Contracting Excellence Magazine - Apr 2012
Getting The Organization To Care About Contracts
Last week, I wrote a blog on the topic 'If contracts are so important, why do so few people care?'
Although my focus in that article was on outsourcing deals, the question could equally well apply to contracts as a whole. Essentially, my point was that although there is wide acceptance within organizations that a contract is necessary, there is limited consensus over its exact purpose and few considerations over its broader business impact. This general lack of interest is reflected in IACCM's 2011 research finding that only 8% of organizations see themselves as having a strategy for contracting.
In my previous article, I observed that one of the consequences of this situation is that contracts (and those who are charged with their creation and management) are viewed by many in a relatively negative light. They are seen primarily as instruments for risk allocation, often indulging in lengthy and apparently obtuse points of law and the apportionment of pain when things go wrong. This attitude tends to have rather self-fulfilling consequences; in particular, contracts and legal personnel are often not involved sufficiently early in the process and the resultant contracts may be poorly structured, hastily negotiated or incomplete.
As a brief case-study, I was recently asked for advice on how the parties in a $4 billion contract might best establish a governance and management framework that will generate more collaborative behaviors. The project owner told me that one challenge – perhaps the biggest – would be to overcome the opposition of many stakeholders, who believe that the contract and its management should be all about 'wielding a stick'. He went on to explain that his reason for asking IACCM to help is because he believes we are the only people with the 'compelling research and examples' and 'perceived objectivity' that can help him overcome these attitudes.
The point behind this story is that it is not of course the contract that is causing contention. It is the people within the organization who see suppliers (and often customers) as 'the enemy' and then seek to use the contract and the contracting process as a weapon. Their dismissal of the idea that collaboration is necessary and their refusal to consider contract terms and structures that focus on value delivery and positive incentives ultimately condemns many deals and projects to either fail or yield disappointing results.
Of course, the nice thing with that disappointment is that it confirms the cynicism that was actually its cause and adds to the resistance to change.
So what should be done? In my opinion, senior management from around the business must start to revisit the question 'what is the purpose of contracts?' and from there, they need to consider a strategy for contracting that aligns with their wider business goals. Without this, contracts will continue to undermine business opportunities and deliver less than optimal results. But who is going to plant the seed with executive management that they should even be asking that question – will it be you?
When The Writing's On The Wall Everyone Can See It
If you step back a moment and create an “if only …” list for you or your organisation and then look at its contents then it is likely that you'll see an interesting trend and one which is important for our profession. You will likely see that your list is made up of offerings that when you dig beneath the surface are based on not just product innovation but a blend of product innovation and “commercial innovation” such as a novel business model, a new channel, brand enhancement or extension, leverage of core processes or standards.
Example – Publishing / Book Retailing
An example of this is the approach that a new player in the book retail sector took to adapting the relationship they had with the publishers. They moved from the sector norm of buying on a 'sale or return' basis a 'firm-sale' basis, in effect removing the ability to return the books if they didn't sell. In return for this change to the relationship and in effect the T&Cs of trading they were able to get access to books at a lower price than their competition. This coupled with access and control of a direct distribution model allowed them to create a business that with other commercial innovations along the way is today one of the largest sellers of books in the UK.
Whilst there have been good examples of the use of commercial innovation over the years, with recent market and technology innovations organisations are increasingly looking to a greater use of commercial innovation to drive competitive advantage.
Traditionally, innovation has been seen as a product centric set of activities revolving around the process of identifying new or novel technologies, developing them, and then bringing them to market either as a new product or as an improvement to an existing product, usually through existing channels.
Increasingly to be successful and create differentiation organisations are having to challenge themselves to look wider than this and to bring together and align a mix of innovations.
The Innovation Process – a move to five phases from three
If we look at the traditional product centric innovation lifecycle then simplistically there are three main phases: invention; product development; and commercialization.
The invention phase would likely have been the preserve of business development, technologists and scientists who would bring market needs together with the potential for science/technology to deliver a solution. In broad terms the product would then have been developed, often bringing in various engineering skills to the blend. It is likely that only in the later stages of the prototyping and testing would there be an increased involvement by contracting, procurement, supply chain and legal functions in order to package it for the market.
With an increasing move towards a more holistic view of innovation blending product and commercial innovations together there is a need to review the traditional model. Whereas in the traditional model there were three broad phases, in order to bring focus on to the wider range of innovation types there is a need to break down the development and commercialization phases in order to create an innovation lifecycle that has five phases: invention; conceptualization; productisation; commercialization; and monetization.
By doing this it allows organisations to consciously bring in relevant expertise at an early enough stage in the process to create and develop the various strands innovation in an aligned manner.
In addition with the traditional lifecycle it was often seen as a convergent process with a wide number of initial ideas consistently reducing to a smaller number of products. With the holistic process and the complexity introduced by multiple types of innovation there is a need to accept that the process is more iterative with each phase possibly introducing new invention and therefore being diamond shaped diverging with new invention before converging to a smaller number of outcomes.
