Contracting Excellence Magazine - Jul 2012
The Three C's: Commercial, Contracts & Change
Last week, General Motors announced its intention to insource 90% of its outsourcing – impacting some 80,000 jobs and around $3bn in annual spend. It highlights that there will now be two years of work to unwind from a complex web of current contracts.
Yesterday, the head of compliance at HSBC publicly resigned, following a similar resignation the previous week by the CEO of Barclays. With the industry in disarray, the management of reputation risk has become core to survival.
Also last week, the UK Government published its opinion around the critical importance of commercial and contract management skills to the future of public sector management – and highlighted that these are distinct from the work undertaken by procurement professionals.
Today, the press is full of stories about the failure of service provider G4S to meet the terms of its contract to provide security staff at the London Olympics. The responsible Managing Director highlights poor commitment management and a failure to plan in accordance with the contract. More than $1bn is lost from the company's market value.
All around us, the volatility and uncertainty of market conditions are daunting. Yet this is the environment in which business deals are being negotiated and relationships formed and managed. Success increasingly depends on having people with the necessary skills and tools to make good business judgment and to oversee execution and performance. Part of that judgment is to understand the best structure for trading relationships, to build in the right governance procedures and terms that support flexibility and adjustment to market conditions.
The last decade was driven by the three C's of commoditization, category management and compliance. But these mechanisms simply created an environment for improved control and a framework for the management of change. They do not address the realities of today's business conditions.
The commercial and contracts community faces a time of unprecedented challenge and opportunity. Our potential to bring value to our business grows by the day; in many cases, it will be the key to survival.
Trust and Value in the Oil and Gas Supply Chain, Does it Exist?
The supply chain -- getting goods from point of origin to point of use or providing services to end users -- is similar in many industries. For all industries, relationship is critical throughout the process. If it is lacking, value is gone and business is lost!
Can we eliminate this troubling reality? Absolutely. Once we understand the root cause, we can fix it.
Research shows that the parties entering into a supply chain relationship sometimes feel dissatisfied within five to nine months after entering into that relationship. The oil and gas industry is like any other, where adversarial and confrontational attitudes can fuel suspicion and dominate the relationship between the client and supplier or contractor. If either side fails any part of the bargain, adversarial fires can ignite and burn up the value of the relationship!
Surely the goal of any organization over the short, mid or long term should be to deliver value not only to meet the needs and expectations of its stakeholders, but also to fulfill the needs of markets in which the organization exists.
The oil and gas industry must survive in an environment of extreme price volatility and within a unique set of legal frameworks. Each client supplier /contractor relationship is unique. Each must be treated individually. Long lead times for complex and/or high value items are the norm, demanding that parties understand both internal and external environments and expect a higher level of trust from the buy and sell side to create value in the supply chain.
An internet search conducted recently with the words “Value - Supply Chain” revealed 108,000,000 results; it is clear there are many opinions on what value means in the supply chain. Is supply chain value just another buzzword, or is it something deeper and far more powerful?
Clearly, value is hard to capture. If each party in the relationship is to reap value from the exchange, each must take a more holistic approach for managing supply chain relationships. Each party must focus on integrity, transparency, clarity, and trust and pair them up with more traditional performance measures relating to cost, quality, delivery, service and technology metrics.
A Success Story in the Oil Industry Supply Chain
Nexen and Tenaris, one of the world's leading steel providers, recently embarked on a relationship based on the enablers (shown below) to have industry leading impacts to provide OCTG (Oil Country Tubular Goods)..
The company developed a Relationship Management Plan to document the guidelines to enable value creation and realized value from...
- Performance Management
- Process Improvement
- Planning, through enablers mentioned before.
The Relationship Management Plan focused on providing:
- Clarity on Objectives and Roles and Responsibilities
- Transparency on Contract and Performance Management (through clear processes and meaningful KPIs)
- Guidelines to work as a team and build trust during the relationship
Supply chain partners must set aside self-interest and create an environment where willing partners are open and transparent, working together to structure long term, mutually beneficial relationships without comprising personal values.
Parties need less cynicism about their trading partners as they rigorously evaluate and monitor the process.
Complex technical endeavors, characterized by exploration for oil and gas - especially in deep water -is a high stakes endeavor. A deep water exploration well can cost anywhere up from one or even two hundred million dollars. One only has to read the business press to understand exploration is a challenging business with success rates industry-wide usually averaging about 20% (Nexen's commercial success rate is a best-in-class 28%.). Companies must ensure that in the race to preserve dollars, they don't over measure, which often results in failure, wasting untold hours and energy and eroding value.
