Based on analysis of recent reports from leading consultants and procurement experts, the ‘big topics’ impacting the supply market appear to be a mix of technology, global market dynamics, environmental concerns, and shifts in underlying business practices – sometimes occurring individually, but often also with a need to consider the interplay between the various topics.
What interests me is the implications these issues have for both the nature of contracts and contract terms and also for supplier relationships.
My overall assessment is that they suggest a future where contract management and supplier relationships will continue to be characterized by growing complexity, imposing a need for flexibility and deeper collaboration – the antithesis of many relationships today. To make this change, organizations will need to be more agile, forward-thinking and strategic in their approach to contract negotiations and supplier management.
Implications for Contracts and Contract Terms
There is a risk that contracts become even more complex and detailed as they attempt to address issues such as AI integration, cybersecurity measures, and ESG compliance. This complexity might include more comprehensive clauses related to data privacy, the ethical use of AI, and sustainability targets or certifications.
Given the speed of technological change and the volatility of geopolitics, contracts will increasingly need to incorporate greater flexibility, allowing for adjustments to accommodate new laws, economic sanctions, or supply chain disruptions. We are likely to see greater focus on clauses that allow for renegotiation or termination due to altered market conditions.
As sustainability and ESG gather pace through further regulation, terms that require detailed reporting on environmental impact, labor practices, and governance structures will become more common. Frequently, these terms are likely to require third-party audits and certifications.
Risks associated with geopolitical tensions and supply chain vulnerabilities will result in more stringent risk assessment and mitigation clauses. This is already resulting in more detailed disaster recovery plans and contingency measures.
Implications for Supplier Relationships
The trend towards friend-shoring and duplicating supply chains implies a shift towards more collaborative and strategic partnerships. Companies will need to work closely with suppliers to ensure alignment on values, particularly concerning sustainability and resilience initiatives. This approach may lead to more long-term contracts and joint ventures. It also creates a confusing dynamic: greater collaboration implies consolidating purchases with a smaller number of key suppliers, but supply security sometimes pushes in the opposite direction.
As AI and digital transformation play larger roles in operations, relationships with technology providers and AI firms are becoming more critical. These relationships need a focus on continuous innovation and compliance with evolving cybersecurity standards.
Supplier relationships are increasingly being tested for alignment with corporate ESG goals. Somehow organizations will need to find a way to increase insight to include their entire supply chain. This obviously requires deeper collaboration and transparency. Perhaps it will also encourage greater levels of vertical integration and impact make or buy decisions.
The volatile geopolitical and economic environment means that relationships must be structured in such a way that they can rapidly adapt to changes. This requires more frequent and better defined structures for communication and decision-making, real-time data exchange, and a capability for dynamic contract adjustments based on external conditions.
Contracts are likely to place shared responsibilities on both buyers and suppliers for compliance with regulatory requirements and for managing risks related to external workforce, data breaches, and environmental impact. This implies a need for a heightened level of trust and joint efforts in areas such as compliance training and audits. Building this trust from the low levels that often exist today will prove challenging – it demands a significant change in organizational behavior.
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The belief that collaboration yields better business results is widely accepted and has led to growing interest in the role that contracts play in either supporting or undermining collaborative relationships. As a result, ‘relational contracting’ has increasingly come under the spotlight, with continuing efforts to provide better definition and guidance on what it means and the forms it can take.
Most commentators reecognize that relational contracts – and collaboration more broadly – face a number of significant barriers, one of which is thought to be the traditional hierarchical structure of most large organizations. Yet is this correct? When we think of collaboration, Japanese business has often been held up as a role model, yet it also operates within a strongly hierarchical culture.
Unravelling the Paradox
This apparent paradox requires analysis and understanding of power and authority in Japanese society. Japanese organizational structures operate with clear lines of authority and respect for seniority. However, unlike in some Western contexts where hierarchy may impede collaboration and innovation, Japanese culture alters the power dynamic through an emphasis on relational bonds, consensus-building, and group harmony.
