Commitment Matters

If you are a professional in Contract & Commercial Management, committed to achieving the best possible outcomes from negotiations with all your trading relationships, then ‘Commitment Matters’ is the perfect source of regular articles and posts dedicated to helping you achieve that goal.

Be wary of rules – and the behaviors they induce

Posted by Tim Cummins

Apr 28, 2016 4:59:12 AM

The Financial Times this week reported on a study that investigated the behavior and attitudes of New York cab drivers. The research led them to conclude that 'regulatory constraints can prompt sharp practices (including fraud) to recover lost ground'.

When taking passengers to Staten Island or to Newark airport, the ride involves passing through a tunnel and paying a toll. There is a special lane for cabs, to speed the journey. However, in some cases the driver deliberately avoids this lane and instead queues - often for lengthy period - in the 'standard' lanes. The reason, of course, is because the meter keeps ticking and they charge their passenger more money.

The researchers found that this behavior is 50 times more frequent for journeys to Newark than it is for journeys to Staten Island. The reason? It appears to be because cab drivers from New York are not allowed to pick up passengers at Newark - so must drive back empty.

Understandably, drivers feel aggrieved by this regulation, but rather than campaign against it, they take revenge on innocent and unsuspecting passengers. They see no moral issue with transferring their issue with the regulators into cheating the general public.

The Financial Times article makes the point that similar self-justification could apply at many levels. It may subconsciously affect the actions of corporate executives when they face rules that they consider unfair, or which stand in the way of meeting their goals. And for those of us in legal, procurement or contract management, it suggests we must think carefully about the rules we impose and the extent to which these induce negative behaviors by others in the business.

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Topics: contract /commercial management, procurement, performance management, legal

When Contracts Fail...

Posted by Tim Cummins

Apr 20, 2016 12:57:00 AM

"Why is it called contract failure? It's failure of a relationship."

That was the reaction of a group of law professors in Tokyo this week, when I showed them a set of newspaper headlines highlighting 'failed contracts'.

In a culture where relationships have traditionally dominated and contracts have been deemed of little importance, such a reaction is understandable. The contract is not seen as a specific commitment vehicle or a significant management tool. Therefore, it cannot 'fail' and those headlines are more likely to lead to a questioning of the relationship.

For cultures that make substantial use of contracts, it is often the case that an individual agreement can fail without inflicting lasting damage on the overall relationship.

These differences of approach and perception are important to understand because they may reflect quite fundamental variations in the way that agreements are established, viewed and managed. In Japan – and some other parts of Asia – the relationship may precede the contract; a contract is created only when a relationship has shown its value. In the United States – and most other common law jurisdictions – the contract comes first and a relationship may follow.

Similarly, relationship cultures tend to rely on personal contact or connections to review performance or address problems, without reference to a contract (which may or may not exist).

These apparently simple differences can have significant implications. For example, when one side wants to push for a contract and the other wants first to develop a relationship, there is real potential for misunderstanding. One side may feel the other is not to be trusted because it is avoiding commitment. The other may feel that it is being pushed into a rigid structure before it is ready. Similarly, attitudes to how performance will be managed, or changes agreed, will inevitably differ in their level of formality.

The differences go deeper. For those in a relationship-based business culture, 'relational contracting' implies a reduction in the role of the contract. For those who come from a contract-based culture, relational contracting implies an expansion of the contract's role, to include increased clarity over approaches to governance and performance.

Given the uncertainties and underlying risks and complexities of global business, it seems more likely that contracting discipline will increase to ensure that there is shared understanding and agreed methods of management. Of course relationships are important, but the challenge of increasingly virtual business, operating across language, law and business culture, demands mechanisms that increase clarity, not those that entirely depend on human memory and goodwill.

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Topics: negotiation, contract /commercial management, procurement, relationship management, international, legal

War & Peace in the World of Contracts

Posted by Tim Cummins

Mar 15, 2016 7:33:00 AM

There are some undeniable trends in the way that trading relationships are being formed and managed. Among the most significant are the push for improved outcomes and greater value for money. These overarching concerns are driving demand for more collaboration between trading partners.

IACCM has conducted extensive research into the benefits and implications of collaborative business relationships. There is no doubt that collaboration tends to improve results, but such behavior is not innate to the way that organizations operate. The boundaries of self-interest are volatile, driven by shifts in business priorities and market conditions. However, many businesses are developing collaborative capability – for example, by investing in relevant skills, adjusting selection criteria, refocusing governance systems and operating with greater transparency around performance and risk.

Yet while these initiatives take root, we also see new battlegrounds emerging. Perhaps the most significant of these is in the field of patents, where state-sponsored growth means an inevitable era of conflict. Last year saw the 5th successive year of increase in filings, with an estimated 10.2 million patents now in effect globally.

