Contracting Excellence Magazine - Nov 2012
2012 Top Terms in Negotiation released
Contracting and commercial capability have risen in importance on the Corporate agenda – and IACCM's 11th Annual Study of the Most Frequently Negotiated Terms explains why. Continued turmoil in global markets, coupled with a wave of regulation and shifting economic power, are creating an environment of increased complexity and risk, which is having a major impact on contract negotiations.
This year's study reveals changes that are far more dramatic than at any time since inception of the report. Among the highlights:
- Markets are fragmenting; major corporations are either choosing or being forced to shift the focus of their negotiation in international markets as local issues or concerns challenge standard templates.
- The buy-side / sell-side agenda has become more polarized, reflecting a growing divergence of concerns and increased focus by Legal and contracting specialists on supplier risk.
- The frequency of negotiation and of post-award claims and disputes has increased, driven by a combination of rapid power shifts within industries and between countries, and economic conditions that result in cost-cutting and adversarial behaviour.
- There are encouraging signs that negotiators are placing greater focus on terms that impact risk probability. However, there are also indications of diminished trust between buyers and suppliers, with collaboration occurring only between a select few.
These changes have significant implications for workload, skills, operational management and risk. They demand revised contract and commercial strategies and increase the urgency of steps toward 'intelligent contracting'.
To read the full report, go to:
Taking the Reins: Alternative Sources of Corporate Funding in Asia
By Will Nagle, Falcon Trade Corporation
Asia is facing a conundrum: its appetite for funding is increasing just as bank lending from historically liquid continents is shrinking. Strong domestic demand is augmenting company expansion, helping to prop up and stimulate the region's continued industrial growth and economic development, which, although slowing, remains enviable. Indeed, analysis shows that the east Asia and Pacific region's share of the global economy has tripled in the past two decades. â€¨â€¨
Meanwhile, the continued fallout from the global financial crisis and the ensuing eurozone debt problems are having knock-on effects on the availability of funding in the region. Many European and US banks are leading an industry-wide retreat to their home markets, scaling-back billions of dollars of funding to companies in Asia. Indeed, according to data from the Bank for International Settlements (BIS), lending by continental European banks to Asia-Pacific had dropped from around US$455bn in June 2008 to US$356bn by the end of 2011 - a fall of 22%, despite on-going demand. â€¨â€¨
However, the withdrawal of global banks from the emerging markets is not all bad news for corporates in Asia, as both regional banks and alternative providers have established a position to fill this space.â€¨â€¨A Western Retreatâ€¨â€¨Even without the advent of tighter bank regulation, bank constraints caused by the euro sovereign debt crisis are being felt in Asia. Yet the imminent implementation of Basel III, which demands better-capitalised banks globally and is prompting them to slim their balance sheets, has accentuated the squeeze. Indeed, given the stringent treatment of letters of credit (L/Cs) and other trade instruments under Basel III, the availability of trade finance globally is becoming diluted. â€¨â€¨
This trend is being further driven by political pressure. The global financial crisis highlighted the link between banks and the state, particularly given the use of taxpayers' money to bail out many of the world's largest banks. This has led to governments pressurising their banks to prioritise domestic companies when it comes to lending decisions, further reinforcing the retreat from emerging-market lending. â€¨â€¨
Regional banks are taking advantage of this shift. They have a historical domestic presence and an unrivalled grasp of local clients' needs. Certainly, the withdrawal of European and US banks from Asia is prompting the region's corporates to look towards local banks for US dollar funding. Banks in countries such as Singapore, Hong Kong and Japan are benefiting from this retreat.
Recently, for instance, Singapore-based DBS Bank posted a record Q1 profit as loans to Chinese borrowers soared by 81% and lending to Indian borrowers increased by 42%. â€¨â€¨In addition, several local banks that come from smaller markets - such as Malaysia's CIMB Group and Maybank and Singapore's DBS, OCBC and United Overseas Bank (UOB) - have started expanding across the continent. They are also benefiting from some international banks selling their regional loan books to both mitigate risk and improve liquidity.
