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IACCM - International Association for Contract & Commercial Management Contracting Excellence Magazine
 

July 2013 Edition

 
 

 

 

Keep responding to Commitment Matters!

 
Tim Cummins CEO, IACCM I welcome your comments on our blog, Commitment Matters. Your thoughts surface what matters most to you.  They help us clarify challenges and can inspire better business outcomes for all of usl.  In future editions of Contracting Excellence we plan to publish some of your responses in Commitment Matters, with your permission of course!  What follows are several in-depth responses from your colleagues about collaboration...
 
 

Tim Cummins
CEO, IACCM
I welcome your comments on our blog, Commitment Matters. Your thoughts surface what matters most to you.  They clarify challenges and inspire better business outcomes for all of usl.  In future editions of Contracting Excellence we plan to publish some of your responses in Commitment Matters, with your permission of course!  What follows are several in-depth responses from your colleagues about collaboration...
 

In March of this year, several of you responded to my blog titled, Is Collaboration a Myth? (March 2013). We asked respondents to expand on their opinions.

 

Here is my original blog

In response to a past blog, Charles Rear poses a question: “I wonder if an IACCM member in a Procurement function, and an IACCM counterpart in a sales-function, have ever agreed, openly and with their employers’ blessings, to undertake a contract negotiation according to the IACCM principles of Principled (“win-win”) negotation styles. In the Western world, the instinct to keep information and skills privy to oneself, inhibits application of best practice in negotiations with external parties and knowledge sharing within one’s own organization ….”

I can certainly offer examples from both IACCM members and personal experience. But it does tend to depend on specific conditions, typically either strong personal relationships that have generated underlying trust between the negotiators, or (on the buy side) a history of adversarial relationships and disappointing outcomes that have led to internal soul-searching and a realization that things must change.

Charles is right that ‘win-win’ negotiating tends to be the exception, not the norm – in spite of the fact that a vast majority of negotiators claim that they prefer a win-win approach. It seems to me that there are several factors that result in adversarial negotiations being more typical:

1) Absence of trust.

2) Measurement systems (driven by incentives that have no connection to long-term win-win outcomes).

3) Inadequate planning.

4) Poor coordination within the internal team.

5) Absence of substantive authority to negotiate (especially within Procurement).

What are your experiences and what factors would you say lead to the predominance of a win-lose style?

(As a footnote, I should comment that while it is generous of Charles to credit IACCM with the concept of Principled Negotiation, it was of course introduced in the book ‘Getting to Yes’ some 20 years ago)

Here is what they said

Owen Davies
Commercial Director, Group Legal and Contracting, Computacenter, UK

It can be a practice of short termism.  Where long termism is the key, businesses take decisions based on business cases established at a strategic level but then rely on their officers to deploy them, this strategy gets lost in the negotiation process 
 


I have been involved in several transformational outsource deals in the IT world where the deal was shaped around an aspirational business case and long term view in which the supplier’s success depended on an innovative and long term approach geared to helping the buyer achieve its goals in the business case. 

This is great if both the supplier’s and buyer’s organizations at all levels communicate and buy into this business case.  However, shifts in this business case owing to shorter term goals  -- e.g. a reduction in spend or R&D, amendments to capital and operational expenditure, executive churn – often impacts the effort.

The mantra is that deals should have in-built flexibility; the problem is that the offer by the supplier aligns to the long term goal but the short term impacts cannot be embraced.  It’s a dilemma. 

Two way collaboration is essential, but competitive pressures means someone could step in to meet the buyer’s short term demands and the cycle continues.  Onerous conditions around benchmarking, termination for convenience and step in mean that the buyer has a right of exit. And that doesn’t sit well with the collaborative and long-term framework.

 

Jaap Nijssen
CEO Pinetop BV, owner IT Contract Governance.com, Netherlands

I have numerous experiences where the picture Owen paints is the other way around: on an operational level people know their company would be better off with a long-term relationship state of mind for their vital contracts, where looking for ‘win-win’ outcomes is second nature, both suppliers as well as customers are being regarded as assets, and becoming a ‘customer of choice’ or ‘preferred supplier’ is key to survival.

According to IACCM surveys, we  -- procurers, contract managers, sales managers, project and delivery managers, and what have you on a ‘operational level’ --  all make each other’s lives miserable. And we know that we do so. But we also would like to do things differently. So, what’s holding us back?

To me, it’s the strategic level, where minds seem to have become more and more short-term, both on customer as well as on supplier side.
And therefore, to me, one of the major reasons why collaboration still seems ‘a myth’ is what I call: “The Rock and The Hard Place”.

“The Rock” is management on the demand side not listening to what users say they really need, and pushing procurement to squeeze as hard as they can. After all – who cares about good requirements and long-term relationships if that takes longer to get to than your political career will last? So, “Get a move on and give me something I can count for!”

“The Hard Place” is management on the supply side. Same deal. Shareholders decide how long a management career will last and what incentives will be paid, merely based on profits on a rapidly turning shorter time span. So, “Just make that sale so I can count for it!”

A delivery manager recently told me that his company organizes so called ‘integrity sessions’. Not to talk about how to be a nice and trustworthy delivery manager.  No, it was all about: “How far can we push the limits? What can we still get away with?”

Now, this is a respectable delivery manager, believe me. But he just couldn’t help it – he was being forced by his own management to deploy the hidden tricks the bid manager, pricing offers the sales team had provided him with, hidden in the successful offering, waiting for him to unfold them and cash in.

Same goes for many a procurement professional, loaded with all kinds of hidden safety nets, hidden throughout standard terms and conditions and forced upon suppliers who can’t say ‘no’ for they won’t be allowed to join the race.

So, there we have it – two souls at either side, both crushed between The Rock and The Hard Place: short-sided, short-term, ego-management.

There’s still a lot to do, Tim. Pointing at management and leaving it to that will not help us any further. It’s also the easy way out. We have to show some more backbone ourselves too. After all, where does it leave us?  If we knowingly make each other’s lives miserable, would we very much like to act differently, but only have the guts to say so in a confidential survey?

We have to come up with arguments, insights and answers that will convince board members that ‘going long term win-win’ equals serious stuff like complying with SOX.

Great mission for IACCM and each and every member!

Tim Cummins 
Jaap, thanks for sharing this interesting perspective on the problems we face in generating longer-term value, Unfortunately, I think you are right that in many cases this is what happens. It is also perpetuated by past experience and resulting perceptions – in other words, because I do not trust that you will treat me well, I will treat you badly in anticipation …
 


 

Kate Vitasek
Faculty, University of Tennessee Center for Executive Education, USA

I can state unequivocally that collaboration is no myth!    As a faculty member at the University of Tennessee I have researched in detail some of the world’s most successful collaborative buyer-supplier partnerships. 

Unfortunately, most companies are locked into self-interested, what’s-in-it-for-me mindsets.   The natural tendency is to seek short-term gains rather than make investments in the relationship that can have the power to drive true lasting “win-win” benefits.  

Companies with short-term-isms typically operate under a virtual fog of suspicion and paranoia that leads to opportunistic decisions.    This one sided, short-term approach to working with suppliers is myopic and inefficient.     

It is time for a change – and our research has revealed the success stories of companies that have paved the way with great success. I’ve not only seen them in action first hand, I’ve documented their incredible stories in detail as part of our research that has led to four books on a topic we call “Vested”.  

So if in doubt – I encourage you to read the compelling stories of successful collaborations from companies like McDonald’s, P&G, Microsoft and Dell that have been featured in our work / books on the topic. You’ll find out for yourself that true collaborative relationships are highly successfully – over the long term.   Unfortunately, these types of relationships are the exception – not the norm.   

Individuals and companies having the fortitude and wisdom to break out of short-term, opportunistic behaviors will truly be the biggest winners in this decade and beyond – forging pioneering partnerships where both the buyer and supplier seek to combine the power of each parties core competencies to create a truly winning collaboration that will ensure the long-term success for themselves and their partners.
 