My research has led to several key concepts, the first of which is “uchi-soto,” which refers to the distinction between insiders (uchi) and outsiders (soto). Within hierarchical organizational structures, there is a strong sense of loyalty and cohesion among insiders, who share common goals and values. This internal unity enables organizations to navigate complex social hierarchies and external challenges while fostering trust and cooperation among members. (I find this interesting, because I recall a Japanese colleague expressing surprise that Western executives make themselves remote by having offices in corners and with windows. He told me that in Japan a ‘window person’ is someone on the way out).
Japanese culture also places a premium on “wa” (harmony) and “nemawashi” (consensus-building), which prioritize the collective good over individual interests. Together, these mean that hierarchical power structures are softened by relational norms that encourage consultation, collaboration, and mutual respect. Even within hierarchical organizations, decision-making processes often involve extensive discussions and consensus-building exercises to ensure buy-in and alignment among stakeholders.
Finally, there is the concept of “amae,” which recognizes mutual dependency and the need for nurturing relationships. This underpins many interpersonal interactions in Japanese society. So while an organization might be hierarchical, superiors are expected to provide guidance and support to subordinates, which fosters and environment of trust and reciprocity – which are the sort of behaviors that facilitate relational exchanges.
So is it the structure, or is it us?
From this, we must conclude that it is not so much organizational structure that impacts the ability to collaborate, but rather the cultural and behavioral norms and expectations that operate within it. Hierarchical power structures can work fine if they are complemented by relational norms and values that promote collaboration, consensus-building, and group cohesion. (And by the way, until Japan engaged more fully in the global economy, it did not need contracts at all!)
2024 is already an energizing year! It has been wonderful to be back fully in face-to-face meetings and to feel the enthusiasm of the community that continues to build around WorldCC. Such diversity – geographic, functional, industry – yet inspired by a common belief in the importance and contribution of a fresh approach to contracting and commercial thinking.
Commercial innovation is the foundation for human progress!
This fact is often overlooked – and those who are key to creative thinking and its implementation are too often relegated to the back room, their work seen as an afterthought. And many have allowed this to happen, accepting a role that focuses on risk avoidance or compliance, rather than the creativity that our dynamic world demands.
So what is energizing me?
In just a few weeks, I have had the chance to interact with contracts,, commercial, procurement and legal practitioners in the US, UK, France, India and Saudi Arabia. Very different places, with their own unique and priceless characters. Yet everywhere I find the same buoyancy, a sense of optimism and a readiness to escape the constraints of the past.
And I am excited!
What better time than WorldCC’s 25th anniversary for real change to take root, for this powerful community to move to a position of leading and inspiring fresh approaches? In 2024, we are introducing major shifts in our training and certification. Empowered by AI, we are able to elevate the services and support we offer. The research that is needed to generate the insights and authority for new approaches is gathering pace. And our community is gathering, coming together in a rich series of local meetings and international summits.
So we have the foundations: now is the time to climb out of those back rooms, to come into the light and implement those new approaches to the way we establish and manage our trading relationships. It is actually not complicated to formulate fresh commercial models, simplified and balanced forms of contract, improved models of governance.
What it requires is a belief in ourselves, a unity of purpose. Come together, stay together – and change will happen.
This adage rings especially true when we look at the state of relationship management between buyers and suppliers. WorldCC’s latest study (to be published next month) reveals a wide gap between understanding its importance and taking the steps needed to align each party’s interests.
In today’s fast-paced and volatile business environment, open and collaborative relationships take on added significance. For any customer organization, a coherent approach to managing supplier relationships is a strategic imperative for managing risk and achieving business value. Executed well, the WorldCC study confirms the mutual benefits that flow to both buyers and suppliers, from improved efficiency and cost savings, to innovation and competitive advantage.