CIMB Group, for instance, is buying some of the Asian units of the Royal Bank of Scotland (RBS), and DBS is in the process of purchasing Bank Danoman in Indonesia to strengthen its already substantial presence in that country. â€¨â€¨
â€¨However, while it is reassuring to see regional banks stepping into this funding gap, they can only do so much. Also, their focus is often on providing off-the-shelf, generic solutions to their existing client base. Many of the smaller regional banks may lack adequate IT infrastructure and resources that would allow them to create sophisticated solutions with a fast approval turnaround.â€¨â€¨
Certainly, no two clients are the same, and they all have different requirements, meaning that generic solutions typically provided by banks are sometimes incapable of meeting the precise needs of a company.â€¨â€¨
However, there are sophisticated solutions available. Many corporates have started to look beyond traditional sources of funding and have found that alternative solutions providers have both the resources and expertise to structure sophisticated corporate and trade based solutions. Additionally, some alternative providers operate on a global scale and are capable of providing the global reach now sought by Asia's increasingly ambitious corporates. â€¨â€¨
Alternative providers often do not have the balance sheet size of the global banks although this need not be a constraint, particularly in the current environment. Their smaller size makes them nimble, allowing them to operate with various parties along the supply chain and form deeper relationships with their clients. This, in turn, enables them to offer tailored solutions that fit the company's exact requirements. â€¨â€¨
A Positive Shiftâ€¨
â€¨Certainly, the retrenchment of European and US banks to their home markets may require many Asian corporates to reassess their business practices and sources of funding. But this need not be for the worse. Much pre-crisis cross-border lending could now be judged by some as being too risky for the current book, and a number of financial institutions are finding it hard to be enthusiastic about some of the new decisions, strategies and approvals found in the present market. â€¨â€¨
At the same time, the steady rise of regional banks and alternative providers indicates that corporates are no longer solely reliant on global banks. Instead, Asian corporates are presented with a wider variety of funding options, and a new approach to corporate finance.
In addition, the collaboration between financial institutions suggests that the emphasis in the corporate finance space has shifted to placing importance on the quality of solution, rather than on the financial institution that provides it. â€¨â€¨
As a result, Asian corporates now operate in an environment that holds their needs at its core. Therefore, despite European and US banks reducing funding to corporates in Asia, this may actually prove to be good news in terms of the speed and flexibility of the financing on offer.
Think Right, Do Right, Add it up Right
By Jacqui Archer
In an increasingly complex trading environment, contracts are simply not up to the job, we've evolved beyond them. We've become more than negotiated terms, we've become an interconnected system and that needs new rules.
Complex relationships don't need more control, they need holistic thinking and a flexible economic model that seeks to rectify deviations from risk and reward boundaries and re-calibrates itself when the environment changes.
Nevertheless, let's keep this in mind. Although existing contractual constructs are outdated, we do still need a contract, one that has the capacity to flex as business happens. Yes, the contract is required! It just needs to evolve.
When life was easy, simple transactions were enough. When we made more than we needed, we sold the surplus at the best profit we could get. By our own selfish actions, we created commercialism and an upward wealth curve that calibrated itself and benefited society. Enter the media and internet revolution, nanotechnology, world knowledge on line, jet propulsion, Facebook, mass globalization, crowdsourcing and BIG data. Things got risky and very complicated.
Simple goods and services are bought and sold by click and more complex goods and services are increasingly dependent on the efforts of others to bring them to market. There is a tipping point along the axis of complexity and dependency that escapes the boundaries of traditional transactional cost economics and becomes a society. A complex society that requires an integrated approach to sustaining the society as opposed to managing contracts in the context of traditionally managed commercial relationships bound in rigid legal terms and conditions. The closest available model to help us deconstruct and make sense of this complexity is systems thinking.