Still not convinced?  I encourage you to study up on the long list of academics. Oliver Williamson, Robert Axelrod and John Nash are three of the most famous.  They have chartered research to prove the age old adage that win-win is not just a nice thing to say – but really is the best strategy.  In addition, our case based research at UT spans over a decade and adds to these thought leaders wisdom by profiling real world case studies that prove that collaboration is indeed not a myth – but alive and working – and paying off in huge dividends for those that chose the path less traveled. 

Tim Cummins 
Kate, you are right. There are great examples of projects – and sometimes of companies – where there is a collaborative spirit and a readiness to build long-term relationships and as a result they achieve superior value. But I think you would acknowledge that these remain the exception rather than the rule – though that is clearly something we are together working to change!
 


 

Ian Heptinstall
Consultant PMMS Consulting Group, UK

Great discussion, and I would like to add a slightly different perspective.


In a project environment, I believe that collaboration can work short-term on a single project. It does not have to be over a series of projects to deliver benefits. Major projects have inherent characteristics that make collaboration a better route than arms-length competition.

I can understand a client’s reluctance if the selling point of collaboration is this: “…the first project or two may not be better – could be a little worse, but by the time we do the third and fourth, we will really be delivering”.

I see no reason why collaboration can’t deliver fast results.
I have no issue if a client truly wants a “cheap as chips” project. However they are more likely to get one if they use collaborative approaches such as early selection of the team based on capability; aligned incentives and reward for all the team; open acceptance and management of uncertainty; trusting intercompany relationships; contracts which reflect the expected behaviours and relationships, etc.
 


If you have collaboration, what do you “do” with it?  Although collaboration is necessary for big performance improvement, I don’t believe it is sufficient, particularly in a major project environment.  There is a significant opportunity awaiting anyone who is willing to take the next step

Until last year when age caught up with me, I still played rugby at the weekend.  Our group of guys -- who had played together for many years and on the field -- were a good example of a collaborative group.  That gave us an edge against similarly skilled (and aged) teams without that team spirit.  However it didn’t make us national champions.  And a team of young skilled strangers whom we had never met could beat us.

I think this is the reason why some examples of projects that tried to use collaboration were not successful.  They also need the right levels of skill knowledge and practices. 

I now spend a good part of my current time trying to persuade a reluctant industry to give this a go on major projects – marrying a collaborative cross-company team with improvement approaches that can only work with collaboration. 

From the mid 90’s companies across the world have been using a new approach to planning and managing projects.  When projects don’t have commercial contracts in the way (ie most of the work was done in house) the results are spectacular.  Durations have fallen by 25-50+%.  Projects have generated income much sooner.  Resources have been freed up and costs have reduced.  The speed does not come from “throwing money at the problem”, the same people produce the same – or better – results in less time.  They don’t work harder, and if anything stress is reduced.

The main problem is it seems too good to be true.  However many big names have vouched for the results – Seagate & Mazda have said it saved their companies - Tata, Boeing, the Japanese Government, Daiwa House and Siemens are a few of the others successfully using it.

The method is called Critical Chain Project Management (CCPM).  It will only work in a collaborative environment.  Projects with a small amount of outsourcing can use it by working around the contract.  Major capital projects cant work around the contracts – 80-90% of the cost is spent with third parties.  However if you can combine CCPM with a collaborative project team, selected and contacted on a collaborative basis, I believe you have a robust, trainable and repeatable way of truly benefiting from collaboration.

Thanks to you all! 

Keep your comments coming.  It helps us get to know you better and better ascertain your business needs.  The point is not that we all agree!  Quite the contrary. Seeing things through the eyes of others helps sharpen our own views and get better at what we do.  The last thing we want is for members to see themselves as a silent majority.  So, keep responding.  You never know who you might be helping.  

 
 

Buncefield explosion crisis - restoring stability to Northgate

 
On Sunday December 11, 2005, massive explosions hit the Buncefield Oil depot near Hemel Hempstead in the UK.  The fire severely damaged Northgate Information Solutions headquarters located next door.   Jeremy Evans was there that day.  His article reveals the actions he and his team took to resolve -- not only immediate emergency response --  but also contract and commercial management challenges that arose in the months that followed.  Their response became a critical part of that organization's survival. 
 
 

By JEREMY EVANS
Former Group Head of Legal & Commercial Services, at Northgate Information Solutions, UK

On Sunday December 11, 2005, a series of massive explosions hit the Buncefield Oil Depot, near Hemel Hempstead in the UK[1].  The ensuing blaze was the largest fire reported in peacetime Europe rolling out shock waves measuring 2.4 on the Richter scale. People felt them up to over forty miles away.  

I was there when I served as Northgate Head of Commercial and Legal services. Northgate's headquarters, next door to the depot, suffered the most damage from the blast. My colleagues and I had to contend not only with emergency response but legal and contractual surprises that would follow in the months ahead. 

My focus here is how we handled the commercial and contractual consequences and issues arising from the disaster and claims from both suppliers and customers in somewhat difficult circumstances. I briefly cite other challenges we faced at the end of this article. Also at the end are links to a presentation.

Were we prepared?  Before I answer this let me ask you…

  • How well prepared are you, should a disaster (man-made or natural) destroy your offices?
  • Would you be able to meet your contractual obligations to your customers?
  • If the event occurred during a working day, would you, your colleagues and other staff know exactly what to do in event of injury or death? 

What happened in brief?  Negligence.  An ignition spark from an oil tanker ignited a petrol vapour cloud releasing to the air from petrol overflowing from one of the giant containers at the depot. Although there was no loss of life, the exploding fireball damaged businesses and homes, injuring local residents and other people near the scene.

Northgate's head office was destroyed and as you can imagine we were one of the major claimants.

 

The Northgate building front and back (photos by Jeremy Evans 2006)

At the time a FTSE 250 company2, Northgate was, and remains, an IT services and solutions business, providing IT services to public and private sector organisations in connection with HR management.  This includes payroll processing and pension administration (at the time responsible for payroll processing for forty per cent of UK employees) and other critical and specialist solutions and applications to local authorities and the emergency services.

Northgate had a reasonable Disaster Recovery (DR) plan that detailed the immediate response to a crisis, such as handling personnel and taking other critical actions. But we discovered early on that DR plan had significant deficiencies. Even so, when I reflect on that December morning and the immediate aftermath, I'm convinced that nothing can really prepare you for an event on this scale. Attempting to create an emergency scenario through role-play differs dramatically from the real life event.

ENSUING CHALLENGES

Could location eventually haunt us?  One of our early concerns was whether or not Northgate could be accused of negligence (or negligent conduct) simply because we were right behind the Buncefield Depot. Northgate was located on an industrial park that had expanded over the years, but the depot had expanded considerably as well.

The Health and Safety Executive (HSE) and its forerunners at various points in time agreed to the expansion. Accordingly, we concluded that HSE would have had to evaluate relevant risks of allowing the depot to expand and the potential impact to businesses and households in the surrounding area.

Put another way, we were relying on a government agency to ensure that the depot was safe and secure. After due consideration, we considered that we had a reasonable defence should any claimant try to raise this issue as grounds for a claim. No one did directly.

Urgent communication to customers

As soon as possible after the incident, our Commercial and Legal team notified customers and suppliers that this event was a “force majeure3. At the time, it was impossible to be clear which customers or suppliers had or had not been affected.  So we issued letters to all of them.  We knew that most agreements (contracts) had a tight timeline in which to respond – mostly 48 hours after a disaster scenario.

To prepare for claims from customers/suppliers, my team's next step was to review a selection of the company's key contracts.  Although we had stored most at a secure storage facility before the disaster struck, some had been stored at head office.  Several had to be destroyed.

Our team agreed to review the rights and liabilities of Northgate and those of our customers and suppliers. We would review the top 150 contracts and agreements to obtain a “good feel” of the risks to Northgate.  My team would then report back to the business unit heads.

As our work progressed, we were not surprised at some awkward situations and challenges for us. Below, I have set out some examples:

Force Majeure

Referring to the “force majeure” letter we sent to customers and suppliers, we discovered a handful of agreements that had effectively “conceded” Northgate's right to rely on events of force majeure, which came as a nasty shock!