Transformational Change – at the enterprise and team/individual levels
Such a step change in approach to innovation is likely to be a considerable challenge for most organisations and require adaption at both the enterprise level and the team/individual level.
At the enterprise level it is key for an organisation to ensure that it creates adequate absorptive capacity to pull through the innovation at all points in the process from invention to monetization.
To do this organisations need to consider whether they foster an innovation friendly environment, whether their enterprise processes, including the innovation processes, are aligned and synchronized with the business and corporate strategy, and whether they have a metrication framework that incentivizes the desired outcomes.
At the team/personal level, for everyone, including functional professionals to play their part in the innovative culture then they need to ensure that they have a mindsets, skillsets and toolsets that are consistent and supportive of the new ways of thinking and working that are key for innovation to flow through the organisation as the way that it does business.
So, what does this mean for us as forward looking professionals?
As senior leaders we have to set an environment of culture, processes and metrics that align, we have to analyse and link resources in a way that drives innovative business solutions, and we have to lead on a wider basis than just our functional focus.
As team leaders we have to be receptive to new ideas, give people space to make new linkages and encourage innovation as a part of the 'day job'.
And as individuals we have to ensure that we are receptive and drive change as the norm, we have to ensure that we equip ourselves with a new blend of skills that are likely to be different from those that we have felt comfortable with in the past, and we have to embrace new toolsets that help us understand the impact of the changes that we propose.
Above all we as professionals need to be bold and step up to the plate in the area of innovation to demonstrate the value that we can add to our businesses through the development of new business models, new relationships, new contracting models, new contract delivery mechanisms, and that we can deliver them as parts of holistic solutions to customer needs.
If we are successful at the above then we will have helped ensure that our organisations are adding to the 'writing on the wall' and not just reading it.
This article is part of the IACCM series on the 'Future of Contracting' which is, through a variety of interviews, survey, articles and other interactions aims to help us set a vision for the future of our profession. Key to this is engendering a debate around the issues raised and therefore your thoughts and views are key.
Innovation and transformation is but one of the challenges we face so join the debate on the IACCM discussion forum https://www.iaccm.com/members/network/forum/
Adrian Furner is the founding partner at Kommercialize, which provides support and advice to organisations in the area of business model architecting, functional innovation competence development and functional-led transformational programme delivery.
Contract & Commercial Management: Operational Guide
The Definitive Guide to Commercial Contracting
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Commercial Expertise In Today's Global Economy
Two articles in the Financial Times point to the challenges of maintaining competitive advantage in today's global economy.
The first relates to a decision by Microsoft to relocate its European logistics center from Germany to the Netherlands. This has been prompted by a lawsuit filed by Motorola Mobility alleging patent infringement by several Microsoft products. A judgment is due later this month and, fearing a possibly adverse decision, Microsoft has decided to move its operations to a new jurisdiction.
I find this story interesting from several perspectives. First, the fact that two US-based corporations are engaged in litigation in an overseas country. This is driven, apparently, by the patent-friendly laws in Germany and represents a spill-over from the patent battles that have been the norm in the US over recent years. Second, the fact that Microsoft has decided to move its operations to another country, to avoid the possibility that its products could be seized if the German courts grant an injunction. The ease with which this can be done is itself interesting and illustrates the extent to which jurisdictional borders are becoming significant in corporate decision-making. Third is the extent to which this reflects the complexities of international competitiveness and the role of regulation in determining investment and location decisions. While the number of jobs involved in this case is relatively small, the wider impact on investment in Germany could be considerably greater as other companies weigh up the risks of locating operations in that country.
The other article highlighted a decision by GE to 'reshore' manufacturing of domestic appliance manufacturing to the US, from outsourced operations in China and Mexico. The decision has several elements. One is the fall in relative cost advantage as wage rates in many off-shore locations escalate. Another is the steady increase in logistics costs, in particular the price of oil, that undermines the cost advantages of offshoring. Third, there are US Government incentives, plus more flexible attitudes by the trade unions with regard to worker wage rates. And fourth – perhaps most interesting – is the belief that 'lean production' can deliver greater long-term benefits than a cost-reduction strategy based on labor arbitrage.
This final point is of particular importance because it challenges many of the purchasing theories of the last decade. Essentially, lean production depends on co-location of core functions so that they can work as teams in driving continuous improvement and innovation. This concept is based on a belief that process improvement and the ability to respond fast to market changes depend on levels of collaboration and integration that cannot be achieved through outsourcing to low-wage economies. Arguably, the same can be said of many other aspects of price-driven procurement decisions, which have themselves forced many suppliers to outsource or offshore their production activities.
