Contracting Excellence Magazine - Jun 2012
The Future of Contracting
Does your organization have a contracting strategy? Can you describe how your approaches to contracting will change over the next few years to align with business and market needs?
At IACCM, we are often contacted by members who are struggling to describe the role and value of the contracts process or function. They are sometimes frustrated by their late involvement, or the apparent lack of appreciation for their role and contribution. Alternatively, they may be overwhelmed by the volume of demand for their support and services.
No matter what the challenges being described, we have found a common theme: there is typically no strategic plan for the development of contracting and commercial capability. Whether buy-side or sell-side, contracts and related policies and practices are generally reactive to business and market demands. As a result, they tend to be seen as slow to change and are viewed by many as inflexible and perhaps even bureaucratic.
There is no strategy without a vision. To develop strategic plans, we must have sense of where we are going. And it is that vision which IACCM set out a year ago to provide. Now, through a series of interviews, research studies, member meetings and roundtable discussion groups, we have produced a view of the future.
In this edition of Contracting Excellence, we provide a series of articles that touch on various aspects of that future and will assist managers and practitioners worldwide to develop a contracting strategy.
The Forces for Change
Contracts & Relationships
"In a complex and highly unpredictable world, it is hard for people to think very far ahead and to plan for all the various contingencies that may arise. Even if individual plans can be made, it is hard for the parties to negotiate about the future, it may be very difficult for them to write their plans down in such a way that, in the event of a dispute an outside authority....can figure out what these plans mean and enforce them.” (Oliver Hart, Professor of Economics, Harvard University)
“There will be more focus on performance based contracting with balanced incentives and penalties. There will be more leaning towards this model from today, where it's more focused on fixed fee and a known-commodity based approach.” (Gabriel Buigas, Deputy General Counsel, Hewlett-Packard)
“Latin America and Asia operate on the basis of business relationships (and ambiguity). At these regions gain in prominence and the balance in contracting and trading relationships change, U.S. commercial contracting practices must adapt with less emphasis on legal terms; more on business relationship terms and conditions”.(VP, Contract Management, Global Aerospace & Defense)
The IACCM Conclusion
There is wide consensus that contracts of the future must become far more effective at managing uncertainty and change. This means that the process –and the balance of terms - will shift from a focus on the consequences of failure, to provisions that assist in reducing the probability of failure. The parties to a contract must agree on the governance principles that enable on-going interaction and shared insight to the status of performance. While technology may be the vehicle for delivering much of this benefit, the contract itself must provide “a single point of truth, so the parties can stop arguing about the data and address the issues and solutions to the problems that come up”. (Bill Huber, Information Services Group)
In addition, more complex business conditions demand simpler, more easily understood contracts – and this requires better use of language and increased focus on usability. “Contracts must become a strategic tool, communicating what people want to know, when they need to know it. They won't only be text on paper; they must be user-aware, helping all users to find information quickly and easily”. (Helena Haapio, CEO, Lexpert, leader in the Pro-active Approach to Contracting)
Technology has in many ways been the driver of the growth in complexity – and it will be a major element in facilitating and simplifying the contracts and relationships of the future. “Just think of everything that is now on your iPad and iPhone and the access you have to information. Dealing with complexity demands a simplified contract, taking complex issues and presenting them in a simpler and more instantly accessible fashion.” (MC McNeill, Vice President of Global Business Offerings, IBM Corporation)
One perspective could be that a more relational basis for trading will reduce the role of the contract and favour the 'informality' of traditional sales and business development. However, this seems unlikely due to the pressures for regulatory compliance on one hand, and the demands for better management of risk and delivery of financial returns on the other. This leads to an overwhelming view that the result of growing complexity will be a different form of contract, adjusted to the needs of the market. Ways that this will be achieved include a growth in industry standards, including in some cases increased use of 'private law'. There will also be a continued drive towards international standards that can enable agreement through reference, rather than requiring case by case negotiation.
Contract management and relationship management will become more integrated. On the buy-side, this will be easier to achieve than on the sell-side because there is no pre-existing organizational model to re-align. The reason for this integration is that many aspects of complexity can be handled only through a deeper understanding of the commercial relationship to which both parties are committed. Many aspects of this – for example, the level of resource allocation, the extent of integration between reporting and management systems – cannot be agreed efficiently during a negotiation. Therefore the framework within which a contract will be formed and managed will increasingly have been established as part of a relational commitment. “In the end, it's about security – that is something that must be important to both parties. They have to work together because there is a feeling of trust … without confidence, there will be tension in the relationship, so openness in your practices and how you do things internally will be important”. (Head of Outsourcing, global software and services company).
A more relational approach also suggests that the tendency to blame the other side when things go wrong will reduce, implying increased maturity and understanding in the way relationships are formed and managed. “If we don't trust our partner, we should recognize that the problem lies in our selection process”. (Srini Krishna, Director of Global Supplier Management, Microsoft).
Globalization is one factor that is driving these developments – because of the need it creates to address the issue of cross-cultural, cross-language, cross- jurisdictional understanding. “Contracting in every culture is being impacted by its experiences picked up from doing business with different cultures. The tradition of each geography is changing based upon those experiences and the need to manage the unknown, the unexpected.” (KB Iyappa, EVP - Legal, GMR Group)
All of these findings indicate a need for much closer alignment between the contracting process and the identification and management of business requirements and opportunities. Too often these activities lack integration – there is 'the vision' of an outcome, and then there is 'the contract and its negotiation'. “When you are guessing the value proposition, you are unlikely to be getting anywhere near the dartboard.” (Ian Mack, Director General, Major Projects Delivery, Department of National Defence, Canada)
Terms & Negotiation
Terms and negotiation must inspire “confidence in the parties that they believe they are getting what they are contracting for in terms of the goals as well as the process, the ethics, the speed and efficiency with which it is done and in which contracts are administered.” (KB Iyappa, GMR Group)
The IACCM Conclusion
Efficiency, speed, simplification. These are seen as critical ingredients of the future process and in order to achieve them, negotiations must become far more focused on the things that really matter. In order to fulfill a more strategic role in the business, there is broad consensus that greater segmentation of contract and relationship types will lead to an improved catalog of approved terms, a growth of commonly accepted standards and (in consequence) a shift in the focus on negotiations. In part, this shift will be to ensure the time and effort of negotiators is more closely aligned with the delivery of value. Also, it will therefore concentrate on more complex situations and terms that assist in delivering successful outcomes. This suggests that the desire by negotiators to spend time on negotiating topics such as scope and goals, change management terms, performance criteria and reporting will steadily be realized.
This means that, over the next 10 years, there will be growing consensus on standards at both an industry level and between major trading partners. Some of these standards will be driven by the growth of regulation – for example, the need for financial services, food industry, oil and gas, pharmaceutical companies to demonstrate effective control over their supply chain can only be achieved through common principles and methods that will steadily become embedded in industry practices and audited compliance, rather than by individually established terms and conditions.
Efficiency will also be achieved by establishing and maintaining terms and conditions as a much more integrated element of the product or service development and management process. Market research and needs analysis will include improved understanding of the commercial terms that are needed to meet specific segment needs.
Finally, contract terms must stop undermining business purpose. This story from one of our interviewees illustrates the dilemma perfectly. "How can you ask a supplier to invest in people, talent and innovative thinking, to put money into the development of your relationship, and then insert an escape clause, where we can leave the relationship in 30 days when we feel like it?”
Many of those interviewed recognize the need for greater emphasis on the economic and behavioral impacts of terms and conditions. Today, the balance has tilted too far towards legally-driven terms that seek to allocate fault and consequence when things go wrong. Much of the boilerplate could be handled through standardized procedures and norms that would shift the substantive terms and conditions to a focus on the definition of value and how it will be achieved, plus the performance management methods and criteria that will be used to drive success (or identify and resolve problems). Terms and conditions will therefore be more thoughtful and creative in areas such as the management of change; on-going communications; joint working; benchmarking; and problem-solving forums and authorities.
Technology & Innovation
“Ten years from now, contracting will be driven by quality and innovation. Predictive modelling will become important. Now, a lot of information is based on probability, in 10 years it will be on innovation. Tools will be able to tell you the right contract for each industry and type of contracting. They will help to refine key information. They will browse a history.”
Today, much of the investment in contract management technology has focused on control and compliance. There has been limited attention to the possibilities of data extraction and value analysis, using contracts as a source of business intelligence or to predict probable outcomes. In particular, existing technologies tend to operate at a transactional level and yield few insights to the portfolio of contracts or contract types.
Technology delivers data – but increasingly, over the next few years, the focus will be on analysis of that data. It will support improved estimations of risk and opportunity, better understanding of the consequences of particular terms or relationship models and when they should be applied. This will include increased influence over business unit decisions and also over supplier selection. For example, the increased transparency that results from networking and that has already led to 'comparison sites' such as TripAdviser, will continue to spread to the business-to-business environment. Credit ratings will be supplemented by broader measures of reputation and reliability, including fundamental issues such as contract compliance, operational performance and business ethics.
“We will continue to see the equivalent of ERP-type functionality that extends beyond the single enterprise and integrates among connected networks of companies.” (Bill Huber, Information Services Group). This vision of inter-organizational transparency will shift the burden of responsibility and increase levels of trust and confidence, in many ways simplifying contracts. It leads to an environment where the parties have an agreed and single 'point of truth', meaning that they can focus efforts less on arguing about the data and more onto identifying solutions to the problem.
Social networking, crowd sourcing, on-demand support and inter-organizational collaboration will have fundamental impact on the way that contracts and relationships are formed and managed, as well as the underlying research, selection process, benchmarks and performance oversight are undertaken. These new capabilities will be the source of a fresh dynamism in contract management as it develops the ability to deliver a pro-active source of market and business intelligence.
“Traditionally, business information has either been lost during the negotiation and contract management process, or locked within individual contracts. Automation will steadily ensure that we capture and share experience, knowledge, techniques, trends ….” (Craig Guarente, Oracle)
Contract & Commercial Management: Operational Guide
The Definitive Guide to Commercial Contracting
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Skills, Organization & Process
There is wide belief that contracting and commercial competence will be critical differentiators in the delivery of business results. As already described, today's market forces demand that organizations must constantly improve their capabilities to commit, and the quality of the relationships they form (with suppliers, customers and through alliances and partnerships).
Many organizations already recognize that they must focus on the skills and process that will support these needs. In particular, they are focusing on:
- cross-cultural awareness, competency and process management
- end-to-end process (need / opportunity inception to close-out)
- outcome-based measurement and management
- ability to manage change, apply judgment, understand value and consequences of non-compliance
There is wide consensus that there is a need for improved relationship skills, greater financial acumen, influencing and broad business awareness – seeing connections, anticipating change.
But while there will be major investments in skills and in process, it is far from clear how this will translate in terms of organization. Contracting is a cross-functional activity and its coordination could be undertaken by a variety of different groups. While some Contracts and Commercial functions are rising to the challenge, many are not. Yet their natural rivals for this role – Procurement, Project Management, Legal, perhaps Finance – are mostly also failing to grasp the implications of market trends. They mostly remain fixated on the development of standards, the monitoring of compliance or the negotiation of one-off exceptions.
The probability seems to be that different models will evolve, but that a core of contracts and commercial experts will develop to support the strategic needs of business and to oversee required capabilities. In some instances, the capability will be delivered through dedicated contracting professionals; in others, it will be through other functions equipped with the necessary skills or tools.
'Supplier Relationship Management ' Program
This pioneering program equips practitioners with the skills and knowledge they need to implement SRM practices effectively within their organizations. Completion of the program leads to individual certification and a 'license to practise SRM'.
Relationship management requires a blend of technical capabilities - for example, in process and organizational design, and structuring of appropriate contracts and future-facing measurement systems - and key behavioural competencies such as communication, influencing and trust building.
Participants of this e-learning program 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 program is flexible. Learning typically takes up to four months.
SRM Program participation includes:
- a secure learning portal for you to access learning modules and skills assessment
- a learning progress page to track your progress through the program
- individual self-assessment online, against commercial competencies
- external benchmark of skill level
- analysis of your skills data
- personal development report including recommendations
- structured curriculum of learning modules
- up to four months course of study
- a mentored message board (if you have selected to join a scheduled cohort)
- share knowledge and experience with others in the learning program
- IACCM interventions to add value to discussions
- Powerpoint presentations with audio commentary
- Extensive module document library of 'optional extras'
- Module tests, to enhance and assess learning and test understanding
- 12 month license to access the learning modules
- Unlimited number of module visits
Click below for information or to register:
You may also apply for certification at one of two levels. See below.
SRM Practitioner Certification is open to anyone with a minimum of 3 years in a relevant business function, with a current active role in relationship management activities.
SRM Expert Certification requires a minimum of 3 years of leading on supplier relationship management activities, at an advanced level. Able to mentor others in the principles and practices of SRM. A track record of introducing innovative SRM initiatives in your organisation.
Click below for Certification information or to register:
For further information, please contact:
Vice-President, Europe and Africa
+44 (0)759 553 4239