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.
In the Financial Times (September 7th), Martin Wolf commented that globalization ‘has stalled … and it might reverse’. He cited the unexpected consequences that have flowed from the globalization of markets, such as mass migration and growing inequality, which are reducing public and political support. This is reflected in ‘stagnation of world trade’, even when the world economy is growing, and a reduction in cross-border financial assets and foreign direct investment.
Yesterday I received an invitation from HR.com to attend a webinar entitled ‘Disagree agreeably to boost productivity’. The theme of the session is that disagreement is sometimes inevitable, but it does not have to create disharmony or argument. When we operate with openness and respect, disagreement can be a learning experience that boosts value. On the other hand, handled the wrong way, disagreement creates chasms, it undermines cooperation and respect.
"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.
Topics: negotiation, contract /commercial management, procurement, relationship management, international, legal
Economist John Kay has highlighted the importance of 'distinctive capabilities' in establishing competitive advantage. The correlation to contracting and commercial terms is immediately evident – not least because he sees these capabilities being delivered in the context of external relationships.
"Distinctive capabilities are a relevant factor of an organization's resources. Companies with distinctive capabilities have attributes, which others don't have and cannot replicate. There are three distinctive capabilities which a company can possess to achieve competitive advantage through relationships:
There is, of course, a counter-side to this position – which is that contracts and the contracting process can distinguish an organization for its negative capabilities. In other words, if contract terms and approaches to negotiation are risk averse and seeking to limit commitment, they damage architecture, reputation and innovation.
So distinctive capabilities are created through contracting and commercial skills – but require a real shift in attitudes to risk.
Increasingly, the winners in the marketplace are those who consciously endeavor to meet – rather than resist – market aspirations. Often that means a need to consider how to embrace levels of risk that were previously unthinkable. For example, in industries such as telecoms or oil and gas, clients are demanding ever more onerous terms from their suppliers. Rather than resist, there will be some who start to 'think the opposite' – in other words, how can we accept these risks? The answer will often be to take on greater responsibility and control, to reduce the extent of dependency on the customer's capabilities or actions.
This was the revolution that happened to much of the IT industry, when it moved from supplying products to undertaking long-term outsourced services. Initially reluctant to accept increased liabilities, the industry has steadily realized that many perceived risks are actually a phantom and that many others can be effectively controlled through appropriate forms of governance. The best suppliers have focused on improving their capabilities – including their contract management skills – so that they can offer distinctive commitments.
This thinking is just one more illustration of why contracting and commercial skills have become so important – and why, as practitioners, our attitudes must shift from a focus on protection and avoidance to instead being a force for creativity and enabling.
Topics: negotiation, contract /commercial management, relationship management, risk management
The UK government is at the forefront in its recognition of the importance of contract and commercial management. It is leading many private sector organizations in its efforts to transform. On March 23rd, the powerful Public Accounts Committee of the UK Parliament issued its review of progress. Here is IACCM's perspective on that report.
The Public Accounts Committee has rightly identified the need for 'transforming contract management'. The challenging environment for delivering high quality and affordable public services necessitates far greater focus on integrated commercial competence and contract management capability. The committee highlights continuing gaps and urges an increased sense of urgency and control.
The scale of change implied by this ambition must not be underestimated. Private sector organizations face a similar dilemma and in many cases are not demonstrating great success in their change initiatives. Essentially, today's business is struggling to adapt to a networked world in which digitization is now fundamentally disrupting trading relationships, business capabilities and the terms of trade. Contract management sits at the nexus of these forces and is transforming from a largely administrative task to a dynamic role that orchestrates change and makes sense of market volatility.
In its March 23rd report on the state of contract management in the UK government, the Public Accounts Committee observes:
"While government has made encouraging progress in some areas, the pace of change is disappointing. We expect the Cabinet Office to raise its game, be more assertive and challenge those departments that are lagging behind, as well as supporting them where necessary. Given the increasing scale and complexity of government's contracts, departments need to focus on the governance, systems and assurance frameworks around their major contracts, as well as recruiting more commercial staff. The government also needs to tackle the longstanding problem of a civil service culture that does not place enough value on commercial expertise. We expect the Cabinet Office and individual departments to accelerate the pace of change and be able to demonstrate tangible improvements by the end of this parliament, so that we see a civil service which is first rate at managing commercial contracts."
IACCM's unique experience in this field leads to the following observations.
The issue of assertiveness and challenge is a valid criticism. Contract management is a pervasive discipline with a myriad of stakeholders and interested parties. It is not simply about overseeing the performance of a signed agreement; it is essentially about ensuring that the agreement is fit for purpose. Many government contracts quite simply are not fit for purpose and there appear to have been limited efforts to challenge the historic models or their suitability.
When it comes to competence, there have indeed been efforts to assess contract management capability at a departmental level, but I would suggest that the model being used is timid and outdated. The assessment framework that has been deployed is almost 10 years old and it does not reflect the dramatic change in environment and needs that followed the financial crash and the massive re-think in public service delivery models. Departments are being tested for their ability to manage the past, not the future.
Some of the work that has been undertaken on skills is truly world-leading. However, it needs to move at a faster pace and the tone needs to impart a greater sense of urgency to individuals. Existing commercial staff will become an impediment to change if they are not energized and excited about the opportunities ahead and if they are not engaged in new ways of working that include the requirement to raise their skills. Too often, contract management is being seen as a sub-element of Procurement; this is a fundamental mistake and prevents rapid progress.
The Committee is mistaken in its apparent belief that increased recruitment is the answer and the Cabinet Office is similarly wrong to cite pay as the primary issue. While selective recruitment will assist, the real problem is a general lack of candidates with the skills that are needed. Industry is facing a similar challenge because there has been insufficient investment in these core competencies. Therefore, an urgent focus on skills development and training is critical, as well as more focus on implementing tools that will support commercial capability and efficiency.
Several departments have increased their focus on 'contract owners' and their accountability for driving performance and achieving outcomes. This is an insightful approach and there has been excellent work in designing and defining the program. Many of these contract owners are commercially astute and ready to challenge outdated contract and commercial practices. However, they need greater support and more opportunities for mentoring.
It is especially interesting to note that, while technology is fundamental in creating this challenge, there is no mention of it in the report. This is a massive omission and should be a core focus of any improvement. For example, last week the head of the US Armed Services Committee concluded that contracting today is so complex that it demands the application of artificial intelligence. Such vision is a glaring omission in the report and appears to be absent in a substantive way from the plans of the Cabinet Office. Without creative use of technology, the task of transformation will prove overwhelming and it will fail.
In conclusion, contract management transformation demands sustained executive focus and courage in the vision of what it must become. Given our experience at IACCM, the scale of change implied by this transformation will be achieved only through a fully integrated plan led and overseen by powerful executive sponsors. Right now, while there are some excellent individual initiatives, there is no evidence of a coherent master plan accompanied by a clear and well-communicated sense of future mission and purpose. To succeed, transformation demands a spirit of enthusiasm and excitement over what lies ahead. Instead, there is a real risk that the move to increase commercial skills and contract management capability becomes seen as an imposition and a threat."
IACCM's theme for its 2016 conferences is 'transformation'. We understand the challenge this represents for so many organizations and individuals; hence our focus on the practical steps that can be taken to drive progress and create that sense of excitement in what can be achieved. For details of the conference series (Europe, Americas, Asia and Australia) visit https://www2.iaccm.com/events/
Topics: contract /commercial management, procurement, relationship management, organization & people
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Yesterday I was listening to a highly respected trainer in negotiations. He set out the sequence of activities needed to deliver success. His start point was to develop a negotiation strategy and he suggested that this should be based on an analysis of relative power. I understand that power has a major influence in a negotiation, but should it really provide the framework? Surely this approach perpetuates negotiations as being akin to 'the art of war' – essentially an adversarial model where each party is wrestling for individual advantage? It seems to me that negotiation strategy should instead be founded on an understanding of need, both perceived and potential, and the relationship required for success. I appreciate that it might be argued that a good power analysis should lead to the same place, because you would explore how to counter power through value, or alternatively how relative needs influence power. But in my experience, the focus on power often leads to the more negative master-slave approach and frequently results in the wrong conversations. So I prefer to focus instead on the potential of the deal or relationship and the ingredients needed to make it work. For example, to what extent does it require collaboration and harmonisation of resources? What is the best division of responsibilities and what interfaces do we need? Analysis on this basis sets a very different tone for planning and subsequent negotiation. It also assists in highlighting comparative risks for the parties and therefore early thinking about the various terms and techniques through which they may be mitigated. |
Topics: negotiation, contract /commercial management, relationship management
Once we start to erect tribal boundaries, where does it stop? Advanced economies depend on being open, on working to establish accord rather than discord. By working together we create an environment of potential harmony. By excluding others, we create an environment of likely conflict.
Many of us know this – and sadly experience the consequences of 'tribal protectionism' – in our work as contract and commercial experts. Whether the boundaries are internal, between functions or profit centers, or external, between customers and suppliers, they create inefficiencies, they detract from value, and they make our daily work less pleasant. Since our activities focus on trading relationships, current debates about world trade are certainly relevant to us.
Trade lies at the heart of human development. It has enabled progress, yet it has also been the source of imperial expansion and wars. Economic and technical progress cause massive fluctuations in the relevance and importance of different geographic regions and the need for specific skills. At any point in time, this is good news for some, bad news for others.
Given this environment, it is not surprising that the issue of trade lies at the heart of political debate. There will always be a desire by some to expand and by others to protect. Each has valid arguments. But ultimately, I think it is important to reflect on the fact that human development has been driven by our unique capability to trade with each other. It lies at the heart of our economic and social well-being.
Therefore we must be cautious about political leaders who offer protection, but in reality have no sense of the consequences of such protection. It is essential to remember that for every action, there is an equal and opposite reaction. The thing we must always ask is "if your policies are implemented, what will the reaction be – and is that something we will welcome?"
And indeed, it is the same question we should always be asking within the context of our own organization or company – are we protecting or are we enabling and which policies will actually have beneficial results?
Topics: contract /commercial management, relationship management, commercial management, international
Posted by Tim Cummins
Mar 14, 2016 6:34:00 AM
IACCM has been undertaking a series of industry studies on the values and experiences of contract negotiators from both a customer and supplier perspective. Our studies are increasing understanding of the approaches used by the best-performing organizations and how they are creating a framework that increases the chances of not only reaching agreement, but also realizing long-term value from their trading relationships. It points to the fact that success is highly dependent on the organizational framework, rather than the personal skills of a specific negotiator.
Topics: negotiation, contract /commercial management, procurement, relationship management, organization & people
Posted by Tim Cummins
Mar 8, 2016 8:38:00 AM
In many respects, these seem to be challenging times. I observe many commercial, contracts and procurement groups struggling to build momentum and indeed suffering cuts, because they are not adjusting to business needs. The question is whether the function can adapt and take on a wider role, or whether that wider role will be performed elsewhere. The need is for individuals to focus on the areas of the future, not those of the past, and to show a grasp of the emerging agenda driven by new technologies and digitization.
Just as the threat lies in technology, so do the opportunities. We must understand and use the systems that will define and support leading-edge supply chains. These enable a growing reliance on external sources of supply, with corporate size increasingly measured on revenue, not numbers of employees. Coordinating and integrating across these multiple, interdependent relationships will be key to survival. Another growth area will be SRM, due to the need for a more blended approach to supply management and innovation.
This means, for the right people, growth industries will be those where either there is significant disaggregation (and therefore dependence on commercial integration) and those where there is extensive regulatory / reputational oversight (and therefore dependence on integrity). As a result, I think there will be major opportunities in industries like pharma, financial services, insurance and perhaps telecoms, where better structured and well managed relationships will be critical. To a degree, that will also flow into IT and IT services, especially for companies that rely heavily on aggregation of suppliers and delivery of outcomes.
Capital goods and infrastructure industries should also need more commercial resource, but probably with a focus on building more effective supplier /project selection, negotiation and delivery management. As margins continue to operate under pressure, the theoretical savings generated by traditional procurement and 'risk management' provided by traditional contract management need to be turned into the ability to oversee contracts that deliver value, efficiency and improved margin.
Topics: contract /commercial management, procurement, relationship management, technology, organization & people, supply chain management
In an interesting article (To neither lose the customer's respect nor become an ordinary salesman), Marcelo Rezende sets out the importance of building an empathetic relationship with a customer. He points to understanding the customer's perspective and needs, pushing your own objectives into the background.
In many ways, Marcelo's arguments reflect the traditional principles of good relationship management and certainly they mirror the behavior of many successful sales people. However, in an age where customers increasingly demand high quality results and outcomes, is this traditional approach sustainable?
The problem is that a business relationship is ultimately with an organization, not with the sales person. Yes, they may be an intermediary, but is their empathy actually a form of manipulation that will come back to haunt both supplier and customer? In other words, the sales interface may be highly adaptive in delivering a value proposition that the customer wants to hear, but is it reflective of what the supplier organization will actually do?
Unless there is real care, empathy can ultimately undermine trust. It may leave the sales representative seeing their role as being the customer advocate and their own organization becomes 'the enemy'.
In many respects, this scenario is unavoidable. Sales are paid to sell; successful sales people need to relate to the customer and the customer's needs; they will position the product or service in terms that represent value to the customer; this may create false expectations – indeed, those expectations are often dashed when the customer sees the contract (which is why many sales people prefer to be dismissive of the importance of terms and conditions and often leave their introduction to the last minute).
This is where we encounter the classic debate about 'the contract' and 'the relationship', with the sales organization generally anxious to promote the value of the former rather than the latter. Unfortunately, this does little to demonstrate overall business integrity and it also leaves contracts / commercial groups in a back-stop protective role. Even if the contract terms could have been adjusted to better reflect the customer's values, they often are not, because the conversations that might have led to amendment were never held.
IACCM research has shown the benefits that can be achieved through closer partnering and earlier engagement between Sales and Commercial groups. Not only does this typically shorten cycle times, it is also much more likely to yield a happy customer and more profitable business. Empathy is something that must be embedded throughout the organization – not just within the sales department.
Topics: contract /commercial management, relationship management
Tim Cummins
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