Value erosion exists in every industry and may be due in part to the human error, system errors and combinations of both.
The traditional measures of success must be enhanced with a thoughtful and intelligent approach that measures the things that really matter. Such as
- Efficiency, quality and reliability
- Innovation and learning
- Timeliness, performance and responsiveness
and combine the above with a
- Willingness to share knowledge and information
- Ownership, leadership and accountability
- Honest and open communication
At Nexen, we conduct business in an ethical manner and build relationships based on collaboration, honesty and respect. We listen, share information openly, collaborate and participate. We each know our responsibilities and are accountable for our decisions, behavior and actions. We measure our results to validate our individual and shared ownership of Nexen's successes and shortcomings. By applying these practices to all aspects of the supply management chain, we increase value, save time, maintain relationships and create partnerships to the benefit of our partners, our stakeholders and the communities we serve.
A Case Study For The 'Licence To Act Differently' Programme
This annual survey, including the most recent one we performed in 2011, has consistently shown over the past few years that members focus mostly on the following terms and conditions:
- Limitation of Liability
- Price / Charge / Price Changes
- Intellectual Property
- Liquidated Damages
- Performance / Guarantees / Undertakings
- Delivery / Acceptance
- Applicable Law / Jurisdiction
- Confidential Information / Non-Disclosure
KMD took a 'straw poll' of their contract management team -- without disclosing the IACCM survey to them -- to ask which terms they believed they spent most of their time negotiating. The team identified price benchmarking as one subject they used often in recent negotiations. But, other than that, they identified terms very similar to the top ten listed in the IACCM survey.
KMD used this top ten list as a baseline for knowledge transfer in their organisation. All ten terms are now a starting point for planning negotiations.
The company has written negotiation guidelines, including company policies and preferred positions, on each of those subjects. At KMD, it is now mandatory for all new business to check the bid against the commercial guidelines. In this way, the soundness of the contract can be checked, from a commercial business perspective. The question now being asked is 'Does the deal support good business relationships?'
In particular, KMD has looked at what goes wrong in the management phase after contract award. Teams doing new business are now encouraged to focus on certain key issues, based on the knowledge of the business impact of what commonly goes wrong, combined with some of the research performed by Kate Vitasek1 from the University of Tennessee on the causes of outsourcing failures.
The key issues focus on:
- Contractual change management
- Roles and responsibilities
- Price benchmarking
- Service Level Agreements
- Price models
Recognising that different types of contract (e.g. product sale vs. outsourcing, etc.) have different types of issues, the company created tools that analyse risks by contract type.
The management board of KMD now prohibits business teams from using a contract template older than 120 days, because the company builds continuous improvement to the contract templates as the lessons are learned.
KMD compiled questionnaires for each of the ten key items. For example:
- Is the change process clearly defined?
- Who has authority to approve?
Many questions originate from the IACCM contracting body of knowledge online training materials. For example, the IACCM change control module has been used to identify some of the best practices to be implemented in KMD's business.
KMD's risk questionnaires are designed to lead to an overall risk score. Risk is not only about delivery, but also about building and sustaining business relationships.
KMD is now working on building a governance model. Although clients care about delivering the service, it is really about managing expectations. KMD's experience is that sometimes delivery to contract doesn't equate to satisfied customers.
All this hard work is making a real difference to the way KMD does business. It is critical that business teams understand the new ways of working fully.
KMD is now launching a structured programme of communication to the business. Their programme will include conference calls introducing the principles to the business and training sessions for employees, which will take KMD employees through the risk questionnaires, surveys and processes. Account managers, bid managers, product managers, and others working with client contacts will receive face-to-face training.
How can IACCM help you?
IACCM research is designed to influence all members to also ask the question: 'How can we use this information to improve the quality of our business approach?'
Who knows? Maybe your business can find other ways IACCM research can be your tool for greater profitability!
1. Kate Vitasek is the lead researcher into Vested Outsourcing based on research with the University of Tennessee, and the co-author of two books based on the concept: Vested Outsourcing: Five Rules That Will Transform Outsourcing and Vested Outsourcing Manual: A Guide for Creating Successful Business and Outsourcing Agreements).
futurethink is a global foresight and innovation firm that specializes in training. Watch this 1 minute video with futurethink's CEO, Lisa Bodell, giving tips on how to create innovative business cultures.
Synergizing Operations and Contract Management -- a MUST for Effectively Managing Project Changes
Effectively managing contract project changes is the key to a company's overall success. For long term contracts, project changes can significantly boost revenue and profit streams. But, when projects fail, you might be startled at how often such failures equate to staggering lost dollars.