Thinking in Systems
Donella Meadows was a pioneering systems analyst and her work on creating a sustainable future and positive outcomes taught us to pay attention to what is important not just what can be quantified. Her 1972 book, “The Limits to Growth” forewarned business leaders that the drive for exponential economic growth and unsustainable patterns could lead to economic disruption. Her later book “Thinking in Systems” published posthumously in 2009, helped business leaders understand complexity though the lens of systems thinking, get to grips with it and apply the techniques to find leverage points and pathways to more effective decisions.
Finding the Pathway
In order to help us “get it”, Donella asked us to consider the humble “slinky”. Yes the toy that magically walks downstairs all by itself. All you need to do is find a set of steps (the right platform) and let it go with a gentle push. This one push releases the behaviour designed within the toy's own structure to make it all the way down the stairs by itself. It's that simple. A well designed system with the right motivation has the inherent ability to sustain and manage itself.
A system is an interconnected elements structured in a way that achieves a defined purpose or function. The interconnectivity between the elements forms a data loop and the purpose or function of the system can be established from the way the system behaves in order to perpetuate or replicate a chosen result.
In a complex business environment, we could not possibly hope to manage every single element or interaction (although some do try), we really just need to be able to intervene at specific points where the data indicates that the purpose or function has or is about to move away from the outcome we had intended.
A complex business system may need to evolve its behaviour to derive the best long term outcome for the complete system of which it is now a part.
The problem with an ever increasing complex and interdependent system is that lots of things simply happen at once and because we are used to operating in contained hierarchical governance models with rigid contracts, we attempt to manage everything at ever more finite levels of detail and we simply lose sight of what really matters.
We need dynamic governance systems with just enough coordination to achieve the overall system function and just enough autonomy to keep the sub systems flourishing, self-organising and innovating better ways to achieve the outcome.
Less is More
Self-organising systems are highly resilient, adaptive and can evolve if we learn how to communicate with all the subject matter experts that play a part in the system in the language of their part in delivering the outcome. We need to design into our complex relational models the ability for individuals to experiment and make decisions within the system boundaries.
With less rigour guided by a few simple standard principles we get more innovation and paradoxically more long term success because rewards are aligned to long term outcomes. We talk less of control and past performance indicators and our energy is re-focused on connecting and cooperating with people, across discipline boundaries, across the extended environment and we work together to find solutions to the events that mitigate risk or bring us closer to the best value outcomes.
Like proud parents nurturing children through school, systems grow up too and we need to evolve our thinking as the system evolves.
Before we form an opinion or elect to make decisions, think carefully about the intended outcome of any actions and the potential consequences of our respective choices on others. Be clear that our action is helpful, beneficial and positive for ourselves and others in our society. It is important therefore to understand our own boundaries and limits and be aware when we are near to reach or breach them.
The environment in which we operate is constantly changing; our actions however small and insignificant can create a chain of events, an interconnected cycle of cause and impact. The governance system for complex business relationships needs to create measures that make data visible and create rules of behaviour that incentivise all parties to achieve the function of and profit from the system.
Creative thinking in a systems world requires us to train ourselves to think holistically and be mindful about the possible impact of a course of action before we act. If our thinking is distorted by selfish goals and a win-lose approach to commercial negotiations, we risk making the wrong decisions and if too many people within the system are making selfish short term decisions, the culture of the organisation will be distorted, the outcome diminished and a small door opened to the prospect of poor trading practices.
Once the right thinking has been applied, focus can be applied to DOING IT RIGHT and making the right choices when we come up against a limitation of the system. We rarely require decisions when things are in abundance, we usually have to make decisions when something is missing, late, too expensive, broken, off target or we require to divert time effort and money to pursue another opportunity.