Achieving these benefits at a consistent level is the exception, not the rule. Many organizations find themselves at a crossroads, struggling to move beyond transactional interactions to instead build meaningful, strategic partnerships with their suppliers. This disconnect stems from a variety of challenges, including internal resistance, lack of clear roles and responsibilities, and under-utilization of technologies that could facilitate deeper collaboration. Together, these factors undermine levels of trust, transparency and collaboration.
The report provides insights and actionable strategies to bridge the gap between theory and practice. One element of this is exploring the role that an effective SRM program plays as part of a broader relationship management capability.
As we navigate the complexities of modern supply chains, there is a critical need for strategic focus on relationship management, understanding and executing on ‘the things that matter’. This report contains valuable insight to why today’s contracts and relationships so often under-perform – and highlights what is needed to improve.
If you need advance information on the report, please get in touch with afernandez@worldcc.com
The pace may be slow, the reservations significant – but there is certainly plenty of interest in the impact AI will have on contracts and contract management.
It is somewhat ironic that many lawyers are skeptical or even fearful of AI yet, as an industry, the Legal sector is forging ahead of most. Law firms fully appreciate the impact on their traditional offerings and ways of working.
While other industries are in most cases more hesitant, it doesn’t prevent curiosity. Indeed, forward thinking contracts and legal teams are keen to investigate and understand how AI might alter their role, in particular eliminating many repetitive tasks and contributing to increased value. Early use cases indicate that these hopes are being realized and I am looking forward to an up-coming webinar where Amgen explains their experience in deploying AI (visit here for details or to register).
For many, existing systems remain a limiting factor in the benefits they can achieve. Low adoption rates together with fragmented functionality make it difficult to access or generate the data on which AI flourishes. While fixing the problems is not easy, the pace of improvement has picked up and I am confident that the next 2 years will see a massive upsurge in the use of AI in the contracting process, with some exciting results spurring us on.
With ever-greater frequency, organizations highlight the importance of collaboration, both internally and with their trading partners. Few would argue that collaboration depends upon strong relationships, so the early findings from current WorldCC research are a cause for concern.
Despite the clear benefits, the survey shows that there is a notable shortfall in the execution of relationship management. This is recognized by most in the buyer community and contributes to a lack of belief among suppliers, where 77% question the sincerity of customers in truly wanting to collaborate. This gap is largely attributed to:
1. Internal Challenges: Buyers report significant internal challenges, such as overlapping or poorly defined roles and responsibilities (69%), unrealistic expectations (58%), and frequent changes in requirements (50%). These issues point to a need for better internal alignment and clearer communication within organizations.
2. Transactional Focus: Relationship management is often confined to project or contract levels, leading to a focus on immediate transactional performance rather than long-term business value. This narrow scope limits the potential for broader strategic benefits that relationship management and collaboration can offer.
3. Limited Use of Relationship Management-Specific Technology: Despite the availability of sophisticated technology tailored to relationship management, most rely on Contract Lifecycle Management and Data Analytics tools. The under-utilization of technology represents a missed opportunity to support more effective relationship management practices.
The full report will be issued to survey participants at the end of January. If you’d like to be among the recipients, you can participate at
https://iaccm.fra1.qualtrics.com/jfe/form/SV_0SLXODYKzKDz1ci
Insight from WorldCC Research: Diversifying Contract Types Amid Market Uncertainty
Recent WorldCC research underscores an important trend: businesses are increasingly diversifying their contract types to navigate the uncertainties and risks of today’s market. While this strategic development makes sense, a critical gap has been identified. Many organizations overlook the impact these varying contracts have on internal capabilities and skill requirements. Because of this, there’s often a lack of clear guidelines on the appropriate application of different contract models.
The Art of Selecting the Optimal Contract
Selecting the most effective contract and commercial model is a major factor in achieving successful business outcomes. This process demands astute business judgment and necessitates constructive dialogue both with external parties and internal stakeholders. To support this, I am developing a module for the WorldCC training and certification program. Here, to give a sense of direction, is a concise overview of how different contract types necessitate varied organizational structures and skill sets:
- Purchase Orders
- Structure: Primarily Procurement-driven.
- Required Skills: Vendor selection, foundational contract management.
- Master Agreements
- Structure: A blend of Procurement and Legal, with an emphasis on relationship management.
- Required Skills: Strategic sourcing, comprehensive contract administration.
- Short Form Contracts
- Structure: Geared towards Project Management with rapid decision-making.
- Required Skills: Fundamental project management, basic contract literacy.
- Performance-Based Contracts
- Structure: Centers on Performance Monitoring teams.
- Required Skills: Detailed performance analysis, effective vendor management.
- Outcome-Based Contracts
- Structure: Oriented towards achieving strategic outcomes, often involving integrated teams.
- Required Skills: Outcome definition and measurement, strategic execution.
- Relational Contracts
- Structure: Relationship-centric, involving cross-functional teams.
- Required Skills: Proficient relationship management, adaptable negotiation strategies.
- Agile Contracts
- Structure: Characterized by Agile teams, favoring iterative project methodologies.
- Required Skills: Agile project management, continuous adaptation and feedback.
- Alliance Contracts
- Structure: Partnership-oriented with collaborative decision-making.
- Required Skills: Collaboration, shared risk and benefit mindset.
- Joint Venture Agreements
- Structure: Distinct governance structure for joint ventures.
- Required Skills: Joint management expertise, strategic cooperative leadership.
- As-a-Service Contracts
- Structure: Focused on continuous service management.
- Required Skills: Management of service levels, ongoing vendor assessment.
Key Takeaway
It is essential to understand the unique demands of each contract type and the circumstances where each should be applied. This understanding enables alignment with your organization’s structure and skill set, reducing performance risks and ensuring that you are strategically positioned for success. This knowledge empowers you to deploy contracts that are not only legally sound but also optimally structured to serve their true purpose of supporting economic performance and business growth.
As we enter a new year, reflect for a moment how much (and how little) contracts have changed over the last two millennia.
1. The Medium: Think about how contracts were written in the past. Long ago, people used clay tablets, papyrus, or wood. Today, our tools and technology mean that we type them up on computers and store them digitally.
2. Signing a Contract: In old times, sealing a contract with wax and a unique stamp was common. Then, we moved to writing signatures by hand. Now, we often use digital signatures – just a click or a tap on a screen.
3. The Role of Laws: Over time, laws around contracts became more formal and structured. This shift helped in dealing with more complex trade and social interactions.
Contracts Today: Complex but Unchanging Records
Today, we have many more contracts than before, and they’re often longer and more complicated. Despite these changes, each contract is like a snapshot, capturing an agreement at a specific moment. The unique nature of each contract and the varying situations they cover can make it tough to analyze them on a large scale and learn from past success or failure.
AI – enabling the contract of the future
As in the past, many changes will be a direct or indirect result of advances in technology. In the case of contracts, we should ask fundamental questions that go to the heart of the way agreements are formed and managed. Here are three areas where Artificial Intelligence may lead to radically different approaches and expectations of value.
- Emotion-Responsive Contracts: In the future, contracts might include emotion-responsive clauses, thanks to advances in AI and neuroscience. These contracts would adapt their terms based on the emotional state of the parties involved. For instance, if a party is under distress or extreme happiness, certain clauses could automatically adjust to ensure fair and ethical dealings. This would require sophisticated emotional recognition technology, possibly even direct neural interfacing. Experiments in this area have been running for several years – for example, AI can predict the likely reaction to a specific clause and the way it is worded.