Fortunately, all but two customers were also surprised at this and after consultation, agreed to a “reinstatement” of this provision. We made a realistic offer to the two that didn't -- one a London Borough and one a substantial private sector company.  Regardless, they maintained their positions on force majeure and on the settlement amount we offered.

Ultimately, they took us to mediation (third party negotiation) on the basis of getting a better “deal”. However, it was Northgate that ended up with the better deal, with an extended term to each of the agreements and the provision of additional services!

This might seem bizarre, but not really, because neither of the other two parties really had any room to manoeuvre, particularly the London Borough, because it would have had to go through a lengthy tender (bidding) process to find a new service provider, at great cost both to itself and to the citizens it represented.

Excessive warranty provisions

Some agreements within the top 150 customers we reviewed contained excessive warranty provisions in the terms with Northgate, backed up by indemnity provisions for almost every warranty given by Northgate.

Clearly, these contracts (some of which had not been looked at in years) had never been near the Commercial and Legal team.  Once “discovered”, we decided “to let sleeping dogs lie” and agreed to come back to these once Northgate was back in reasonably steady state.

More importantly, this set of agreements gave the team the leverage to bring sales teams into line and encourage the business units to work with us, rather than work against us as had been the case for some time before and after I joined the company.  Longer term, I did manage, as Head of Department, significantly progress the business units, but that account is for another day.

Similarly, the Commercial and Legal team had to contend with agreements that contained “best efforts” and “best endeavours” clauses in the company's agreements as well as “time of the essence” clauses.

Meeting service level obligations

Another product of the disaster revolved around the inability of Northgate to meet its service level obligations under many contracts and having to deal with customers who maintained that they were entitled to adequate business continuity and/or disaster recovery services from Northgate at no extra cost to them, arguing that they had paid for these services in advance.  

Finally, in December of 2005, we had a good grip on the issues that the contracts raised.  We had been reviewing claims from customers (for loss or degradation of service) and some suppliers (for loss of equipment), seeking to take advantage of Northgate's Professional Indemnity Insurance (PI) insurance coverage.

Alongside this, our technical teams had managed to reasonably restore service through the disaster recovery facilities. Having access to many customers gave us breathing space, but we still had a way to go.

By early 2006, we had received most claims. Together with the insurers, the Legal and Commercial team and business unit representatives, we decided to settle claims through the company's business interruption policy, as opposed to its professional indemnity policy. We decided to service credit payments to affected parties proportionate to the loss suffered and possibly offer additional services under the following agreed process.

Northgate and its insurers would review and discuss each claim and determine whether it was reasonable or not.  Northgate would then hopefully agree to a mutually satisfactory settlement with each customer based on the loss suffered evaluated within a range of low, medium or high.   Once agreed upon by all parties, the customer and Northgate would then sign the agreement in “full and final settlement”.

In general, the process took about six months to complete and generally worked very well. We did lose a few customers who were not prepared to follow this process and they terminated their contracts with Northgate.

Asking the right questions when disaster strikes

As promised, here are some wider challenges your business might face in a disaster scenario. You will have plenty to contend with, if the Buncefield disaster is anything to go by.  Remember that all of these questions, early actions, etc. would most likely be occurring simultaneously with other activities. 

From my personal experiences, the initial questions at the outset of a disaster would likely resemble the list below: 

  • Has anyone been injured, or worse, killed?
  • Have senior managers been able to contact all their staff and told them to stay at home?
  • Have the Crisis Committee met to discuss the situation and what actions has it taken?
  • How badly damaged are the company's offices? Are IT systems down?
  • Does the Company have a back-up facility?
  • What is the impact on customers and/or suppliers?
  • Can the company communicate with its staff and/or third parties (eg. customers, suppliers, shareholders, the Company's external lawyers, insurance companies, loss adjusters, the Company's bank, the Stock Exchange, etc.)?
  • What are the next steps?
  • Have the emergency services been called?

Hopefully I have helped you capture some of the challenges your organization could face in a disaster like this one. 

It might be helpful to review my previous article covering more details about Northgate's emergency response to get back on its feet and how all the key functions of the business worked together to achieve the overall recovery. Click on The Buncefield Aftermath – Restoring Stability after a Crisis [add link to article]

As well, the slide deck -- particularly slides 2-5 and 11-14 – pinpoints major concerns and recovery process.  Managing a Crisis slide deck [add link to presentation]

It might be helpful to review my previous article covering more details about Northgate's emergency response to get back on its feet and how all the key functions of the business worked together to achieve the overall recovery. 

The Buncefield Aftermath – Restoring Stability after a Crisis [.docx 0.5MB]

As well, the slide deck -- particularly slides 2-5 and 11-14 — pinpoints major concerns and recovery process. 

Managing a Crisis slide deck [.pptx 1.8 MB]

 

ABOUT THE AUTHOR

Jeremy Evans originally qualified as a lawyer and has worked in various sectors over 30 years: broadcasting & entertainment; telecommunications; and IT services. For 12 years, he was at the BBC and during his last four years was Head of Contracts supporting the BBC's commercial activities in the UK and overseas. 

He moved to British Telecom in 1995 and worked in the Global Satellite Services division, working on international contracts, and was involve in the launch of web hosting and other multimedia services.

He then went to Siemens UK and worked on a number of BPO and IT outsourcing contracts.

In 2003, he joined Northgate Information Solutions as Head of Commercial and Legal Services. He left in 2007 and since then has run his own company, JECCS Limited, offering commercial and legal consultancy services to clients. Through his own company, he provided support to StreamServe Inc, Open Text Corporation, and is currently supporting Anoto AB in Sweden and HP in Australia.

END NOTES

[1] Hemel Hempstead is a town about 15 miles north of London.

[2/3] Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization.

 
 

Supplier Management - Key Components, Challenges and Benefits

 
Almost all major oil and gas companies use Category Management (CM), a supply chain process.  In most companies its application and purpose is basically the same: to effectively manage product and service line categories to ensure smooth operations, both locally and globally. Supplier Management (SM) is one of the key components of the CM process.
 
 

By Famil Garayev, Supply Chain Category Manager, Chevron Canada Business Unit

Almost all major oil and gas companies use Category Management (CM), a supply chain process.  In most companies its application and purpose is basically the same: to effectively manage product and service line categories to ensure smooth operations, both locally and globally.

Supplier Management (SM) is one of the key components of the CM process. The major purpose of this article is to focus on some components of SM.  Throughout the article I will also emphasize challenges and benefits of implementing SM, which I learned during my experience with two major oil and gas companies. 

What is Supplier Management?

Supplier Management is structured engagement of key suppliers to properly track and manage their performance (including Health, Environment and Safety (HES), operational and commercial performances), and leverage their capabilities through increased reliability, Total Cost of Ownership (TCO) value creation and new technology utilization.

SM starts with supplier segmentation, which is very essential for implementing proper SM and is a systematic classification of suppliers into these groups: Strategic, Core, Managed, Transactional (see figure 1).  The basic criteria for segmentation are the criticality and dollar value of the services and products provided by suppliers. This enables teams to properly allocate internal resources and focus.

Figure 1.  Classifications of Suppliers

SM's Key Components

Key Performance Indicators (KPIs)

To understand and measure supplier performance, the company and supplier should agree on KPIs per service and product line. KPI targets should be achievable and should always have enough space for continuous improvement. They should cover all aspects of operations including HSE and commercial.

Performance Review Meeting (PRM) 

Another key component of SM is PRM. (The terms Supplier Quality Meeting and Service Quality Meeting have the same purpose as PRM.) PRMs follow at periodic intervals agreed by relationship determination above: quarterly for Strategic, bi annually for Core and annually for Managed suppliers. Company and supplier senior leadership teams attend PRMs with Strategic and Core suppliers.

The purpose of the PRM is to analyze the supplier service and product lines' performances based on pre-agreed KPIs for specific timeframe; understand operational highlights and lowlights / improvements; and discuss short and long term value added initiatives and strategic plans. PRMs enable the senior leadership teams from both sides to see the whole picture and get awareness and information on supplier's performance on regular basis.