In thinking through a specific problem it is helpful to consider:
1. What is the desired outcome?
2. What is the root cause of the problem?
3. What options are there?
4. Can we find an option that benefits the system as a whole?
If we think about options and choices in the right way and have the right intentions, we have a much better chance of making better decisions and doing the right thing for the benefit of all parties in the relationship including the social infrastructure around our corporations.
Add it up Right
We've all heard the cliché that money talks, however revenue and cost is only part of the equation. Behind every cost, price and margin is a bundle of economic assumptions that are fixed, variable, semi variable and subject to movement over the course of time as “business happens”.
It is also common knowledge amongst systems engineers that functional limitations can be managed by finding the key lever points usually at system interfaces or boundaries and re-setting them back on the right course to meet the desired outcomes or requirements. The same is true of a business model and its underpinning business case when operated as a flexible economic system.
A relationship where one party says yes at the outset and then loses out financially during the course of the relationship may be inclined to change their behaviour and alter the system to bring their financial needs back into equilibrium. A see-saw of negotiations may occur where neither party really reveals their thinking or intention for fear of being viewed as greedy or acting in their own self-interest. Risks may go unnoticed and short-cuts may be taken, risks hidden and the outcome or the potential of the complete system driven off course.
In a systems world, people of all disciplines come together to share thoughts, solve problems, get past limitations and where all seek to enhance the performance of the system.
If we view our trading relationships in the same light, we can perhaps begin to unclutter and re-calibrate our static commercial terms and conditions with some dynamic economics. The simplicity of systems logic may just be the magic ingredient to making complex commercial relationships work better than contracts ever did.
ABOUT THE AUTHOR
Jacqui Archer is the owner and director of Dealworks Ltd, a progressive consultancy offering commercial and contracting expertise to organisations seeking effective collaboration with their customers and suppliers. Her leadership spans healthcare, aviation, aerospace, oil and gas and Government sectors.
Her core success is focusing on outcomes that encompass fair play to unlock greater business performance through mutual gain. She co-authored the Vested Outsourcing Manual (Palgrave Macmillan, 2011) and authored and contributed to numerous articles, model contracts and books on commercial and contracting best practice including Contract and Commercial Management, the Operational Guide (IACCM, VanHaren Publishing, 2011/2012). An inspirational speaker, she is regularly invited to share her insights at key conferences and leadership round table events. She is a Fellow and former Board Member of the IACCM, a guest lecturer on the MSC Commercial Management programme at Manchester Business School, UK, and an adjunct professional for the University of Tennessee's Certified Deal Architect programme in the US.
The Role of Contracts in the Management of Risk: A Case Study from the Energy Industry
How often do perspectives on risk prevent the realization of opportunity?
That is a question which is increasingly being asked in the UK energy sector, where projects to support Government policy on alternative energy sources are lagging far behind plan.
A recent working group identified the extent to which embedded and traditional behavior within the industry stands in the way of innovation and joint problem solving. Specifically, the group was studying the slow progress in development of off-shore wind farms, an area in which the UK should have leadership given climactic conditions. It found that a history of adversarial relationships was reflected in contracts and contracting processes that sought to allocate risk to the weakest parties and led to a blame-based culture.
Off-shore wind farms certainly represent an area of substantial risk. They demand initial high levels of investment and will require continued technological advance. At present, development is delayed because suppliers are reluctant to build capacity and no one is willing to shoulder the risks of technological uncertainty (for example, dealing with the limited warranties or performance undertakings that manufacturers offer in such untested conditions).
The working group concluded that progress depends on realizing a need for a fairer balance of risk, moving away from traditional turnkey projects and towards alternative forms of multi-partner' contracts. Some of the identified options for increased collaboration through alternative forms of contract were:
- To incorporate partnering and collaborative working provisions as an overlay to existing forms of contract
- Target cost contracts
- Framework agreements (to address issues of continuity, expanded timeframes for the relationship)
- Individual alliance agreements
- Project alliances, with gain/pain share
- Strategic alliance
There was also discussion about the importance of bid and negotiation procedures that allocate the share of risk or gain on a formula related to the extent of influence and control, and the ability to bear the risk.
