For centuries, professional development has depended on associations and other membership bodies that delivered a range of physical services. These included regular network meetings and classroom training, with internships or apprenticeships, perhaps supplemented by some forms of distance learning through ‘correspondence courses’.
The latest member satisfaction survey from IACCM provides fascinating insights into how rapidly this is changing (see summary results below). In particular, the findings reflect the dramatic influence of networked technologies. LinkedIn is now viewed as a more effective source of support than traditional professional associations; the demand has swung very rapidly from a desire for physical training to e-learning.
These trends have doubtless been driven in part by cost-cutting. People simplay can’t get budget to attend external classes and they cannot justify the massive cost differential from on-demand, web-based courses. Similarly, with time under so much pressure, the inclination to attend local member (or ‘chapter’) meetings is eroding. Also, the value of that local networking has declined as many trading relationships today are not local.
This data does much to explain why IACCM’s mix of global membership, high-value networking (without the intrusion of spam and endless advertisements), low cost, web-based research, advisory services and learning products, plus an integrated on-line library, is proving so powerful. It is reflected in membership growth of more than 30% in 2010 year to date and revenue growth of 28%. The Association’s goal has been to stay ahead of the on-line competition; it has been our beleif that the world for professional associations would shift dramatically and they would be forced increasingly to compete with the business and social networks offered through services like LinkedIn, Plaxo and even Facebook. Thus it is proving – and it suggests our strategy of staying ahead of those networking sites has been correct. The recent launch of IACCM’s new website has placed even more ‘clear blue water’ between the Association and its competitors.
But it is a tough world and the need for continuous change and service improvement will not diminish. Just as the professionals themselves face constant pressure to raise their skills and value, so wil those who seek to provide them with the services that support those skills.
The summary findings from the recent IACCM survey were:
- Only 2.3% responded that IACCM is not meeting their needs in an effective way
- IACCM was rated 30% more effective than its competition. LinkedIn was placed second, with ‘other professional associations’ in third.
- Most frequently members chose IACCM because of a personal referral
- The most important and the most valuable events are Ask the expert calls (score 3.8 out of 5)
- The most important and the most valuable research is the top terms survey (score 4 out of 5), closely followed by benchmarking study (3.9 out of 5) and talent survey (3.7 out of 5)
- The most important and the most valuable professional development resource is the learning modules (4.2 out of 5)
- The most important and the most valuable general resource is the library (4 out of 5)
- No service scored below 2.8 out of 5. Lowest ranked were new members calls and vendor-related services
- For low ranked services the majority, typically around 70%, have not actually tried the service (in many cases because it is not personally relevant).
- There is a continuing – and substantial – decline in the perceived value of physical training programs.
- The areas of greatest demand for additional services are on-line training and mini conferences. This is a switch from previous years, when more local member meetings and more physical training classes topped the list.
- 95% responded that they would recommend IACCM to a friend
Increasingly volatile markets and growing supplier dependency have combined to make contract exit strategies far more relevant and important than they were in the past.
The drivers for contract exit may be planned or unplanned. They range from factors such as financial distress or reputational risk, through to changes in market conditions or disinvestment.
Contracts have always had termination provisions, typically allowing early exit for non-performance and increasingly perhaps including some form of ‘termination for convenience’. The extent to which specific consequences of termination were spelt out has tended to vary, but again our contracts are likely to have specific obligations or survival clauses. But are these still adequate and should companies have more thorough approaches to their exit planning?
These were questions that a group of IACCM members sought to answer during a conference call last week. The conversation included practitioners from a number of large global corporations, as well as some experienced consultants and law firm partners. The group agreed that the consequences of exit – whether voluntary or involuntary – have become far more significant today, due to the heightened dependence on key suppliers (for example, in areas such as core software, IT systems and outsourced relationships). However, most felt that exit activities still tend to be handled on an ad-hoc basis, rather than through a well-defined or consistent process.
There appeared to be four major challenges facing those who would like to improve the quality and consistency of exit planning:
- It takes time – and the business is unlikely to accept delays in getting to contract caused by planning on how to exit
- It is not practical to consider every eventuality
- Rights of exit carry a cost; suppliers need to gain recovery so early exit can have severe financial implications
- In many cases, the business concludes that exit is not practical and allows contracts to run their course or undertakes specific renegotiation
However, these obstacles do not eliminate the desirability of having some form of exit plan in place. Various suggestions were made about ways to develop and manage this:
- Checklists based on past experience should be developed
- Checklists or plans can also be documented based on ‘reverse engineering’ the original transition plan
- Include plans – and their update – into the annual planning process, including option analysis
- Review existing contract models; where exit rights may be important, consider this within the original contract structure (eg asset ownership, software license ownership) as well as within relevant terms (eg data management, escrow provisions, obligations to assist transfer)
- Incorporate exit planning into the risk management and review process. For example, the relative risk associated with a particular product or service should be guiding supplier selection – not only in terms of their reliability, but also the level of future negotiability.
- Proactively negotiating a new and more detailed termination agreement once the actual situation is known – rather than solely relying on the more hypothetical and more general provisions of exit arrangements negotiated in the original agreement
In general, suppliers are not averse to discussing exit plans and their readiness to do this – together with the quality and integrity of the process they follow – could be a significant factor in supplier selection. However, a level of specificity may be difficult to achieve because there are too many hypotheticals – what’s the basis of termination, what’s the relationship like, how full or how partial the termination is, whether services are going to one new supplier (external or in-house) or many new suppliers.
Some interesting points to consider when thinking about exit plans included the need to recognize that many terminations are not absolute; they may cover only part of the relationship, or they may result in a phased wind-down of service. In many cases, it may be possible to transition the supplier to a different project, thereby alleviating resistance and financial implications. Factors such as these significantly affect the nature of any negotiation at the time of an exit. In addition, the consequences of exit can vary between industries and geographies; as an example, it was suggested that in Europe, employees normally transfer back in the event of the customer terminating an outsourced service, whereas that is less commonly the case in other geographies. Another influence that was discussed was the impact of a mutually agreed exit, versus a contentious exit; in the latter case, the plan should allow for the need to switch the relationship management and performance teams, since they will rarely have positive views of each other and cooperation (which will be crucial to smooth transition) is unlikely to be achieved.
Overall, there was agreement that companies should seek to record and document lessons learned; that it is wise to have more in-depth planning for key strategic relationships; that these plans should be reviewed and updated on at least an annual basis; that exit planning should be an inherent element of risk management and mitigation; and that checklists of key points to consider are valuable and can potentially be applied across a wide range of contract relationships.
(My thanks to Richard Hawtin, partner at Baker & McKenzie, for his valuable contributions to the original discussion and this summary)
The IACCM Message Board generates many interesting questions and replies. One that recently caught my eye – being a perennial question – related to the goals and objectives for contracts / commercial staff.
The original query asked: “I am looking to reset the objectives of my senior commercial team members. They are the main commercial points of contact for £30m-£60m consultancy businesses and have small teams (3-8 employees) reporting to them. I would be interested to know what objectives have been put in place by IACCM members for similar type roles and responsibilites.” A subsequent clarification confirmed the scope of role of the group – pricing, negotiation, post-award oversight / change, partnering agreements / marketing agreements and working with the supply management team to undertake required sub-contracting.
It may seem surprising, but I often find that groups design their goals and objectives in isolation from the declared corporate goals or strategies. We are so focused on our internal view of our role and value that we fail to relate it to the outside world – in particular, the perspectives of what matters to our executives. As a result, we struggle to directly relate our work and output to the things they care about.
As an example, I went to the website of the company from which this question emerged and made the following comments:
“The key point is to ensure alignment with declared company goals and strategies. The commercial team should be able to point at ways it is directly contributing to executive priorities.
For example, most commercial groups tend to focus on ways they will contribute to profitability and risk management. But these, while critical, can be rather nebulous. We need to translate them into specific aspects of contribution. In reading your company’s business goals and strategies (from your website), a number of characteristics jump out at me as things you might include:
– key words are ‘trusted’, ‘global’, ‘integrity’, ‘teamwork” and ‘care’: what aspects of commercial behavior and performance might demonstrate these qualities? I would see teamwork and integrity as items of specific responsibility for commercial; I would suggest that demonstrated understanding of global markets and trading terms might be another for major contribution.
– strategic attributes: the list includes excellence, safety, responsiveness, listening, openness and continuous improvement. Most of these characteristics are fundamental to the way that contracts are negotiated and the governance procedures within them.
So you might want to brainstorm the types of specific objective that would demonstrate how commercial is delivering against these characteristics. That could include things like reduced cycle times; increased / sustained satisfaction of user groups with the commercial process; reduction in claims / disputes; evidence of continuous improvement in updated commerial policies, practices, procedures and terms.
I hope these ideas are helpful. Often a brainstorm around the desired characteristics and ‘what can we do to contribute to them’ may yield some good collective ideas – with resulting buy-in. I’ll be happy to discuss with you, if that would assist.”
I know that many others have struggled with this problem of objectives and I hope a few may contribute their ideas to this important topic.
(IACCM recently published an updated series of benchmarking results which include the most commonly used performance measures.)
Most intelligent business people long ago stopped believing that ‘Once you sign a contract, you should put it in the drawer’. Yet for many, contracts remain primarily a record of a specific deal, transaction or relationship and, while they may be used to inform, communicate and govern business activity, it is rare to find them perceived as critical assets.
Yet assets they certainly are – and effective analysis reveals an invaluable source of strategic information.
Yesterday I moderated a webinar for Pramata, which describes itself as ‘the contracts intelligence company’. The session featured Tom Carretta, Associate General Counsel at FICO (perhaps better known under its former name of Fair Isaac Corporation). The reason that the session so excited me was because it represented a rare example of the portfolio-based view of contracting that we have long promoted at IACCM. Tom was clear and to the point. By thinking about contracts as sources of corporate data, the law department at FICO has been able to transform its image and become core to strategic business decisions.
As in many companies, FICO long ago invested in a basic contracts repository and document management system. But while this ensured that contracts no longer went missing, it did little to enable in-depth research or understanding of the company’s commitments, contracting trends, client or portfolio analysis. Through their work with Pramata, FICO now has powerful analytical tools. They can review the variations or history within a particular account. They can see the varying patters of commitment, risk or financial performance of different industries, sectors or business units.
Why does this matter? For a whole host of reasons, many of which Tom described and explained. Senior management and account management can now undertake analysis of major customer history; the finance organization can observe varying patterns of discounting or price negotiation; operations can review commitment trends and patterns of ‘deviation’ from standard obligations; Legal is able to review industry risk profiles and testify to regulatory or contractual compliance. All of this data supports in-depth diagnostics – for example, the need to change or update product or service offerings; potential benefits to be achieved through improved sales training or local empowerment; potentially even decisions to invest or disinvest in specifc industries or geographies, based on their economic or risk performance.
Tom described the pressure that Legal were under to use established ERP solutions for contract management. But fortunately, with the support of other executives, they realized that such systems might bring control, but would never offer meaningful business insights that would turn contracts from instruments of control to strategic business assets. Nor can ERP systems readily allow ‘customer intimacy’ in the way that a more flexible, ‘contract intelligence’ system offers.
At FICO, contracts – and those who oversee them – are no longer viewed as a ‘necessary evil’, but instead have become an integral tool to business management and the realization of market value. I commend Tom’s presentation to all who care about their contribution to business performance.
We have a choice in how we manage our relationships. We can focus on what divides us, and seek to protect ourselves. Or we can work towards reconciling differences, finding ways to work within them towards some shared goals or visions.
That sentiment was the essence of Barack Obama’s speech in Indonesia this week – and it is a critical message for those who seek to negotiate and manage trading relationships. President Obama empahsized the growing interdependency that we all have on harmonious relationships. Of course there will be disagreements, and we must create structures within which to manage those. But if we focus only on the negative, we make the divisions and conflict almost inevitable.
“Gone are the days when seven or eight countries could come together to determine the direction of global markets,” he observed, in another principle that is important for all corporations and negotiators to remember. “Our world has grown smaller and while those forces that connect us have unleashed opportunity, they also empower those who seek to derail progress. One bomb in a marketplace can obliterate the bustle of daily commerce. One whispered rumour can obscure the truth, and set off violence between communities that once lived in peace. In an age of rapid change and colliding cultures, what we share as human beings can be lost.”
Trading relationships are potential sources of growing unity, or of division. The benefits of trade drove the growth of inter-tribal behavior; yet disputes over trade – and relative economic wealth – have also been the source of most human conflict.
For those in the world of contracts and negotiations, we have a choice regarding whether we start with assumptions of bad faith and lack of trust, or whether we seek a path of collaboration and mutual benefit. Many negotiations and trading relationships today appear to follow the former route. Our anonymity, shielded by electronic tools and systems, has doubtless worsened that situation.
If we wish to excel in the value we bring to our business, we must challenge our assumptions and be ready to ‘think the opposite’. A good start is to focus less on what divides us and more on what may potentially unite us – a shared vision, rather than an assumed apocolypse.
I am told that the latest target for Procurement is ‘the elimination of sole source supply agreements’. Apparently the most recent ‘best practice’ thinking is that sole source always equates to higher prices and therefore opportunities for savings – typically around 15%, acording to my source.
This news, if true, represents yet another example of the simplistic – indeed, primitive – thinking that comes from many advisory firms and consultants. It is one more illustration of the confusion between price and cost – and unless Procurement starts to demonstrate understanding of the difference and fight for new value measurements, its relevance to the business will continue to be narrow and marginal.
It is certainly true that sole source suppliers – like long-term incumbents – can take the customer for granted and fail to maximize their value. But in many cases, security brings levels of alignment and trust that result in substantial cost savings, continuous improvement and innovation. If these are absent, it may have little to do with the threat of competition and more to do with the weakness of performance and relationship management.
The US auto industry was a case in point where aggressive use of competition caused relationships and loyalty to be fractured. Recent reports suggest that sole source supply arrangements are re-surfacing in a big way, as part of the rebuilding of the industry. There are many occasions where the price of the commodity is but a fraction of the total cost of the relationship. Cheap prices do not generally result in high value relationships. And poor relationships certainly do result in higher costs.
Sophisticated sourcing groups are smart at economics. Unfortunately they are relatively rare – not least because the measurements used to measure Procurement success remain so narrow. Many times, it is the CFO who is to blame for this. Their refusal to allow a change – or increased balance – in Procurement metrics is damaging the bottom line. An unthinking attack on sole source supply relationships would be yet one more example of failure to understand true costs and the wider business interests.
The most recent World Bank report on ‘Doing Business’ provides a useful complement to IACCM’s market comparisons of international contracting.
The IACCM study (released in September 2011) focused on the relative ease of doing business between countries, whereas the World Bank explores the barriers to internal business set-up and operations. Therefore the characteristics that form the basis for study are somewhat different, but with interesting overlaps. For example, each report covers the issue of contract enforcement and both reference the underlying regulatory environment.
The news from the World Bank is encouraging, in that it reports a steady improvement in the business environment. Governments are recognizing the fundamental importance of enabling business start-up and operation and many have taken steps to simplify and ensure a benign regulatory regime. Among those highlighted are countries such as Kazakhstan, Hungary and Rwanda. Sub-Saharan Africa and South Asia remain the most difficult – and therefore most risky – areas in which to do business.
Technology lies at the heart of many improvements. “New technology underpins regulatory best practice around the world,” said Janamitra Devan, Vice President for Financial and Private Sector Development for the World Bank Group. “Technology makes compliance easier, less costly, and more transparent.” This has included the way that court cases are filed and handled, as well as the automation of business registration, export-import procedures and tax collection.
Top of the list in terms of ‘ease of doing business’ are Singapore, Hong Kong, New Zealand, UK and the United States. This reflects the findings of the IACCM research, although for international trade specifically, the IACCM list gave pride of place to Canada (7th in the World Bank report), with Australia and the Netherlands also faring well.
Today I participated at an event organized by Huthwaite, a leading provider of negotiations training. The theme of the conference was ‘Winning With Procurement’ and its objective was to assist Sales organizations to better understand Procurement and how to work with them, rather than against them.
Huthwaite presented the findings of research that confirmed the largely negative view in which Procurement is held by Sales. The perception of a rules and process-driven organization, focused on cost to the exclusion of value, was a dominant theme, not convincingly dismissed by the presentations of several senior Procurement leaders. Their protestations of growing professionalsim and commercial judgment often appeared to reflect aspiration, rather than the day-to-day interactions experienced by most in the room.
However, the session raised broader questions about Sales behavior and the extent to which commercial teams are taking actions to better equip Sales. For example, competition is not just about terms and conditions, it is also about having the data to back them up. We market value – but do we quantify it? Do we commit to it? Do our commercial terms inspire confidence in our ability to deliver – or undermine it? Do we strive to enable Sales to answer questions and display knowledge – or do we constrain them and thereby frustrate the customer?
A clear message from the event was that Sales must stop avoiding Procurement – such behavior seruiously threatens win rates. But to engage effectively, Sales must understand and support the Procurement agenda. As with all stakeholders, you can fight them or you can make them your ally. To become an ally, it is essential that you respect and respond to their agenda – make them look good. So if we want Procurement to understand value (rather than simply make judgments based on commodity cost), we must provide hard data to support the value proposition. If we cannot quantify our ‘added value’ relative to alternative suppliers, how is the customer supposed to do so?
A common theme of the Procurement presentations was the feeling that many Sales presentations are flaky and lacking substance. Contracts and commercial must increasingly work with their Sales teams to ensure substance and to support meaningful commitments.
There were useful pointers on many other subjects, including an attempt to answer the question ‘Is it worth bidding?’ Survey results show that if you have no pre-existing executive contact and are not being offered access, you are wasting your time. So don’t bid without access; demand it as a condition of participating. If it is denied, don’t bid.
Another important lesson is that successful sellers involve procurement early and understand their needs and how they can assist them. While this is in part a responsibility of Sales, it is noteable that high-performing contracts and commercial groups are increasingly taking a lead in these activities, to ensure they are also engaged earlier and provide more direct business value in understanding and responding to customer needs, establishing the framework for a successful Sales negotiation.
My day was once more filled with a wide variety of interesting discussions, covering industries such as technology, aerospace and engineering, and countries as varied as UK, China, Canada, US and Singapore. In all cases, the growing importance of contract and commercial competence was evident – and the fact that this must be through a more integrated strategic plan, rather than relying on case-by-case application of resources.
During one of my calls, there was lively discussion about the extent of cut-backs in staff and resources. This related especially to the extent of such cuts in customer organizations and the negative effect this has on contract performance.
The feeling among the suppliers on the call was that successful execution increasingly depends on their willingness to fill the gaps in the client organization. This demands that they apply extra resources and take on additional costs – otherwise, there is an increased chance that contracts will fail.
This is an interesting perspective and is certainly true in many industries, especially the public sector. And as one participant observed, it is particularly onerous when customers simultaneously press for price reductions.
However, I suspect that this challenging environment will not be going away any time soon. So forward-thinking contracts and commercial groups will be working on developing more efficient contract management and governance techniques, both to protect margins and to ensure they are a more attractive and reliable supplier. Good contract and relationship management is not only about more people; it must increasingly be enabled through more consistent methods, supported by replicable process and underlying tools and systems.
This is an excellent example of the need for more strategic thinking in commercial and contract management and the extent to which competence in these areas will increasingly represent a source of sustained competitive advantage.
The UK government has committed to wide-ranging cuts in public expenditure. Inevitably, this has meant delay, cut-backs and – in many cases – termination of projects.
The government has also called on major suppliers to identify savings and to reduce existing charges. One of these suppliers – Serco, a multi-billion £ ‘international services company’ – decided to pass the pain to its contractors.
In itself, none of this is surprising – until you discover that Serco wrote to supplers seeking retro-active application of savings. It ‘suggested’ that its suppliers should refund an amount equal to 2.5% of their 2010 invoices. Should they decide not to ‘volunteer’ this payment, Serco words implied that they would be unlikely to benefit from future business.
In the face of universal hostility, Serco felt compelled to withdraw its demands. The company succeeded in gaining the wrath of Government (its major customer), opprobrium in the press, the disbelief (and I am sure eroded loyalty) of suppliers and a drop of almost 5% in its share price. Quite an achievement, especiallywhen set against the $20 – 50m gain that I presume it might have achieved if all suppliers had paid up.
It is great to see bullying behavior appropriately rewarded. Serco’s unfortunate CFO appears to be responsible for this remarkable own-goal – at least, his name was on the letter. Once again, we have an example where the prospect of short-term financial gain appears to have trumped commercial judgment. I would love to know what position Procurement took during the discussions of this particular initiative. Hopefully they fought for the interests of their supply base and highlighted the reputation risks inherent to such action. But all too often, that is not the case. The fixation on cost-cutting and savings can come to cloud wider analysis and judgment.
Overall, this story offers another excellent risk management case study. I used it at an international conference of senior procurement executives today, outlining the basic facts without revealing their results. No one pervceived that Serco’s action was wrong.
Commitment Matters 