ago, so at this point there are about 800 replies), I thought you might be interested by a snapshot of the answers to date.
Based on those answers, the ‘top 7’ areas which engender claims or disputes are:
- Delivery / acceptance (cited by 43%)
- Price / charge (38%)
- Change management (33%)
- Invoice / late payment (29%)
- Performance guarantees / undertakings (28%)
- Service levels (27%)
- Scope and goals (23%)
Of the clauses on which we spend most time during negotiation, confidentiality, IP rights and data security are apparently the least invoked. When there is a significant claim or dispute (which occurs on average less than 10% of the time), these terms appear to be relevant in only 10 – 20% of cases. So it would seem these particular clauses actually matter about 1 time out of 50; indemnities appear to be important about 1 time out of 40; and liabilities one time out of 30.
As the study progresses, we will need to consider what this data tells us about negotiation and increasing its effectiveness and efficiency. Certainly a good topic for a future roundtable!
If you would like to encourage your contacts and colleagues to participate in the latest survey (which means that they will of course receive a copy of the results), please feel free to do so.
FOOTNOTE – July 2011. The final results have now been published and can be viewed at http://www.iaccm.com/library/?id=3958&src=plc
“This paper challenges the established view that IT has to be a capital and people intensive industry. In this new decade, business survival and performance will be driven by business leaders demanding agile technology, fast procurement, speedy delivery, opex-funded transformational initiatives that payback within the financial year and the delivery of value deep into their business’ frontline.”
This statement comes from a paper produced by Intellect, a UK-based body representing the technology industry. The paper calls for a ‘ creative re-think of business models in key areas, such as pricing structures, relationship models and the contracting processes,’ and suggests that without these, the industry will not be ready or able to deliver against customer needs.
Although the focus of Intellect’s research was on the outsourcing industry, its comments ring true for many sectors. Once more, they reflect the importance of the work being undertaken by IACCM and its members to re-orient commercial and contractual focus and practices. The paper endorses the point that the key risk we face is a lack of creativity, a failure to develop economic value propositions that are attractive and affordable. Intellect suggests there are three ‘revolutions’ – technological, commercial and financial – which must be addressed through new processes and offerings.
Today’s market and business conditions call for a new balance of risk and responsibility. Long-term relationships cannot be taken for granted. That implies suppliers must think about new approaches for funding their customer offerings and projects. This may mean greater standardization, with customization through pre-configured options. It also suggests more use-based offerings with flexible call-off mechanisms. And, as I have discussed in past blogs, it signals the end of the ‘caveat emptor’ principle for a growing number of contracts – which means accepting responsibility for the quality of outputs and outcomes.
But the changes implied by this new world are not limited to suppliers. For the new economics and performance requirements to work, customers must look at how they can better manage risks through a more open and collaborative interface with their suppliers. This suggests the need for better and more holistic assessment of supplier selection; today’s narrow, price-based judgments frequently result in the wrong choice. Customers must think about the right form of contract and the right economic balance, rather than using some ‘off the shelf’ contract that may bear little resemblance to the realities of the deal. They must also ensure clear internal processes for implementation and enable rigorous performance reviews which are mutual in their nature. The world in which customers sign the contract and then sit back and watch the supplier perform (or fail) must come to an end. If the nature of the contract demands an on-going relationship, then like all relationships, it will succeed only if there is a commitment by both parties to make it work and to apply time and resource.
This requires more thought about on-going governance. What types of information do the parties need to enable them to perform their responsibilities? What types and regularity of review are required? Who needs to be involved in those on-going discussions, not just to ensure performance or to make amendments, but also to support improvement or innovation? Past blogs have touched on many examples where this thinking has been successfully applied. But in general, I have cited individual exceptions. What we need is embedded practice.
If Intellect is right and if we are indeed facing revolutionary times (and personally, I agree that we are), then the solution will demand new organizational structures and motivation systems (internal and external) that mirror today’s business goals. Foremost among these changes is the need for greater clarity over who is responsible for relationship outcomes and reward mechanisms that incent successful performance. Such changes do not imply increased costs; in fact, they would enable far greater speed and efficiency than today’s contentious procedures and functional structures, which were designed to deliver the business offerings of a past era.
Whether we are buying or selling, prices are never far from our mind. But there are a number of forces that are breaking the mould of traditional pricing and raising its importance in the contracting process.
The driver for much of this change appears once more to be the increased volaitility of world markets caused by a global economy. Wild swings in demand, the constant search for lower cost sources of supply and the recurrent crises that threaten even existing contracts and relationships are creating unique conditions for suppliers, which challenge established pricing and charging methods.
To take just a few examples:
- commodity areas are increasingly subject to short-term contracts between suppliers and distributors. In some markets, there is increasing vertical integration between the producers and the distributors; in others, these links are being broken down. Overall, there appears to be a growing trend towards shorter-term – or even spot – pricing, which makes forward forecasting of supply costs extremely unpredictable in key areas such as metals and energy.
- the behavior of buyers, constantly pushing for lower prices, has had many impacts, both desirable and undesirable. In some cases, it has forced large-scale mergers which have substantially shifted the balance of power in negotiations. In others, it has destroyed the old equation of fixed prices or discounts in return for fixed volumes or guaranteed spend. Now, buyers want low prices AND flexibility, creating a real economic dilemma for their suppliers.
- suppliers are also wrestling with the realities of a market where competiveness and survival depend on ‘escaping the commodity trap’. For many, this means either the regular introduction of new products or services, or transitioning to a high value services or solutions model – or both. In either case, their economic model is fundamentally altered. Rapidly changing products increases the reluctance of buyers to make long-term commitments; a move to services or solutions forces increased deferral of revenue, especially when pricing may now be linked to use-based charging.
- the economic crisis has caused much publicized reductions in public sector spending; but it has also increased the caution of business, which either cannot raise cash or seeks to build massive cash reserves. In both cases, the impact on suppliers is to find new and creative funding methods that allow sales to continue, without demanding substantial capital expenditure by their customers.
In combination, these forces are raising price / charge mechanisms into the forefront of thinking for both buyers and sellers. One interesting question is what impact it will have on the contracting process and organization. When I first became a Commercial Manager, pricing was very firmly part of my remit. It was quite common for contracts and commercial staff to be part of the Finance organization and quite rare for it to be part of the Law Department. Contracts were primarily instruments for business management. In recent times, the pendulum has swung (largely, it seems to me, under the influence of a US model), whereby contracting is often seen as primarily a legal process, with risk analysis trumping economic analysis. Today, this has a negative impact, because there is a pressing need for creative relationships, with close links between cost and revenue analysis, contract models and negotiated terms.
If – as I believe – success in winning business over the next few years will depend on financially-based commercial creativity, does this mean we will see a swing back to a more integrated link between finance and contract negotiation and management? And might this ‘pressing need’ not only impact those in sales contracting, but also reflect into Procurement, with buy-side groups far more engaged in the economic consequences of market management?
Right now, 85% of those who work in the contract management / commercial management field see current job prospects as ‘fair to excellent’.
In the midst of such uncertain economic conditions, this is perhaps one of the most surprising findings of the latest IACCM ‘talent survey’ . Overall morale amongst this community remains relatively high, with 75% declaring that they either ‘like’ or ‘love’ their job (down around 5% from historic levels). They especially like the challenging work associated with the role and particularly enjoy negotiation.
So is life a bed of roses for anyone choosing this career path? Well, no – there are some drawbacks. For one thing, many see limited career opportunities. Even allowing for the fact that a relatively high proportion are approaching retirement, around 39% feel ‘squeezed’ in terms of possible advancement. This results in almost 1 in 2 questioning whether they will still be pursuing this role 10 years from now. And for many, it means they see their best hope of progress in leaving their current employer – and with the job market apparently quite buoyant, this is not an unrealistic expectation.
Pay levels are not a big issue for most of this community. The biggest negative when it comes to their current employer is the failure to invest in people – almost 50% cite this as a cause of dissatisfaction. Taking second place in the list is ‘company culture’ – a factor that has shown steady increase over the years and may merit separate investigation.
When it comes to things that contracts and commercial staff dislike about their job, ‘administrative responsibilities’ is the clear winner, with the issues over career path and concerns about clear role and responsibilities vying for second place.
The IACCM talent survey remains open for input and all participants will receive a copy of the final results. The study will offer comprehensive insights to employee perceptions of their role, its value, current and future skills and the factors that keep staff in these roles engaged. The final report will reveal differences between buy-side and sell-side practitioners, as well as variations between major geographic regions. To participate in the study, simply visit https://www.surveymonkey.com/s/TalentSurvey2010
Today I interviewed Terence Teo, General Counsel for the Asia-Pacific region at Edwards, a precision engineering company.
We discussed risk management – and in particular, how companies can improve their ability to take and manage risk. But first I asked Terence whether he observed significant cultural differences in the view of risk. His answer was broadly no, that he found little variation in the way that specific nations see risk today. He observes more variations based on the level of experience than he does on culture. And he commented that most managers and business unit personnel tend to see risk management as ‘a nuisance’, something that ‘holds things up’.
A number of his observations I found especially interesting. For example, we discussed the use of contract terms in managing risk and especially the tendency by powerful multi-nationals to push risk onto their counter-parties. Terence commented that he is seeing an awakening by companies in the Asia-Pacific region, that an increasing number are questioning this approach and asking ‘What is this risk? Do I want to accept it?’
He also mentioned that a growing number of companies in the region are learning from those in the west and have introduced contract standards of their own, often mimicking the terms they receive. “But in some cases, they clearly do not understand the terms they have inserted, when and how they make sense,” he commented.
I particularly liked one of Terence’s ideas about the approach to selling the creation and use of standard terms. He was discussing the push-back that we often receive when we propose the adoption of standards within the business, how many suggest that flexibility and competitiveness will be lost. “I suggest that standard terms are not simply a form of contract, but rather a tool, a checklist, a way of educating that supports more rapid and accurate risk analysis,” Terence suggested.
We also reviewed a number of important market trends – for example, increasing demand for performance bonds, parent guarantees and other forms of security. Terence also confirmed the steady shift away from thinking of the contract as something split between legal terms and business terms. “The tendency to leave scope and service levels to technical staff has changed; contracts staff must ensure (the whole document) makes sense, hangs together. They must engage in structuring and adopt a systems approach throughout the relationship.”
“People tend to run away from risk,” according to Terence. To gain their attentionand support requires ‘a diplomatic approach’. “Talk, explain, use the language they are speaking. Explain issues through case studies based on events within your company. Show people that risk is a universal problem, but that there are solutions.”
In the view of this General Counsel, global variations in the perceptions of risk and the role of the contract are narrowing fast – and in his company at least, there is a strong focus on the role of Legal and contracts staff in providing the types of training that ensure business-wide understanding and consistent approaches to risk management.
The full recording of the interview with Terence Teo can be accessed in the IACCM member library at www.iaccm.com
Another recent IACCM message board posting that caught my interest was a question regarding new market entry. It came from someone in our fast-growing Indian membership base, who was concerned about his company’s struggle to gain traction in new markets.
My past experience leads me to believe that a remarkable number of companies – in particular small and medium enterprises – attempt to expand their operations on a purely opportunistic basis. That is, they chase bids, rather than plan and manage their market entry. In such cases, it is hard to know whether they are better off winning or losing the bid – because if they win, they suddenly discover the implications in ters of resources and support.
In reality, however, they rarely win and instead they absorb a lot of time and money in abortive efforts. And this is where a strong Commercial department should be showing its value. Commercial Management must be about more than facilitating individual bids and deals; it must also provide coherent insights to market manageent and business development.
My answer to the question was brief and did little more than touch on some of the options that could be considered. The questioner was especially concerned abou the attitude and support of local sub-contractors for major EPC contracts, hence my comments reflect areas of that concern.
“From your question, it sounds as if there may not be a coherent business development strategy. New market entry is never easy or cheap. It mostly depends on building local credibility, which is in part by having strong reference sales. Frequently, companies do this by:
a) seeking opportunities to win business with the subsidiaries or sister companies of existing clients (i,e, situations where they have an established record and credibility).
b) a readiness to establish presence through acting as a sub-contractor or through joint bids. For example, have you sought opportunities to partner in this way with some of the local companies? This offers strong opportunities to build your name and reputation – to a point where local suppliers / contractors may start approaching you for business opportunities.
c) what are the typical terms under which suppliers / contractors in that country operate today? Can you offer better terms, so that those companies not only want to partner with you, but also want you to win? Very often, they will have some influence and contacts. You should be incenting them to actively support your bid.”
The purpose of this post is three-fold. First, as contracts or commercial professionals who care about company performance, risk and profitability, we owe it to management to call out when we see wasted and expensive efforts that have little chance of market success. We must not allow our traditional deal-based focus to blind us to the bigger pricture.Second, we must ensure our comments are accompanied by advice on how to do things better – make sure we are not simply seen as obstructive or negative. And third, what additional thoughts do you have regarding potential approaches to market entry in a situation such as that outlined by the original questioner?
(see this post at https://www.iaccm.com/members/network/coi/?coiid=1§ion=forum&post=2087&java)
Commitment Matters 