In itself, this conclusion is probably self-evident to any risk expert. However, achieving a conclusion is difficult because it involves overcoming the challenge of embedded organizational culture. In this regard, the working group saw the development of an appropriate contracting model as key. Without this, there was no basis for discussions that could allay underlying fear and suspicion. Existing projects have made some use of FIDIC, LOGIC, BIMCO and the NEC model – with the NEC approach currently gaining ground due to its perceived flexibility. But whichever model is selected, multi-party contracting creates challenges:
- Dealing with multiple interfaces
- Negotiation and management of contracts
- Maintaining alignment
- Dealing with 'known unknowns', such as weather, supply constraints, regulatory changes etc.
- Handling claims
- Marginal project economics
In order to overcome these innate fears that prevent realization of an economic opportunity, it appears there may be a need for new players to step into the mix and create a fresh environment and attitude. For example, we are discovering that an independent, cross-sector body such as IACCM can have a powerful effect in coordinating the development of industry model contracts. Since it has insights from across many industries and no specific involvement in past failures, it can bring a mediating influence and the benefit of a truly external view. Similarly, there may be a need for a new 'risk owner' to step into the mix, acting as a catalyst for new conversations and attitudes. In this case, it may be a Governmental body that needs to exhibit clearer leadership in order to 'prime the pump' for change.
In the end, this situation is an excellent example of the way that traditional attitudes and historic experience can stand in the way of policy and innovation. Without new approaches to address risk perceptions, there will be little progress. Today's contracts reinforce these fears by their focus on risk allocation and the consequence of failure. A solution depends on the ability to establish new and different governance and management behaviors that tackle risk probability. It is these that lie at the heart of collaborative relationships. They include key issues such as senior management engagement, that both parties must commit interface resources, common methods for communication, accept accountability (eliminate blame) and work together for continuous improvement.
Contracts have typically been seen as an inhibitor to change. They tend to lag behind business needs. In that sense, they are in fact a source of risk. Increasingly, as this case study illustrates, we need to think about contracts as a potential catalyst for change. By focusing on the relational and economic needs of the stakeholders, we can construct contracting models that build, rather than undermine, confidence and which enable a path to the future, rather than a barrier that prevents it. Contracts and contracting processes have a far greater role in risk management than is normally recognised; in particular, we need to adopt models that shift the balance of focus away from risk consequence and towards the reduction of risk probability.
IACCM Welcomes the Contracting Excellence 2013 Editorial Board
The new editorial board is now in place for 2013 Contracting Excellence! Read these brief bios to find out who they are, where they work and what they do.
Famil Garayev is a Supply Chain Category Manager at Chevron Canada Business Unit. He is a professional in supply chain strategy planning and development, strategic sourcing, bid evaluation & negotiation, contracting, procurement, supplier management, financial and cost analysis with nine years’ experience.
Fayola Yeboah has worked in commercial contract management for market leaders in the defence, pharmaceutical and oil and gas industries. Fayola currently works as a Contracts Officer in the aerospace and defence industry for Cobham. Cobham is an industry leader in the design and manufacture of communication, navigation, jamming, electronic warfare and radar antennas. Her role focuses on the drafting and negotiation of prime contracts for both government and commercial customers in Europe, Asia and the Middle East.
George Neid, manager Program Contracts with Raytheon, is a 33 year Domestic & International Contracts veteran of Raytheon/Hughes Aircraft//L-3 Communications/Honeywell. Currently assigned to Combat Systems Contract, he is working a major US Army proposal, GCV and contract lead on our multi-million dollar ENVG contract with RDECOM.
George is a Certified member of IACCM and serves on IACCM’s Professions Development Council. He is also an active member of the NCMA, Fort Worth Chapter and Society for North American Affairs (Defense Industry Exports Group).