Challenges

While implementing SM, the specific challenges our team faced at the initial stage were the inefficiency and the lack of standardization in the performance measurement and management process demonstrated by:

  • Too many PRMs, without relevant prioritization based on value and criticality
  • Unclear roles and responsibilities
  • Issues being “fixed” at PRMs reactively, not proactively
  • Wrong attendees and wrong conversations within the PRMs
  • Too retrospective with minimum look-ahead iniatives
  • PRMs that took full day fixing operational issues rather than focusing on value added initiatives and strategic plans for future
  • Poor or no data reflecting the performance
  • Lack of resources to catch up with this time consuming process.
  • Poor PRM scheduling (often half way into next quarter or even later for quarterly PRMs).

To overcome those challenges we held numerous SM engagement and enrollment sessions with Supply Chain Management (SCM), Drilling and Completions (D&C), HES teams and suppliers to ensure the SM details are communicated and awareness increased. We assigned an engineering tag (assigned an engineer from D&C team) per product and service line with clear SM roles and

Responsibilities. The D&C Engineering Tag role now is to develop and agree KPIs with supplier and focus on supplier's performance. SCM Category Manager for D&C in the meantime supports regular operational meetings, PRM co-ordination and all other contractual support to D&C team.

Having established clarity around the roles and responsibilities along with having the teams established, we needed consistent practical implementation of the SM across the board. The way we decided to implement it after long and productive discussions is reflected in Figure 2 below (click to view).

Figure 2: SM Implementation

We established joint teams for each critical product and service line which are now managing the performance and operations on daily basis, defining the KPIs (by using the newly worked global indicators), agreeing to the targets, and managing the issues proactively by periodic (usually monthly) operational review meetings. This is where all the issues are now captured, fixed and data recorded. On other side, PRMs are utilized to discuss future strategic plans and value added initiative by involving senior leadership teams both from company and supplier.

Benefits

Since its implementation, the benefits of SM have been acknowledged both by company and supplier. Our benefits included:

  • Continuous performance tracking per pre agreed KPIs
  • Drop in Non Productive Time (NPT) rate
  • Quick problem resolutions due to leadership involvement
  • Focusing on operational highlights and on how to improve performance, rather than finger pointing each other by discussing operational lowlights
  • Focusing more on future rather than past by discussing possible value adding initiatives and plans
  • Open discussions involving people from all categories including field engineers who are involved in daily operations and senior leadership from both sides
  • Provide high level regular update on operational performance to senior leadership
  • Achieving deeper relationships with fewer suppliers based mutual trust and benefit

Conclusion

To implement successful SM, you must develop a culture that encourages change, rewards creative thinking, teamwork and autonomy. In our case, the support of this cultural transformation took many positive interventions from the D&C Manager, Chief Procurement Officer (CPO), HES Team Lead, SCM Category Manager for D&C and Engineering tags per service and product lines. From this perspective SM's successful implementation requires dense internal coordination and cooperation among various stakeholders.


ABOUT THE AUTHOR

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 ten years' of experience and a certified member of IACCM. Previously Famil worked for BP Azerbaijan and BP Canada in various supply chain and contracts management roles. He is fluent Azerbaijani (his native language), English, Russian and Turkish. He lives in Calgary, Canada with his wife Mehriban and daughters Amina (2 years old) and Madina (5 years old).

 
 

Second in series: The learning journey - Continuing Professional Development (CPD)

 
Ongoing learning and skills development are essential for success of individuals, teams and organisations, but it is a challenge.  How can we create a learning environment designed to get ourselves where we need to be? How do we know if we're still competitive?  How can we prove we are getting better?  What training works best? Are there requirements?  
 
 

Ongoing learning and skills development are essential for success of individuals, teams and organisations, but it is a challenge.  How can we create a learning environment designed to get ourselves where we need to be? How do we know if we're still competitive?  How can we prove we are getting better?  What training works best? Are there requirements?  

In the first article in this series, Jo Needs explored the Training Needs Analysis (TNA) designed to help us look carefully at learning results and measurable behaviour changes we need to get successful results.  

In this second of the series, she takes a deeper view into not only developing our competencies but proving them through testing and certification. She explains how the certification requirements mandated by the CPD® Certification Service1 potentially affects us all – and helps us prove our worth in an increasingly competitive world.

CPD – helping you stay competitive

Today, in all areas of business, professional and personal life you will hear the phrase continuing professional development (CPD).  In this article, we will look at what this is, the benefits and what it means, in a little more depth.

CPD is a common abbreviation defined by the CPD® Certification Service as, "the systematic maintenance, improvement and broadening of knowledge, understanding and skills and the development of the personal qualities necessary to undertake your duties throughout your working life".

Regardless of the industry, or sector in which we work, all professionals, and a growing number of non-professionals, are increasingly being required to undertake CPD, as a means of developing their competence regardless of their roles and responsibilities.

Within the past decade, in the UK, the Leitch report (2006)2 and McLeod report (2009)3 both identified vast skills gaps and shortages across the complete UK workforce, and have stimulated the need for individuals to undertake CPD, by continually 'up –skilling' or 're-skilling', irrespective of profession, occupation, age or indeed education level.

Both reports emphasized that ongoing development of skills and knowledge through CPD is a critical necessity to retain a competitive edge to operate in global markets. For many professions, CPD is no longer viewed as an optional extra.

 

The importance

Continuously updating knowledge and skills is essential to career progression especially as we continue to see the demise of a 'job for life'.  No longer is gaining a professional qualification the end of the learning process, but merely the beginning.

The world of work for professionals is changing.  The competition on a global scale has never been so fervent.  Clients are increasingly demanding and knowledgeable.  Coupled with the speed of technological growth, affecting all aspects of life, developing knowledge and skills has become a necessity.

The commitment to keeping up to date and enhancing capabilities is growing in its significance as an ever-increasing number of individuals recognise the benefits and need for approaching post qualification learning in a planned and structured way.

Commitment to CPD is also an acknowledgment that learning, or developing is a lifelong journey.

The goal of CPD and specific ways it helps you

According to the Chartered Institute of Personnel and Development (CIPD),4 http://en.wikipedia.org/wiki/Continuing_professional_development - cite_note-9 CPD should:

  • be continuous - professionals should always be looking for ways to improve performance
  • be the responsibility of the individual learner to own and manage
  • be driven by the learning needs and development of the individual
  • be evaluative rather than descriptive of what has taken place
  • be an essential component of professional and personal life

Everyone undertakes CPD, often without even realising that they have done it.  Being consciously aware of CPD, managing CPD activities and keeping a record of it, is a key step in the process.


Where the IACCM and CPD Journey Meet

The IACCM skills assessment, including the experience section is one tool for commencing your CPD journey.  It captures your starting point, where you are currently.  However, as you progress through your career and perhaps the certification route, a more conscious, proactive, evaluative and reflective approach is required. 

Benefits of CPD 

CPD umbrellas a range of learning activities. The following table used by permission of CPD®1 is not exhaustive, but suggests some examples that you might find useful. 

METHOD OF CPD

EXAMPLES

Formal Events

  • Courses, seminars, conferences
  • Workshops & briefing sessions

Long-term qualifications & projects (6 months or more)

  • Full/part-time study
  • Open distance learning
  • Contributions to original research

On-the-job development

  • Internal discussion groups
  • Adviser/consultancy positions
  • Professional interviews
  • Voluntary (professional) work
  • Special project work
  • Staff training
  • Developing transferable skills e.g. languages, IT, business/financial skills
  • Skills related to management responsibilities

Private study, structured reading

  • Assimilation of knowledge on specific topics from various texts & references
  • Use of audio, video or multi-media resources and company, public or institute Library services

Presentations and Publications

  • Research for publications and papers
  • Preparation for presentations to colleagues/clients/branch
  • Participation in public meetings
  • Lecturing on careers/the profession

Professional meetings, working groups and panels (e.g. Institutional)

  • Practice, policy & market panels
  • Special working groups
  • Course accreditation exercises
  • External examiner positions
  • Branch officer, (i.e. organisational skills)

Responsibility within the community

  • Voluntary (non-professional) work
  • School governor/member of PTA
  • Parish council/other local government work
  • Youth groups
  • Local business community boards

 

The benefits of CPD

As a professional,CPD enables you to:

  • update knowledge and skills in existing and new areas of your profession;
  • keep professional qualifications up to date and relevant for yourself organisation and profession;
  • raise your profile through certification and networking;
  • make yourself valuable to an existing employer and more marketable to future employers;
  • gain recognition for CPD already undertaken;
  • increase competence in a wider context, which benefits you both professionally and personally;
  • demonstrate a commitment to your profession; and
  • increase skills, knowledge, confidence and competence in your profession.

In summary, CPD should be seen as a process which enables you to keep up-to-date and to develop new knowledge and skills continually.

How is CPD measured?

CPD is usually measured and recorded via a points or hours system and is an established way of recording your learning.

At IACCM we are currently reviewing and developing further our CPD route and approach to recording your learning. Once established and confirmed, this opportunity will be available on the IACCM website. However, best practice with any learning activity is to maintain a learning journal, to keep a record of formal and informal learning undertaken, key learning points gained and actions taken following the learning.

Managing and recording your CPD

Although CPD can occur in a variety of ways -- often without your realising it -- a more proactive and managed approach is recommended.  There are four key steps in managing CPD.

  1. Ensure you know and understand the CPD requirements of either the professional body, relevant institute or employer. Be conversant with what you need to record, and how you need to record it.
     
  2. Identify your learning needs Most CPD schemes require you to attain a set amount of hours, points or identify your learning goals to maintain professional competence.  Before commencing any CPD activities you should identify your specific learning and development requirements reflecting on your experience to date.

The IACCM skills assessment can help you with this; but another useful tool is a SWOT analysis5 illustrated and explained below:


Strengths

What are your core skills?

What do you do well?

  • technical skills and knowledge?
  • other transferable skills
  • information technology
  • business management
  • communication skills etc.

Weakness

Where are your skills/knowledge lacking?

What would you like to improve?

  • from your own point of view?
  • from the point of view of other people?
  • colleagues
  • clients

Opportunity

What are the opportunities facing you?

What are the interesting new trends?

  • changes in markets and professional practice
  • emerging new specialisms
  • developments in technology
  • moves towards quality assurance
  • assuming a management role


Threats

What obstacles do you face?

Is your professional role changing?

  • competition from other businesses
  • merger with other bodies
  • legislative changes
  • different skills required when running a small business
  • limited opportunities for progression
  • threat of redundancy

 

3.   Undertake the CPD learning activity - many CPD schemes require a points/hours to be gained from a mix of learning interventions. It is advisable to know your preferred learning style, but to select a variety of methods and learning approaches. 

4.   Reflect on and record your CPD – whatever medium you use to record your CPD, you should cover the following questions or points:

  • What was the specific CPD activity?
  • What did you learn?
  • Did it meet your learning needs?
  • Summarise the key learning points.
  • What will you commit to doing differently?

Good practise is to review this at regular intervals e.g. three and six months to reflect and record if you carried out the actions agreed.

IACCM will be launching its revised and comprehensive CPD scheme during 2013.  An update on the scheme will be published in this ezine and on the IACCM website

 

END NOTES

  1. CPD®  The CPD Certification Service The Coach Hous,e
 Ealing Green, 
London W5 5ER
T: 020 8840 4383
F: 020 8579 3991 
info@cpduk.co.uk  According to the CPD® website: “The CPD Certification Service primarily supports organisations looking to provide CPD certified training activities to either external delegates, or internal employees.”
     
  2. The Leitch Report summary by Wikipedia  Excerpt from Wikipedia: “The Leitch Review… an independent review by Lord Sandy Leitch, the Chairman of the National Employment Panel, commissioned by the British Government in 2004… was launched due to concerns over the ability of UK to compete in the increasingly globalised markets due to poor levels of literacy and numeracy in some sections of the workforce, and due to the UK's relatively poor international position in intermediate level skills and productivity.
     
  3. About The MacLeod Report 2009  Excerpt from the article:  “The independent Macleod Review, led by the Department for Business, Innovation and Skills was … produced …to define effective employee engagement and examine the barriers which are preventing businesses engaging with their employees and consider non-regulatory solutions that can be offered to help business overcome such obstacles.
     
  4. Chartered Institute of Professional Development (CIPD), founded in 1913; Headquartered in Wimbledon, London, England; Peter Cheese, Chief Executive: www.cipd.co.uk.
     
  5. SWOT analysis According to Wikipedia, A SWOT analysis is designed to “evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture… [It] can be carried out for a product, place, industry or person. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective.
 
 

What can happen when we fail to invest in better supply chain management?

 
In this article Martin Chalkley, a leading expert in relationship management, explains the need for an intergrated, collaborative and strategic supplier management function - something he has found is missing even at some of the world's largest companies. 
 
 

In this article Martin Chalkley, a leading expert in relationship management, explains the need for an intergrated, collaborative and strategic supplier management function - something he has found is missing even at some of the world's largest companies. 

By Martin Chalkley, Owner- Director, COnsultandomi Ltd, UK, Management Consulting

Being without ERP equals time and money wasted

In September 2010, while being interviewed for Supplier Relationship Manager at a leading FTSE 1001 organization, I learned that, despite their size and importance on the UK stock market, they had not implemented a Enterprise Resource Planning software (ERP) system, such as SAP or Oracle to manage their purchase-to-pay systems. 

I was taken by surprise that an FTSE 100 organization lagged behind the technology curve.  Results included:

  • Purchase orders manually prepared by each individual department, with little co-ordination across the organization;
  • Suppliers poorly managed in general, hence the reason I was being interviewed;
  • Supplier spend knowledge lacking;
  • Statistical analysis weak; and
  • Useful management information about the supply chain difficult to gather.

Management recognized their error   Their outdated processes had obviously failed them, and they understood the opportunity the strategic supply chain could offer.  They desperately needed to create an integrated procurement function that worked across their organization and manage the supply chain in a more effective, collaborative atmosphere, where mutual gain was a primary driver.

The company began investing in a supplier relationship management function.  This included upgrading the software systems that underpinned their purchase to pay process, and overhauling the procurement culture that previously existed.  One example is halting the use of retrospective purchase orders (the practice of creating a PO after the purchase is made).

The problem is much too common, Aberdeen Surveys reveal

A recent survey (white paper) from the Aberdeen Group, B2B Integration and Collaboration, Strategies for Building a ROI Business Case2, shows that this organisation is not alone. Such problems occur in many other companies.  In January 2011, Aberdeen surveyed over 191 supply chain executives.  Only a few said they were able to perform online trading partner collaboration.  Likewise, few respondents had online visibility into supply chain issues or disruptions. 

In May 2011 Aberdeen did a follow-up survey during which over 60 organisations detailed their B2B integration and collaboration issues and challenges.  Researchers specifically focused on Return on Investment (ROI) related issues. Aberdeen's report commented on the following major areas:

  • Understanding the Business Context – Pressures and Actions
  • Challenges in Implementing B2B Integration and Collaboration
  • Customer Collaboration – Order to Delivery
  • Supplier Collaboration – Purchase to Order
  • ROI of Process Integration and Collaboration
  • Case in Point (example used was a $13Billion USD global consumer packaged goods manufacturer)
  • Recommended Actions

Survey proves benefits of collaboration

  • 58 percent of those surveyed are looking at collaborative initiatives with suppliers to gain better visibility into supply side processes; 53 percent are integrating partner facing collaboration processes with internal business processes.

    This suggests that companies cannot go it alone.  We need a more collaborative mentality to understand better what our suppliers can do for us.  When suppliers are treated as a strategic asset they can directly impact our profitability or create efficiency in our processes.

  • 71 percent have seen benefits of reducing manual processing and administrative work and 61 percent report much higher customer satisfaction. Again these were some of the drivers in our original example. Benefits abound through collaborative processes and B2B integration.

Other results included fewer data errors; faster, more efficient order processing; and lower costs to process customer orders.  The latter can drive down supplier costs, because, by integrating our suppliers' processes, organisations can be more efficient.  Savings might be negotiable and passed onto the customer.

Research uncovers many other factors, too many to list here.  The point is Aberdeen Group's research proves that organisations need help in building better business cases for B2B integration.  Undoubtedly, a successful business case can be developed for these organisations to implement a strategic supplier management function.

How to build better business cases for B2B integration

IACCM's learning and certification program provides the leading edge on managing the process successfully.  We at IACCM are seeing increasing desire within the global contracting community for research into these kind of issues.  Managers want to better understand how to collaborate with the strategic supply base.  Having an ERP system or something similar is just a part of the solution. 

We need an effective process to manage the strategic supply chain.  This is why IACCM developed the SRM Learning and certification program.  To find out more about how this innovative and much respected program can help your organisation achieve such an effective process, contact:

Martin Chalkley, mchalkley@iaccm.com, or
Paul Mallory, pmallory@iaccm.com

END NOTES

1  FTSE 100 refers to an index of the 100 companies on the London Stock Exchange with the highest market capitalization.

2  To read this fully copyrighted report, click on this link: B2B Integration and Collaboration: Strategies for Building a ROI Business Case (member login is required)

ABOUT THE AUTHOR

Martin Chalkley, owner of COnsultandomi Ltd, is also SRM Program Manager at IACCM and an Associate Consultant at Gartner. A specialist in optimising IT costs and IT Sourcing Strategy.  He has driven collaborative relationships with IT and Telco Vendors and is co-author of the IACCM course on Supplier Relationship Management.

 
 

The Role of Procurement as Trusted Advisor to Management

 
Authors Bill Young and Charles H. Green examine the role of procurement and why it is changing.  Is the change working?  How are customers affected?  Where do conflicts lie?  Is there a solution? This article is an update of an article first published by Trusted Advisor LLC at The Role of Procurement as Trusted Advisor to Management.
 
 

Authors Bill Young and Charles H. Green examine the role of procurement and why it is changing.  Is the change working?  How are customers affected?  Where do conflicts lie?  Is there a solution? 

This article is an update of an article first published by Trusted Advisor LLC at The Role of Procurement as Trusted Advisor to Management.

 

Procurement dysfunction: a close look at purchasing practices

Some of Procurement's intended customers are confused about its role and intentions, and don't trust its motives.  This is only partially due to misunderstandings; a good bit of it is Procurement's fault.   While aiming to be a strategic business partner, some purchasing practices are tactical and self-serving.  In a day and age where collaboration is a strategic must, unnecessary tensions between organizational units are financially harmful.  

The reasons for lack of trust are most obvious in Procurement's metrics.  They are excessively focused on savings, even when savings are secondary to other business aims, or cannot be measured.    While savings are a proper target for certain cost-down programs, the aggregated total of savings is a misleading performance indicator.  Its acceptance and use create perverse incentives. 

Deeper down, these tensions are an outcome of two distinct views of Procurement: one rooted in transactions, another based in relationships.  Both views are necessary; but the inability to distinguish between the two as the situation demands creates dysfunction.

Is the procurement role changing?

Procurement has three broad functions. 

  1. The first is managing internal transactions for ordering and receiving goods and services, and handling procurement data.  The primary goal here is to maximise the efficiency of transaction-flow and reporting. 
  2. The second is support for vendor engagement and contracting processes.   Procurement's roots are in regular price negotiations for raw materials, packaging, tools, consumables, components and other regular purchases.  It is largely a tactical and transaction-focussed process. 
  3. The third area is “value-based strategic procurement that can translate into bottom line improvements to the corporation ...to ensure that the Procurement strategy is aligned with, and that it rolls-up to, the overall corporate strategy.”[1]

The Internet has created massive opportunities for driving efficiency in the first two functions—from automating order processes to establishing online, blinded bid systems, for example.  These have the lion's share of attention in the general management press. 

The change: Procurement metamorphosis plays several roles

Apart from that, the essence of the first two roles has not substantively changed.  But in the third role it has.  Procurement has attempted a metamorphosis[2], in several ways:

  1. Procurement is increasingly responsible for buying non-traditional services such as consultancy, audit, training, and legal.
  2. Procurement now challenges specifications developed by its own internal customers--and in some cases, even the basic need for a purchase.
  3. It may draft or even own the organisation's strategy for buying goods and services with high transaction volumes, such as travel, office supplies and MRO (maintenance, repair and operation)
  4. It may support or lead outsourcing projects.

“This change, with half of [Procurement departments] looking after marketing spend and more than two-thirds in charge of professional services, suggests an increase not only in their responsibility, but also in influence at a strategic level. It also suggests a shift towards an increasing responsibility for people-related buying.”[3]

Is the change working?  How are customers affected?

General managers and the public still tend to think of Procurement as being essentially about bargaining.  But it now aims to create value and even competitive advantage on behalf of its internal customers in all activities relating to vendors, according to this received wisdom. 

Yet has its outlook matured sufficiently to match these responsibilities? And how do its customers see it?

Schiele & McCue[4] describe two main traits that determine the level of meaningful involvement that a purchasing department can have with client departments. They are:

  1. Ability: the extent to which the purchasing department has the requisite expertise and ability to benefit the client department
  2. Benevolence: the extent to which the purchasing department is concerned about the needs and interests of the client department

Chief Procurement Officers (CPOs) have invested heavily in staff and training in order to build expertise and achieve the first trait.  But both traits must be present if client departments are to have trust in Purchasing; and there is evidence that benevolence has not been addressed with the same rigour as ability.  

The problems of tactics, conflict and trust arise when Procurement's traditional, tactical roles are confused with the strategic position it wants to be in.  This typically happens in the realm of performance measurement.

Six Areas of Conflict

Confusion between the traditional tactical role and the new strategic role lead to conflict in six areas:

1. Price vs. value assessments

When there are more factors to consider than price alone, Procurement uses weighted criteria to evaluate the best offer.  Customers often appreciate this help.  

However Procurement's target and the annual assessments of their managers are based mainly on achieved savings, so they have an incentive to push hardest on price, rather than other factors that contribute to value.  Incentives are mixed and customers become confused, even resentful.  

2. Market-based solutions

Procurement relies heavily on rational pricing of commodities.   It aims to formalise the requirements, remove subjectivity, and bring the service as close to a commodity as possible[5] [6].  It's a great theory and hard to argue against – if it did not conflict with the way people actually make purchase decisions.

In practice, we as humans indeed use rational criteria in the first, screening part of a down-selection process, in order to create a short-list of suppliers, all of whom are qualified to provide the required goods or services.  But then we look the candidates in the eye to decide which one we would like to deal with.  This stage is less cognitively-defined and less tangible.  Senior managers are paid to make judgements, and they do so.

Procurement wants an empirical, fact-based process in which the vendor is selected by weighted criteria, set against price.  But client managers want to explore a relationship and test their own comfort level before moving forward.  This is a decision model that's entirely different from the rational, screening process.  There's nothing wrong with this conflict, but it is a conflict that many Procurement staff fail to deal with because of their focus on the traditional, tactical transaction processes.

3. Explicit vs. implicit contracts[7]

Explicit contracts are written and formal.  Implicit contracts are not: they are usually created during a working relationship and are based on trust.  Often the two go together: the explicit contract is agreed between the organisations at the start and implicit deals, based on trust, develop between individuals working together. 

Procurement worries about comfortable relationships that circumvent the formal buying process.  It fails to recognise that implicit deals are essential and tries to over-formalise. 

Procurement may go further, and exploit implicit deals.  For instance, a vendor may invest in production capacity and stock to provide reliability that justifies a price premium, only to find that the business is tendered to the lowest bidder.  Such a case represents a tragic triumph of the tactical—taking pride in counting transactional battles won, at the expense of a war lost on relationships.    

4. Strategic Discussions

Heads of Procurement want their staff to be involved earlier with clients to drive productivity and value during the planning and design stages of projects.  They recruit and develop purchasing managers with higher-level skills, who can work strategically with their clients' functional leadership teams. 

But Procurement's savings target is a perverse incentive to avoid earlier engagement.  Here's how.

Early, strategic engagement by Procurement creates clarity of the business issue, sharper specifications, more appropriate technical solutions, and earlier screening-out of unsuitable suppliers.  All of this is good for the business.  But it narrows the delta which Procurement is able to report as a saving.  With a smaller number of qualified suppliers, the gap between the highest and lowest bidder is reduced and it is even possible that the highest bidder offers the best overall value.  How, if they are rewarded mainly on savings, is the Procurement Manager incentivised to risk an investment of time and effort is such strategic work? 

5. Contrived Calculations

Continued use of transaction-based metrics to evaluate strategic objectives leads to serious gaming of the system.  For example, procurement savings on raw materials can be translated into P&L accounts only if there are on-going purchases and like-for-like unit-price comparisons.  Often, however, this is not the case, so Procurement looks for reportable savings in:

The difference between two quotes

  1. External benchmarks
  2. Internal benchmarks – the average of equivalent purchases, for example
  3. Internal changes (e.g. job cuts)
  4. Other benefits (e.g. production efficiencies, waste reduction, reduced working capital)

If there is not enough scope here to work the system, ignore it: a price rise (a negative saving?) is never unreported.  There is an incentive for Procurement managers to harvest savings the way farmers harvest hay.  Allow the crop to grow longer in order to get a better yield.  Procurement managers may see larger reportable savings from areas that previously they have creatively neglected!

One Head of Group Procurement reported optimistically to a seminar,[8]  “The single reason for us being credible, for us gaining strategic and professional status within the business is nailing the notion of whether something is a genuine cost saving or a made-up number”.  

Realistically, most executives know that Procurement's aggregate savings number is not real.  They accept that cost reductions are generally desirable and should be encouraged; and they also see that it is not the most pleasant and fulfilling of tasks.  So they offer praise to the CPO, and pretend that the reported savings are meaningful.  After all, they may think to themselves, there is little to be gained by ridicule.

6. Operating Budgets vs. Strategic Spending

Some organisations translate savings into budget cuts, especially those where Procurement reports through Finance. 

Not surprisingly, managers may be disinclined to accept support from Procurement if their operating budget is reduced as a consequence.  Although these budget-owning managers did not previously voice their doubts openly about the unreliability of Procurement's reported savings, it may be a different matter when their own budget is cut in order to deliver Procurement's bonuses.

The Dilemma

Procurements' self-elevation into strategic partnerships endangers its reliable sources of hard savings.  And since no one—including CPOs—has effectively argued for a new and discrete metric, unresolved arguments and confusion abound.  The role has changed; the measurement has stayed the same; and no one has stated the problem clearly enough to permit resolution.

CPOs may deny this, but evidence is clear.  When interviewing Procurement managers about where they invest their time, they say they have to focus on short-term savings reporting.  Running a tender or auction is a quick and efficient use of their time: it delivers easily reportable savings and meets their targets.

On the other hand, identifying better business processes and becoming involved in change management are time-consuming and high risk.  In a cost-reduction climate, 'You don't need a weatherman/ To know which way the wind blows'[9] so strategy loses out. This is the message that Procurement teams are getting from their CPO: 'Strategy is a nice-to-have, but when the chips are down, we are measured on savings.'

A Better Way

The solution is two-sided.  One part is a better understanding of the emerging role of Procurement, and the double roles the function must perform.  The other part is the metrics, a particularly powerful tool in Procurement.

Because the very nature of performance assessment for Procurement is so quantitative, it may be useful to put the “cart before the horse” and focus on a revised metric as the most powerful lever for change.

A cost-reduction measure like savings will always be important for traditional purchasing – what we may call down-sourcing.  But creating value from the supply chain – what we may call up-sourcing – is a different activity that requires different metrics. 

Spend Alignment Index

There is a move towards a different key performance indicator – one that has more credibility, can be supported by Internal Audit, and that aligns Procurement to the interests of its internal clients.  It allows procurement organizations to build the trust they need in order to become a strategic partner. That Indicator is a Spend Alignment Index. 

Instead of focusing on a spend area only when a purchase is imminent – and restricting reporting to those areas they have hit – the idea is to make Procurement accountable for all spend.  Not just for the spend that can be easily seen and measured, but for a top-down calculation of external spend, derived from turnover, adjusted for salaries, earnings, interest, extraordinary activities, depreciation and working capital.  Using this as the base (100% of spend), Procurement identifies which areas are covered by a strategy, and develops a plan to address them, defining which vendors are actively managed, where there are contracts, and what improvement targets have been agreed.

Reporting the proportion of total spend that is aligned gets attention from the executive team and relegates tactical savings to second place.  Internal Audit can check its measurement and it is not even necessary for Procurement to manage everything hands-on.  Procurement's role no longer needs to be so interfering. 

Trust      

If an organisation wants to manage its cost base strategically it must escape from the rut of transactional models, and from the exclusive use of tactical savings as its main purchasing performance indicator.  A function trapped in such an assessment system cannot be a trustworthy partner to the rest of the organisation.  The alignment of goals and metrics, through adoption of a Spend Alignment Index, will in itself contribute to greater trust.
 

ABOUT THE AUTHORS:

Charles H. Green, Founder and CEO of Trusted Advisor Associates, is an author, speaker and world expert on trust-based relationships and sales in complex businesses.  Author of Trust-based Selling;  co-author of the classic The Trusted Advisor and its practical follow-up, The Trusted Advisor Fieldbook, he works with complex organizations to improve trust in sales, internal trust between organizations, and trusted advisor relationships with external clients and customers.

A widely sought-after speaker as well, he has published articles in Harvard Business Review, Directorship Magazine, Management Consulting News, CPA Journal, American Lawyer, BusinessWeek, Forbes.com, Investments and Wealth Monitor, and Commercial Lending Review, and is a contributing editor at RainToday.com.

Bill Young, Founder and Consultant at Kestrel Outsourcing and Procurement Services GmbH, Switzerland, is a value creator in sales and procurement. Previously a senior manager in both product management and procurement, he established Kestrel OPS in 2003 to deliver difficult and high-profile procurement projects, mainly in indirect spend; and to improve capability through workshops and performance coaching.

With procurement and supply chain teams, the pressing need is to improve internal partnering capability; and the key to this is value-creation beyond purchase-cost-reduction. 

With sales and key account managers the largest need is to understand the increasingly important role of procurement and its relationship to the other buying influences.

Bill has worked in life sciences, consultancy, energy, finance, engineering and public sector organisations.

CONTACT INFORMATION:

To contact the authors, please email your question to info@iaccm.com or connect using the IACCM Member Search (login required).

Endnotes


[1] J Mahoney & G Stoller, “Strategic vs. Tactical Procurement – Shifting Focus Towards Value Creation” July 2009 http://www.slideshare.net/jamie.mahoney/tactical-vs-strategic-procurement-shifting-focus-towards-value-creation

[2] A Moorhouse, “Insight into the changing role of the procurement professional”  (Bradford University School of Management) 2006

[3] S Bagshaw (Editor), “Direct vs. Indirect Procurement – Market Intelligence Survey”.  (Supply Management & buying Team) September 2009

[4] JJ Schiele and CP McCue, 'Professional service acquisition in public sector procurement: A conceptual model of meaningful involvement.'  International Journal of Operation and Production, Vol 26, 3 pp 300-325.  2006

[5] J Bloom, “Agencies and Media Brands Turning Into Commodities” (Advertising Age) http://adage.com/columns/  22 June 2009,

[7] J Kay, “Foundations of Corporate Success” (Oxford)  Chapter 4, Relationships & Contracts

[8] S Santarelli “Cost Savings in the Spotlight“ (Procurement Intelligence Unit) 24 September 2009 www.procurement-iu.com/ Internet publication

[9] B Dylan “Subterranean Homesick Blues” Columbia Records [catalogue 43242] 1965

 
 

Who are we at IACCM?

 
Every month IACCM features one employee.  Since we began doing this several months ago, response from readers has been encouraging! Featured this month is Bob Emery, VP Business Development and Alliances, IACCM. A native of Connecticut, Bob works with the vendor member community, supporting membership and sponsorship activities.  In addition, he helps leverage IACCM’s development project, creating a new IACCM training offering for non-contracts professionals.  
 
 

In this ezine, IACCM features one employee a month.  We began doing this several months ago, and based on readers' responses, you seem to be as interested in knowing about us as we are about knowing you, our readers!

Featured this month is Bob Emery, VP Business Development and Alliances, IACCM. A native of Connecticut, Bob works with the vendor member community, supporting membership and sponsorship activities.  In addition, he helps leverage IACCM’s development project, creating a new IACCM training offering for non-contracts professionals.  

Bob Emery's responses to our interview with him recently:

Q       Regarding your education, what aspect of school do you remember most vividly?

I attended the University of Colorado and took mostly night classes, because I was working most of my college career.  Many of the night students were military veterans and the discussions often were quite interesting between the vets and the regular students. 

Q       Describe your career path and name one thing you liked the most.

I spent the majority of my career with IBM in various roles.  The most memorable role was as the Asia Pacific Airline Market Support Manager.  It was in the 1990s, during the time of China’s build-up of their regional airlines and the major expansion of Asian airlines in general.  It was especially amazing to witness the changes in China during this time.

Q       What prompted you to join IACCM?

Fate.  I was contacted by IACCM based on a Monster profile.  Two days after a telephone interview, I was working with IACCM.  There were only 4 employees in IACCM at that time.

Q       What do you like most about working with IACCM?  What has been most challenging?

Of course the best part about working with IACCM is the people.  Not just the IACCM team, which is super, but also the members who are an exceptional group of professionals. 

The most challenging is finding time to get everything done, as with most organizations these days.  As a team we are committed to being responsive to our members and derive great satisfaction in providing quality services.

Q       How did you go about marketing IACCM internationally?

I was fortunate to have had global roles and teams, when I was with IBM.   Also, I had international contracts experience from negotiating global contracts with airlines.  So, while contracts were not my professional background, I had a fair understanding of the issues facing the community from these experiences. 

IACCM began with a core group of global corporations and the issues they faced at that time were fairly consistent.  Best practices research and professional development programs were sponsored by the headquarters for their global member teams.  We hosted and participated in events around the world, networking IACCM research and promoting the contracts profession.  

Q       Can you describe briefly your office surroundings when you began the company and where you are now?

Surprisingly, not much has changed.  I am across the hall from the office I had when I first joined IACCM.   While the IACCM has grown by a factor of 4 since I joined, most of the team are in home offices.  The only constant in my office is the clutter, which has not changed much through the years.

Q       If there is one thing you could change about your world, what would it be? 

 More hours in the day!  There are so many interesting events, opportunities and experiences. These wind up being missed because of prioritization and lack of time in our busy world.  Boredom is never an issue!

Q       What do you want most for readers of our website or from Contracting Excellence?

There is so much incredible information and great networking opportunities available with IACCM membership.  The vehicles for getting to these resources are the IACCM website and Contracting Excellence.   Exploring the website and reading Contracting Excellence can provide incredible opportunities to find new ideas and ways to build your professional skills and knowledge, making your job more interesting and yourself a more valuable resource to your team.

 
 

Register Now: IACCM AMERICAS CONFERENCE 2013

 
Join us at the Americas Conference October 8-10 at the Pointe Hilton Squaw Peak Resort, Phoenix, Arizona!   Let us help you optimize business results and gain fresh insights from experts.  You will enjoy and learn from three days of networking with your colleagues from top industries; attend workshops; get a chance to win an award at our awards dinner Oct 9.   Register now for the event at www.iaccm.com/americas
 
 

Join us at the Americas Conference October 8-10 at the Pointe Hilton Squaw Peak Resort, Phoenix, Arizona!  

Let us help you optimize business results and gain fresh insights from experts.  You will enjoy and learn from three days of networking with your colleagues from top industries; attend workshops; get a chance to win an award at our awards dinner Oct 9.  

Register now for the event at www.iaccm.com/americas

Event and registration details

Three days of active networking including

  • Attend skill-enhancing workshops (SRM, Contract Visualization, The Negotiation Challenge)
  • Join closed-door boardroom discussions (Strategic Transformation, IACCM Contract Protocol Development, Talent & Knowledge Management). 
  • Benefit from the all the “how tos” your cross-industry peers will share with you.
  • Embrace this unique opportunity to receive tailored advice on how to effectively respond to the Board Agenda.

Organizations attending include:

  • Agilent Technologies
  • Alstom Grid
  • Avaya
  • BT Americas
  • Chevron Services Company
  • ConnectUs Communications
  • ConocoPhillips Company
  • Consultandomi, UK
  • Crawford and Co
  • CSC
  • DHS (Department of Homeland Security)
  • DSW Inc.
  • DuPont
  • EC Harris
  • Flextronics
  • General Motors Corporation
  • Honeywell International Inc.
  • HP
  • IACCM
  • Intel
  • Kellogg
  • Maersk
  • McLeod&More
  • MedImpact Healthcare Systems, Inc.
  • Microsoft
  • University of Houston Law Center
  • Rockwell Automation
  • SirionLabs
  • TableForce Negotiation Training
  • Thunderbird School of Global Management
  • Vantage Partners
  • White Wave Foods
  • Xerox Business Services, LLC
  • …and others!

The IACCM Americas helps you align contracts and relationship management, as well as develop the commercial capability of your organization to achieve optimal business results.

This conference brings together cross-industry top practitioners, innovators and thought leaders from around the globe. People who usually find themselves on opposite sides of the negotiation table join forces to explore best-in-class contracting, commercial and relationship management practices (both buy and sell side representatives come together at this forum to freely exchange practical insights).

There is no better place to gain fresh thinking, trusted insight, benchmark your organization and make lasting, valuable industry connections.

Register now at www.iaccm.com/americas

And please remember to…

  • Refer your colleagues in the Asia Pacific region to our Asia Pacific Forum in Singapore on November 12 & 13 at the Marina Bay Sands as well!
  • Look for our upcoming ATE series featuring key Americas speakers to give you a taste of what’s to come…

 

Contact: Carina Kuhl, VP Member Events & Partnerships

ckuhl@iaccm.com, tel. +1.203.403.1978, www.iaccm.com

International Association for Contract & Commercial Management

 
 

2013 roundup: highlighting remaining events of the year!

 
Put these not-to-be missed 2013 events on your calendar!  Our seasoned educators and subject-matter experts will meet with members for workshops designed to help ensure your success in contracting and commercial relationships.  Locations include Americas, Asia, South Asia, Australia, Europe, and the Middle East. For your convenience we’ve listed events both by date and location.  You can also click on IACCM EVENTS for a complete listing to discover how to proceed with registration for events of your choice.
 
 

Put these not-to-be missed 2013 events on your calendar!  Our seasoned educators and subject-matter experts will meet with members for workshops designed to help ensure your success in contracting and commercial relationships.  Locations include Americas, Asia, South Asia, Australia, Europe, and the Middle East.

For your convenience we’ve listed events both by date and location.  You can also click on IACCM EVENTS for a complete listing to discover how to proceed with registration for events of your choice.

IACCM EVENTS FROM SEPTEMBER – DECEMBER, 2013

BY DATE BY LOCATION

SEPTEMBER

OCTOBER

NOVEMBER

DECEMBER

AMERICAS

ASIA and SOUTH ASIA

AUSTRALIA

EUROPE

MIDDLE EAST

 
 
 
 

2013 Editorial Board

Maria Arraiza-Monteux, Capability Program Manager, Dupont Contract Manufacturing Center of Competency, US
Guillaume Bernard, Contract and Claim Manager, Schneider Electric, France
Flora Cabean, Contracts Supervisor, Global Business Technology, Procurement & Contract Services, VF Corporation, US
Grant Collingsworth, General Counsel, SciQuest, Inc., US
Stephen Davis, Contracts & Commercial Manager, CGI, UK
Famil Garayev, Supply Chain Category Manger, Chevron Canada Business Unit 

Rene Franz Henschel, Professor, Aarhus University, Denmark
Melissa Jansen, Contract Management, Accenture, South Africa
George Neid, Manager, Program Contracts, Missile Systems, Raytheon, US
Fayola Yeboah, Contracts Manager, Entrprise Rent-a-Car, Europe

_______________________________________________________________________________________

Disclaimer

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