Together, these stories illustrate the pace of change in thinking, the importance of continually challenging our assumptions, and the need to explore and understand market trends and developments, especially in an international context. They are excellent examples of the primary issue highlighted by CEOs in the 2010 IBM study – 'global complexity caused by growing interconnections and interdependencies'. The calculations in these two stories are all commercial in nature – and therefore areas in which the contracts and commercial expert should have knowledge and understanding, the ability to alert senior management to the threats and the opportunities that drive better business decisions.
Protecting Intellectual Property
IACCM member Gregg Barrett forwarded an article that features a story of corporate espionage and a commentary on the scale of intellectual property theft by Chinese firms.
There can be few who are unaware of the threats to IP that arise when doing business with China. The aspect that makes it especially worrying is the feeling that, far from condemning such espionage or IP theft, the state authorities actively condone it. In the case featured within the article, the CEO of the US victim had taken steps to look beyond the contract and, in his opinion, developed a strong and trusting relationship with his Chinese counterparts. We must wait to see whether the Chinese courts take meaningful action in what appears to be a clear-cut case of theft.
However, before leaping to judgment, I believe we must also place IP protection into an historical context. First, it is important to remember that the entire concept is relatively recent – less than 300 years. Second, we must acknowledge that emerging countries have rarely paid great respect to the concept of intellectual property rights. As nations seek to improve their economic wealth, there is always a delicate balance between collaboration and aggressive competition in their international dealings. While on the one hand there is recognition of the benefits of trade, on the other there is a hunger to equal or better the position of rival nations. Even in established economies, this friction remains – for example, the debates over free trade or protectionism.
If we go back to the 1800′s, there are certainly many examples of US entrepreneurs 'borrowing' ideas from elsewhere. In those days, it could take years before the original owner was even aware that their IP had been stolen and the chances of them launching a successful prosecution were few. The acceptance of IP principles tends to come only when a country has passed a point of equilibrium – when it has more to lose than it has to gain. This comes about in two ways. One is through the development of its own inventions and the other is through its hunger to export and trade in foreign markets. In the first case, having its own inventions creates a desire for protection (both domestic and foreign) and therefore a more effective legal system. In the second case, the wish to export creates an exposure to action in foreign courts which may not share the benign view of their Chinese counterparts.
Since the chances of concerted world action against China seem remote, it appears that companies must in large part rely on themselves for handling the threat of IP loss. They must carefully consider the extent and nature of their trade with China. They must think of ways to limit access to the full specification of their products. They must increase vigilance over employee hiring and loyalty. And they must continue to invest in security products that prevent access and create alerts against attempted IP theft. Perhaps most of all they must hope that China soon reaches that point of equilibrium where it starts to share the view that IP should be respected.
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IACCM Launch Accredited Qualification in Supplier Relationship Management (SRM)
Be one of the first to achieve the world's only internationally recognised and accredited qualification in supplier relationship management (SRM).
The pioneering program is designed to equip practitioners with the skills and knowledge they need to implement SRM practices effectively within their organisations. Completion of the program will lead to individual certification and a 'licence to practise SRM'.
SRM is emerging as both an important business activity and a professional discipline within major organisations around the world. Research evidence suggests that SRM can deliver significant tangible benefits in addition to those achieved through world-class strategic sourcing, negotiation, and contract and performance management.
You will join a group of practitioners as they work through the learning program, in a virtual environment of e-learning modules enhanced by message board interactions across the group and webcasts to enhance the learning materials and provide a forum for interactive discussion of best practices. The skills assessment tool will enable you to do a gap analysis on your current level of skill and capability, enabling focus on personal learning goals for greatest development impact.
This comprehensive training program recognises that relationship management requires a blend of technical capabilities - for example, in process and organisational design, and structuring of appropriate contracts and future-facing measurement systems - and key behavioural competencies such as communication, influencing and trust building.
Participants on this e-learning programme, will learn how to:
- Prepare convincing SRM business cases
- Design an effective governance structure
- Create and implement a communications plan
- Engage key stakeholders and supplier executives
- Develop metrics that drive successful behaviours
- Encourage positive approaches to change
- Collaborate with strategic partners
- Devise appropriate contractual arrangements
- Track and report SRM benefits
- Resolve conflicts and issues collaboratively
The SRM Program has the following priced elements, all prices are quoted in US dollars:
Skills Assessment: $150 per person
e-learning program: $750 per person
(note that skills assessment is a requirement of certification)
Practitioner - Member Level (intermediate): $150 per person
Expert - Certified Member Level (advanced): $250 person
IACCM membership is an additional $150 per annum per person
Please note that we are able to run the SRM program as an in-house corporate program for your company, with a minimum of 6 participants.
The corporate program is facilitated by means of a bespoke learning portal created for your company. An additional $1500 set up charge applies.
The above per person charges may vary for a corporate program, to enable us to meet your needs for webcast interactions, on site interventions, message board participation. Further details of corporate programs are available on request: firstname.lastname@example.org
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