Results of the Project Management Institute's (PMI) 2012 Pulse of the Profession report show ”an average of 36 percent of projects did not meet their original goals and business intent in 2011.1” Furthermore, when a project fails, more than $120,000 (USD) are at risk for every $1,000,000 spent on projects. “Low-performing organizations risk 27 percent of each project's budget on average, compared to three percent in high-performing organizations.2”
If these statistics weren't sobering enough, imagine how unsuccessful projects can negatively impact the relationships you have with your clients. Not only are low-performing companies losing money on individual projects, but they are also increasing other costs (on average five times) to secure new clients to replace those clients that have walked away due to your poor performance.
Clearly, these findings reveal the need to create synergy between contract management and operations. High-performing organizations must leverage strong, internal project change management practices and expert client-facing teams. After all, the clients expect suppliers to respond quickly to their business needs. They want creative, well documented, problem-solving solutions – on demand -- at competitive prices. A strong client-facing team should know how to do this and adjust to project requirements with a common goal and a strong sense of mutual commitment. The team may vary based upon the scope of the project. The team should include, at a minimum, a contract manager, project manager, sales executive, financial modeler and individuals with technical expertise.
Too often, however, the operations team engages contract management late in the change management process or simply does not include them at all, creating friction between the two groups. This antagonistic 'us' versus 'them' mentality spawns a negative working relationship between contract management and operations, one that shakes clients' confidence in the suppliers' ability to respond to their requests.
You must take a high-level look at the roles and responsibilities for both operations and contract management. Then you will see complementary but divergent responsibilities between the two functional groups. Interestingly enough, they have common goals.
From a project change management perspective, the operations team defines, manages and delivers the requested change to the client. The team also manages scope and costs while maintaining customer satisfaction. The contract manager makes sure the project change order properly reflects the client's required changes to be delivered pursuant to the contract terms and conditions and country/state regulations; mitigates risks; and obtains proper client authorization to proceed.
Both contract management and operations have the same goals: Provide client satisfaction, generate new revenue and maximize profit for the organization. Both teams try to accomplish these goals, but with two different approaches.
- Contract Management believes it must be the watchdog and enforcer to ensure the organization remains in strict compliance with the contract.
- Operations tends to believe that contract management is too structured, inflexible, not creative and an impediment to getting things done. Operations is known for getting things done more quickly with more flexibility but, on occasion, may not comply with the contract or not follow organizational policies and procedures.
To become a high-performing organization, both mindsets and practices must change in virtually all functional groups and levels of the organization. The following are essential steps to start the organization transformation.
1. Work as a team. Executive management must enforce this. If they do not, then the operations team has no incentive to change its behavior. Operations must include contract management as part of the team and make them an enabling force.
2. Expand skill sets. Contract managers need general business knowledge to deal with tactics used in finance, accounting and marketing. They need better soft skills to support interactions in negotiations and in general, customer relationships. Senior leadership must provide the resources and training to make the contract managers successful.
3. Be creative. Contract managers must bring creative ideas to resolve challenging contract and project issues. Don't stifle creative solutions. Don't say, “we can't”. Be Innovative. You might provide a minimum of three creative solutions the team can do with less cost and within the contract structure and constraints.
4. Clarify and blend. Clearly outline the roles and responsibilities of both operations and contract management for each step in the contract lifecycle and define how they will interact with each other. By integrating the contract management processes with the operations processes, you can better coordinate planning, communication and collaboration.
YOU GET THE BENEFITS! When you successfully blend contract management and operations during project changes, you will enhance teamwork and likely save money by avoiding project failures and losing existing clients.
The potential result of doing it right will be:
- Satisfied customers. You reduced or eliminated misalignment with customer expectations. Your contract management and operations teams worked in tandem to ensure proper documentation and communication going to and from the client.
- Faster turnaround. You responded to client requests and project changes more efficiently and accurately. You handled issues quickly and minimized escalations.
- Project Success. You did the following:
- increased the success rate of delivering projects on-time and within project costs, creating a high-performing organization.
- set the correct expectations by clearly documenting project deliverables and assumptions within the project change order when authorized by the client.
- created the proper process structure to maintain accurate project change documentation throughout the lifecycle of a project.
Today, both operations and contract management need to synergize in ways not always expected in the past. Surviving and becoming a leader in the global economy requires high-performing, agile teams working together with a single mindset.
1PMI's PULSE of the Profession, Driving Success in Challenging Times, March 2012, Page 5
2PM Network, April 2012, Page 15, www.pmi.org
Introduction for Contents Page
Effectively managing contract project changes is the key to a company's overall success. Project changes can significantly boost revenue and profit streams for contracts longer than one year. But, when projects fail, you might be startled at how often such failures equate to staggering lost dollars!
Vice President Contract Administration, ITO
CPCM, CFCM, CCCM and MCCM Cert.
Xerox Business Services, LLC
Pam Fournier is the Vice President Contract Administration, ITO for Xerox Business Services, LLC, which provides Information Technology Outsourcing services to clients globally.
Without Inspiration, Your 'Innovation' Will Need Tuning Up!
Ever heard the joke about the three economists on a hunting trip? They encounter a deer in the forest. The first economist fires and misses by a meter to the left. The second fires and also misses, by a meter to the right. The third doesn't fire, but shouts enthusiastically “on average we got it!”
In the business of contracts, could we, unknowingly be like the three economists? If so, it's time to retune -- maybe transform -- our reasoning.
For example, statistically, the average of one meter to the left and one to the right may be considered dead center, but the actual deer is alive and well! This is like saying inventory was 10% too low one quarter and 10% too high the next. On average, it was forecasted accurately. The average of the two quarters may support the functional scorecard, but long lead times during the under-stocked quarter, and the low return on invested capital during the over-stocked quarter tell a different story to customers and shareholders.
In the contracts function, if we rely only on statistics to measure our success, like cycle time, we miss the real success stories behind the numbers that can drive innovation and change.
If you read my last IACCM article1, you'll know that I am a huge proponent of capturing and using quantitative data to support contracts negotiation and policy decisions. However, when we want to influence the real “thought leaders” and drive innovation and change, we need to be equally adept in using, inspiring examples, stories, anecdotes, and metaphors that serve stakeholders interests beyond our own.
To use a metaphor, if numeric data is the “lyrics”, then qualitative examples are the “music” when it comes to moving people to take action and drive real change and lasting innovation.
But what if you get unexpected surprises?
Let's say you do the above. But what happens if you get a defensive reaction to a change you were proposing? Perhaps it happens in negotiating with a supplier or a customer or in their response to a proposed new internal process or policy. While revising or negotiating new purchase or sales terms, it is not unusual to trigger controversy. After all, our sourcing, contracts and legal teams are trained to argue rigorously in favor of their position.
How do you overcome the controversy without caving in, damaging the relationship, or above all, without depriving your organization of the innovation and change that it needs to compete effectively? You share the data, e.g. the time, or cost savings, or the revenue or profits gained, and you share an inspiring example. Perhaps another company or organization that has successfully implemented the very change you are proposing!
If you don't have examples of how other companies are innovating in ways that you are proposing, you can always turn to IACCM for benchmarking or networking opportunities to learn more. And don't be limited to looking only in your industry for inspiring examples.
One final point about Inspiration
Inspiration, according to Dean Herman, Ph.d., from his leadership book Four Portals to Power – A Practical Guide for True Self Mastery for Leaders, means giving yourself over to something bigger and putting the group first before your own self-interest. If the contract innovation you are proposing is only going to serve your contracts team's interests, your stakeholders are much less likely to be inspired. The quantitative data will fall short, and the change may not happen. However, if you transcend your own self-interest, and serve the broader needs of your company, your supplier, or customer, including using examples and stories from beyond your function, organization, or even beyond your industry, you will hit the moon or at least, land among the stars.
Fostering innovation and positive change requires inspirational leadership. Inspirational leadership includes using real examples, metaphors, stories, and anecdotes to give the other party, your functional stakeholders, or your audience the comfort that your data is not “lying”, like with those misguided deer hunting economists.
1. Negotiating Tips…Should You Listen To The Wise Old Owl? Contracting Excellence May/June 2012.
Contract & Commercial Management: Operational Guide
The Definitive Guide to Commercial Contracting
We are excited to announce that IACCM's groundbreaking commercial contracting guide - the first global work of its kind - is now available.
Secure your copy of Contract & Commercial Management: The Operational Guide today - and find out why this highly recommended title is being called 'a great catch all book that can be referred to by both sell and buy side for worldwide contracts', that will 'serve as a reference handbook throughout a career'. The definitive work on contracting and commercial best practice provides a comprehensive overview of the entire contract life-cycle over more than 500 pages of detailed insight.
The Operational Guide is a unique work, addressing contract and commercial principles on a worldwide basis, for both buy-side and sell-side practitioners. Invaluable for training, as a reference work, or simply to update your understanding of current practices, this is a volume that you really must own!
For more details and to order online, please go to:
'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