- Quantum Entanglement Contracts: Leveraging the properties of quantum mechanics, contracts could be established where the terms are interconnected through quantum entanglement. The fulfillment or breach of a clause in one location could instantaneously affect the contract terms in another location, regardless of the distance. This would be a groundbreaking way to enforce immediate compliance and could revolutionize international agreements or complex multi-party contracts.
- Holographic Lifetime Contracts: Imagine a contract not as a document, but as a holographic entity that accompanies you for its duration. This AI-powered hologram would not only remind you of your contractual obligations but also adapt and provide advice based on changing circumstances. It could negotiate on-the-fly adjustments with the holographic entities of other contract parties, creating a dynamic, living agreement that evolves over time.
Far-fetched as some of these ideas may seem, it is essential we remember that as recently as 40 years ago contracts and legal professionals would have dismissed the idea that contracts could be developed and stored electronically or that digital signatures could exist. So as we start a new year, it is a great time to open our minds and start to re-imagine the purpose of our contracts and the benefits that could flow from a fresh approach.
Anyone who follows my writing or research will know that I’m a massive advocate for commercial teams – buy or sell – to focus on strategic value. ‘Commercial innovation’ is always essential, but today’s challenging market conditions provide a new urgency. That represents a massive opportunity to step out of the shadows.
Forward-thinking organizations already grasp the significance that Artificial Intelligence is likely to have on their future plans and capabilities. It will touch every corner of their operations, not only driving efficiency, but also powering creativity. So forgive me my skepticism, but a recent report from GEP (‘Adopting AI Responsibly: Guidelines for Procurement of AI Solutions by the Private Sector’) strikes me as unrealistic in its aspirations.
It makes the claim that: “Procurement is best positioned within an organization to help the C-suite define and create a holistic blueprint for the organization’s Al strategy.”
Really? I can certainly see that Procurement will play a part in executing on the strategy and hopefully it will also be at the forefront in determining how AI will transform the process of procurement. But to suggest that Procurement is somehow at the forefront in defining and creating the corporate strategy for AI strikes me as a massive overreach, damaging credibility.
A successful AI strategy will demand cross-functional collaboration and it will depend on digital platforms. As different groups across the business start to understand its potential, there will be a myriad of use cases. These will require robust evaluation – for example, cost / benefit analysis, resource implications, ethical and reputational assessment, market and competitive impact, affect on existing products and services.
As WorldCC research is discovering, most organizations are still focused on developing a policy, especially as it relates to Generative AI. Those at the forefront have established multi-functional teams and are encouraging employees to identify potential opportunities, while also ensuring appropriate controls on how these exciting tools are used. Security and IP protection are the big issues.
So Procurement teams, get involved. Be up there in working out how AI can transform your operations and value. But let’s recognise that this is our chance to integrate and collaborate – not an opportunity to alienate others by seeking to control.
Reflect for a moment on what causes you to trust people, or organizations. What are the characteristics, behaviors, values that you look out for?
In a recent article, PASA offers ‘Five essential tips to build trust with your suppliers’. In addition to the need to ‘ensure mutual interests’, it concludes with this summary: “By recognising the importance of business development, understanding supplier capabilities, prioritising empathy, and seeking evidence of authenticity, procurement professionals can establish strong and trustworthy partnerships with suppliers, leading to successful project outcomes.”
OK, you might say, that’s not an unreasonable list. And nor would it be if it were not so one-sided. Take empathy as an example. The article doesn’t suggest that Procurement should demonstrate any empathy with the supplier’s goals and interests, but rather that the supplier must show ‘an empathic understanding of your organization’s goals and challenges’.
In my experience, it is this self-interested, one-sided view of the world that undermines collaboration and generates potential for conflict. Just imagine a personal relationship where all the focus is on the other party’s interests, where all the testing is about their loyalty, where all the questions are ‘what have you done for me today’ …
A recipe for trust? If you want loyal suppliers – or customers – I recommend you don’t follow the advice contained in these ‘five essential tips’. Later this week, I’ll offer an alternative.
Commitment Matters 