María Arraiza-Monteux is the Capability Building Program Manager at the DuPont Contract Manufacturing Center of Competency, based in Wilmington, Delaware. In her current role, María designs and deploys the Learning and Development program for the global contract manufacturing staff at DuPont, and is also the editor of the internal newsletter entitled "Contract Manufacturing Connection." In her nearly 25 year career with DuPont, María has held manufacturing and technical roles at several manufacturing plants in the Unites States, Puerto Rico and France, and has been improving supply chains in the specialty and industrial chemical sectors since 2000. María holds a Bachelor of Science degree in Chemical Engineering, and she is fluent in Spanish, English and French.
Melissa Jansen is a contract manager at Accenture, South Africa. She joined the Accenture Contract Management team in January 2012 and has since worked in different client industries, namely Telecommunications, Financial Services and Resources. She has been involved in the pre-sales negotiation and the delivery phases of Contract Management. She completed an LLM in International Commercial Law at the University of Aberdeen in the UK. Melissa enjoys the opportunities and challenges contract managers face daily, endeavoring to find workable solutions.
RENÉ FRANZ HENSCHEL
René Franz Henschel is Associate Professor at Department of Law, Business and Social Sciences, Aarhus University, Denmark. His area of research is Contract Law, Contract Management and Proactive Management and Proactive Law. He has contributed to chapters in The International Contract Manual (Thomson Westlaw) and the IACCM Contract and Commercial Management – The Operational Guide. He is consultant to companies and public procurement organizations on how to implement best practice Proactive Contract and Commercial Management and software systems to support the relevant processes and activities.
Stephen Davis is a commercial and contract manager with CGI, UK based). Having worked in this capacity for over seven years, his career path spans BAE Systems, Fujitsu and Logica.
“I’ve been fortunate enough to have some great experiences along the way and work with some great people, including pre-contract and post-contract work in both the UK and France. In whatever role I find myself, I aim to ensure that contract and commercial management is a central part of business decision making and really adds value both to business winning and how we execute delivery, working in partnerships with other functions.” With the same name as a famous snooker player from the 1980’s, Stephen finished third in IACCM’s ‘what is contract management’ elevator pitch back in 2010.
Guillaume Bernard has been working as a Contract & Claim Manager for several years in the Energy sector and, especially, as part of turnkey projects relating to the construction of high / medium voltage substations as well as solar power stations. He has a legal background, a strong contractual culture (civil and common law) and an operational experience in Claim Management on a worldwide basis. In particular, he has been working for famous engineering companies such as Siemens T&D and Schneider Electric with a challenging mission dedicated to the implementation of a Claim & Change Management culture within both organizations.
Flora Cabean is the Contracts Supervisor for Global Business Technology, Procurement & Contract Services at VF Corporation in Greensboro, NC. VF is the world’s largest apparel company with brands such as Lee, Wrangler, Nautica, The NorthFace, Timberland, and Vans. Flora has nearly 20 years experience counseling and advocating on behalf of clients and customers in a range of legal roles. In her current capacity, Flora reviews and negotiates technology deals for VF and is responsible for the oversight of VF IT contracts from initiation to execution. Flora is an attorney and a member of the State Bar of Michigan.
Grant Collingsworth is the General Counsel of SciQuest, Inc. (Nasdaq: SQI), a leading provider of cloud-based business automation solutions for spend management. Grant oversees all legal and compliance matters for the company, including securities law compliance and transaction matters. He brings over 20 years of legal experience in areas such as mergers and acquisitions, securities, corporate finance and legal project management. He has extensive experience with companies executing growth strategies through acquisitions, as well as companies in numerous initial and secondary public offerings and other corporate finance transactions. Grant received a B.A. in Finance from the University of Oklahoma and a J.D. from Emory University’s School of Law.
Contracting Excellence en Español
To read the Spanish edition of Contracting Excellence, please go to: