Risk Management: The Uncomfortable Truth - And A Better Way Forward
IACCM research, coupled with a variety of insights from the market, suggest that Procurement is indeed becoming more focused on overall business risks. For example, Justin Fogarty wrote this week in the Supply Excellence blog about a roundtable discussion chaired by Geraint John, editor of the respected magazine CPO Agenda. He highlighted three specific areas:
R-E-S-P-E-C-T (and the responsibility that accompanies it) - There was a great deal of talk about the challenges of rising commodity prices. Despite a broad range of industries and products, these CPOs are all feeling the squeeze on their bottom line from fuel costs, steel, copper, etc. But with that cost pressure has come an increased awareness of procurement from the C-suite and an increasing responsibility to produce results that help the bottom line. As a result, rather than rolling up under the CFO or another branch of the company, CPOs are getting a seat at the table in management discussions, where they’re viewed as a strategic business unit rather than paper pushing purchasers.
Risk Management - Procurement has taken a leading role in managing risks to their supply chain, in terms of unforeseen cost increases and supply chain continuity. But within leading companies, that responsibility for risk management is expanding into areas like ‘reputational’ risk and Corporate Social Responsibility efforts. Pretty logical changes when you consider that the best way to minimize risks of any kind - from PR to regulatory - is to nip them in the bud.
Globalization - I was a little surprised to hear the direction the discussion went around globalization. Obviously everyone there was involved at some level with LCCS (low-cost country sourcing). But their efforts abroad are seen by their companies as a foot in the door of emerging markets. As the middle class grows in an LCC, companies with operations there are well suited to tap into that market.
These comments reflect the point that the areas of focus for risk management are increasing and that of course means extra demands on the time of the more skilled Procurement professionals. Since they are not being given extra headcount, something has to give. And one area of that 'give' appears to be the management of contract terms and negotiations.
Whether driven by Legal or Procurement, there is emerging evidence that many companies are pushing highly risk averse standard terms onto their suppliers. They are also increasingly inclined not to negotiate. Often this is achieved through 'take it or leave it' electronic auctions (see recent IACCM message board discussion about this issue or listen to our Ask The Expert recording with researcher Andrew Moorhouse of Huthwaite International).
Ironically, as so much IACCM literature explains, this approach to risk management is self-defeating. By pushing onerous terms onto suppliers, the buyer has not achieved reduced risk - in fact they have frequently increased the probability of things going wrong. First, the provider may accept the terms, but may be ill-equipped to comply. Second, when suppliers accept risky terms, they introduce risk management techniques that protect their interests. These include contract management procedures that are focused on the ability to recover margins and allocate fault for any non-compliance to the buyer.
So the net effect is a culture of blame and confrontation. And of course, this demands extensive time from the Procurement and Legal groups (plus others) to manage the risks that come from non-compliance, claims and disputes. (And no, I do not actually see more fire-fighting as something that is consistent with a trend towards becoming a 'strategic business unit'.)
So the real pity in contract and relationship risk management today is that time and resources are being expended in needless battles and shoring up untenable positions. What I would have hoped to see emerging from our research and from discussions like the one highlighted above is an awareness of the need for more open and honest contract negotiations that focus on improved relationship governance. Top quality risk management occurs in environments where the parties share information and data and show commitment to risk prevention or mitigation, rather than a bruising battle from which neither side emerges the victor.
IACCM has a working group led by Michel Gahard, a senior counsel at Microsoft, that is exploring mutually agreed buy-side / sell-side term standards. The initiative, agreed by the IACCM Board of Directors earlier this year, involves both buy-side and sell-side representatives from top global corporations and they will endeavor to draft balanced terms and principles that could perhaps offer a reference point for negotiators or contract developers.
Until then, Procurement and Legal groups that truly want to be 'strategic' should step back and consider the impact of their risk averse terms and conditions, in terms of economic costs, relationship costs and contract outcomes.