In previous blogs I have highlighted the point that the patent system has strayed far from its roots of protecting investment by inventors. Instead, it has become an economic weapon and a tool to maintain wealth imbalances. As a result, emerging nations have recognized the need to join the club and they are increasingly the source of patents, with the strongest growth internationally in countries such as China, India, Brazil, Indonesia and Vietnam. To appreciate the scale of this shift, it is worth noting that China registered more patents last year than the United States and Japan combined.

The implications to contract negotiators are significant because the growing use of patents will impact pressure for indemnities. Buyers will have growing concerns about potential claims for infringement, especially in overseas markets. Defense mechanisms will be important. These may range from greater diligence in checking for existing patents, as well as having rapid access to patent experts and support services.

I spoke recently with Rakesh Mittal, CEO of Piverse Inc., a company offering such services to companies and organizations around the globe. "Emerging nations will continue to have GDP growth exceeding 3-4% for at least another decade and hence will demonstrate highest growth in consumption of consumer goods and services supported by global patents", observed Mr Mittal. "With this growth in patent activity, most companies are struggling to find partners who can provide a framework for asset protection and for managing their global filing process at an affordable level. For many, the cost of patent back office functions is escalating year on year by at least 10-12%".

However, the key point that is confirmed by Mr Mittal is that "As patents become a revenue source rather than just costs, patents take center-stage in this fight for global markets." He also observed that many small and medium-sized companies have paid little attention to this topic in the past and therefore may have no internal expertise on which to draw – placing not only themselves, but also their customers, at significant risk.

What this means is that companies need not only to register their patents and trademarks, but also to research and build defensive capability. Increasingly the question is not if, but when and where, they will be challenged for breaching a patent, copyright or trademark, or will be forced to take action to protect their own assets. For all the talk – and merits – of collaboration, our world remains innately competitive. While the areas of battle may alter, conflict remains inevitable. Smart businesses make sure they are prepared.

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Topics: contract /commercial management, legal

Can Contracts Really Change?

Posted by Tim Cummins

Mar 2, 2016 8:38:00 PM

Impenetrable, incomprehensible, confusing and downright boring. These are a few of the words commonly associated with contracts. Whether it is the way they are designed, or the way they are worded, the overwhelming majority of contracts merit those descriptions. Indeed, in the case of many consumer agreements (especially those online), one can only believe the approach is a deliberate turn-off. Large companies would prefer customers not to realize just how unreasonable and unbalanced their terms of business really are.

Despite massive progress in other areas of communication – for example, company reports, marketing materials, web sites, official notices etc. – contracts have largely resisted significant change. In some instances they have moved to 'plain English' and there have been efforts to make them shorter (which does not necessarily make them clearer or easier to understand). But overall, IACCM surveys tell us that more than 90% of business people find contracts 'hard or impossible' to understand. Which may, of course, be good news to their authors, since it means more work providing interpretations of what they wrote – or in some cases, interpretations of what they think someone else was thinking when they wrote it.

Ultimately, none of this makes any sense. Contracts should provide an accurate record of an agreed transaction or relationship. In our increasingly volatile and virtual world, it should also provide a framework for underlying 'business operations' – who does what for whom in what circumstances and, in many cases, how this gets done. Good contracts are those that seek to deliver success; dealing with failure should be the exception. Today's contracts often make failure more likely.

But however illogical the current approach, can it really change? Is there enough interest in making those changes? Increasingly the signs are yes. Led by a growing body of lawyers who are frustrated with current role and image, supported by an increasing number of law schools which want to produce graduates suited to the 21st century, aided by technologists who are working on artificial intelligence and blockchain, urged on by business executives and project managers who need contracts to become viable business tools – the momentum is building fast.

At IACCM, we are seeing this in a range of initiatives. For example, a growing number of in-house legal groups are coming together to explore the possibility of developing agreed 'industry standards' which would set a more consistent framework between suppliers and customers, facilitating increased clarity of those standard terms and reducing the amount of repetitive negotiation and customization. This is further developed by the legal groups approaching us for 'contract design assessments' – a specific effort to design contracts so they can be easily understood by counter-parties and users. Experience shows how this dramatically reduces cycle times, leads to increased compliance - and confers competitive advantage. It tells the world that they are forward-thinking organizations which actually care about open, honest communication and balance in their trading relationships. Then there are the various 'Hackathons', where top corporations and law schools engage in fundamental questioning of the thinking that underlies today's contracting processes and its outputs...

Beyond these practical steps, we have the much grander vision in places like MIT and Stanford, where fundamental thinking is going on about contracts in a digital age. An example is the Center for Collaborative Law 'Common Accord' event in Boston in May. There is a belief – currently beyond my understanding – that we can quite rapidly move to codified content and that contracts become standardized artefacts which increase security and also enhance them as 'tradable assets'.

How quickly this grand vision occurs, I have no idea. But I do know the momentum for change is now here and that the practical examples of it are increasingly visible. Of course there will be those who resist, just as many in the clergy resisted the spread of printed books in the 15th century. Anything that demystifies activity and makes it accessible and understandable is a threat to those who own 'the mystery'. The forces of history are firmly on the side of those who want simplification and self-help.

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Topics: contract /commercial management, legal

Transactions or Relationships - What Does the Future Hold?

Posted by Tim Cummins

Feb 29, 2016 8:28:00 PM

Almost 60% of contract practitioners expect contracts to become more 'relational' and less 'transactional' in the next few years. That's according to the results of a worldwide survey on 'The Future of Contracting' that IACCM has been conducting since last November.

Why do they feel that this is the way forward? The answers vary, as do the motivations, but key factors include:

  • For buyers, there are various pressures suggesting that transactional behavior is no longer a good idea. Since the late 1990s, Procurement has focused on driving down prices at the expense of relationships. Supplier loyalty was a thing of the past. However, that approach carries risks and longer-term costs. The loss of supplier loyalty is one example. The difficulty of overseeing quality and performance is another – and this is especially the case in an area such as regulatory compliance. Frequent supplier switching also carries direct costs in administration and management, which can undermine the savings from a lower price or charge.
  • For suppliers, there is generally little attraction in transactional business. Certainly in the B2B environment, it is disruptive, makes planning hard and is linked to commodity pricing. So the transactional pressures from buyers have forced many suppliers to re-think their business model, to seek ways to differentiate and bring added value. An example of this is a readiness to accept more risk, to take greater responsibility for outputs or outcomes.

Together, these factors have been reflected in the steady shift from pure product sales to an increasing volume of packaged solutions or services (indicated in the growth of indirect procurement and the percentage of world trade in services). However, this growth has exposed real weaknesses in 'relationship management', until now a rather woolly, sales-led activity.

Hence the scale of interest now in 'relational contracting'. There are many myths about relational contracts, top among them being that it introduces a 'softness' to the contract that creates legal doubt or threatens enforceability.

The reality is very different. Relational contracts are fully recognized by the courts and subject to a growing body of case law and precedent. It isn't vast - but that is because relational agreements are less likely to fail and lead to litigation. And in a business context, they actually reduce doubt by creating greater discipline and clarity in the relationship, its governance and performance. They introduce positive measures rather than relying on negative incentives – in other words, more control, less need to use the stick!

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Topics: contract /commercial management, procurement, relationship management, legal

Do corrupt companies have contract managers?

Posted by Tim Cummins

Aug 25, 2015 3:40:23 PM

Continuing revelations about corrupt contracting practices at Brazilian oil giant Petrobras continue to hit the headlines. It is interesting that they are one of the few major oil and gas producers which does not have active membership in IACCM. Might there be a connection between these two facts?

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Topics: contract /commercial management, procurement, international, legal

Why redesigning your contracts is so important

Posted by Tim Cummins

Aug 12, 2015 9:30:22 AM

When we think of contracts, most of us envisage a paper document, full of dense typing, with formalistic style and wording. Or we may even think of an on-line version, a 'click-here- to-accept' contract - but with just the same hard to read typing and hard to understand language. Certainly not something we avidly pick up to read.

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Topics: contract /commercial management, technology, risk management, legal

Are you a trusted advisor?

Posted by Tim Cummins

Aug 10, 2015 8:43:20 AM

We often hear about the benefits of becoming a 'trusted advisor'. Certainly it is a role that most consultants seek to fill, even if only in the context of a specific assignment. But it is also a term widely used by commercial managers and lawyers, representing an aspiration for the value they might deliver. IACCM training includes extensive discussion about the qualities needed to gain this status, especially for those who complain that they are often not consulted or, more commonly, 'not involved early enough'.

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Topics: contract /commercial management, commercial management, legal

Performing international contracts

Posted by Tim Cummins

Aug 10, 2015 4:01:58 AM

Increasing activity in international markets and increasing use of outsourced or contract labor are two of the current trends in business. So what happens when these two trends converge?

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Topics: contract /commercial management, international, risk management, legal, organization & people

The fairness of contract terms

Posted by Tim Cummins

Aug 2, 2015 11:57:08 PM

The UK government's announcement of a new 'Commissioner for Small Business' is just the latest in a series of initiatives by administrations around the world to encourage economic growth.

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Topics: contract /commercial management, international, legal, supply chain management

Does Commitment Matter To You?

Commitment Matters is the personal blog of Tim Cummins, the Founder and CEO of IACCM. If you are a committed contracting professional and want to develop your skills and network, take a look at what IACCM has to offer.
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