Big changes but simple answers - the future's collaborative
In these unpredictable and volatile times, many areas of commerce are becoming increasingly interdependent, demanding more open and honest relationships. The speed, volume and nature of change make the case for more collaborative working even more compelling – and urgent. What keeps us awake at night is the thought that our organizations might instead react to risk by becoming more entrenched in their old adversarial ways!
This is why business transformation and maximizing value and reputation through collaborative and agile relationships are IACCM's key themes for 2016.
Working more collaboratively isn't something that any one team – or organization - can do in isolation. As always, it takes someone to make the first move, but to be successful and sustainable, changes must become embedded across and within entire organizations and their trading partners.
Our lead article in this edition, Collaborative Vision: This Transformation Blueprint Can Make it Happen, by Dalip Raheja, shows how contracting can initiate and drive the organizational transformation that will be needed. If your team leads critical initiatives beyond the scope of its function, or has recently been raided for talent, you will know you're ready to step up to that challenge. Two of our upcoming Ask the Expert webinars1 will take you through the process step-by-step, revealing the secrets of success and the critical milestones you will need to achieve.
Here at IACCM our mission is to support you – and your executive teams - in developing the skills and vision you will need. Our newly launched learning programs will equip you and your teams with the skills you need, and more.2 As CCM teams, more than anything else, we must get better at selling our value to the rest of the organization, so we can ask the tough questions and play a leading role in making collaboration a reality. Read more about creating the right environment for collaboration in my recent blog, Collaboration: Setting the right environment.3
Emerging markets are also recognizing that, to flourish on the world stage, they have an urgent need for contract and commercial skills. IACCM's growing presence in China and India illustrates that recognition. Indeed, with India emerging as one of the hottest and most stable economies of the world, N. Balachandar's article, Contracting Key to India's New Economic Revolution, looks at the growing and vital role of contract and commercial management in realizing the country's massive potential.
Just as the printing press revolutionized society and the world of work 500 years ago, the growing influence of digitization and social media is transforming our lives and the way we do business today. Generating a myriad of new ideas, it is opening the way for lean and nimble start-ups, fundamentally challenging the power and structure of established enterprises and the “old ways of working.”
While change does not happen overnight, it is now occurring at remarkable speed and many of the building blocks for a transformed commercial environment are in place. The changes we need to bring about will see contract and commercial managers regularly participating in strategy formulation discussions at the most senior levels. They will have the skills and competencies needed to play that strategic role and our profession will attract the best and brightest because they see the potential for tremendous career growth.
Also in this edition, Piotr Powazka's article Sting in the Tail of Change Programs that Forgot About Tax gives a powerful example of how contracting's cross-functional reach can make a critical difference. It is a difference that we need to ensure is recognized.
This edition of Contracting Excellence may be the last in its current format. Look out for your new-look e-zine – it will be much easier to read “on the move,” and give you better access to our top professional content.
1. Webinars: Two Thought Leadership Workshops by Dalip Raheja and Tim Cummins as follows:
- Workshop 1: 24 February 2016 - The Why - Contracting Must Change and What Will Happen if We Don't
- Workshop 2: 23 March 2016 - The How - What Does Contracting Need to Change and How
2. Learning programs, see also http://www.iaccm.com/contract-commercial-management-training-ccm
3. Commitment Matters blog January 12 2016: Collaboration: Setting the right environment
Contracting's collaborative vision: this transformation blueprint can make it happen
Is your contracting function a back office cost center or competitive differentiator? The secrets of successful transformation are revealed in this article, supported by a two-part virtual workshop with Tim Cummins and me – see below for details -- that builds on the Executives Only session that occurred during IACCM's 2016 Americas Conference, The Year of Transformation: Maximizing Value through Collaborative and Agile Relationships.
If transformation wasn't your New Year's resolution it should have been!
Globalization, sustainability, immigration/labor shifts, climate change affecting markets and supply chains – these global issues are fast changing our business context and the way we work. But the impacts are too big for any organization to face alone. We can only overcome them by fundamentally rethinking the role and value of our trading relationships – moving away from the adversarial processes of the past and transforming our organizations to become more collaborative.
So, whether on the buy or sell side, isn't it time to stop discussing why we need to transform and start actually transforming?
Contracting's choice – enabler or roadblock?
Trading/commercial relationships are at the core of any organization's success today, not just contracts. Contracting has a choice. It can either embrace that reality and be at the forefront of change, or continue to be perceived as a roadblock to be worked around. Harsh as this may sound, the tone is deliberately provocative to shake us out of complacency. Without a fundamental rethink, our processes are likely to be destroying, not creating, value – and any attempts to make them more efficient will only mean more value destruction, faster.
Increasingly, the value we create totally depends on successful trading relationships. A perfect example of this is Apple. Mostly a design and marketing company, the value Apple creates depends totally on its trading partners. Contracting can follow Apple's example and multiply value achieved for all trading partners. Its new role must be that of competitive differentiator - a strategic business partner, internal consultant and change leader, bringing together internal partners with their customers/suppliers to create alignment and match risk.
Rethinking role and purpose – organization-wide
The journey to collaboration begins by re-assessing what drives our decision making. Are our own goals most important to us, or those of our collaborative “system” – our internal stakeholders AND our trading partners? Do our Decision Drivers support our relationships and the overall success of our partnerships, or do they cause conflict and resistance?
For example, your key Decision Drivers might be price, cost, process controls, time to contract and delivery accuracy. But if “time to market” is of the essence, your stakeholders are much more likely to be interested in locking up capacity in the supply chain AND enough customers to be one of the first suppliers in the market. Thus, the Decision Drivers are not aligned.
This assessment is a fundamental and powerful first step in rethinking the role and value of our trading relationships. It will enable us to move our Decision Drivers closer to those of our stakeholders (internal and trading partners) – creating a strategic link that can be actively supported by all stakeholders, and changing the whole context of our business relationships.
For those of you in contracting struggling with resistance from your internal stakeholders, this may hold the clue! To become a competitive differentiator you MUST change who you consider to be an internal stakeholder (there are more of them than we might think), and how you engage with those stakeholders. The way to do this is by focusing on their Decision Drivers. Your approach to collaborating and working with trading partners must also change similarly. With Decision Drivers more closely aligned, the contracting function can start redefining its process management role and add internal consultant, change leader, and strategic business partner to its portfolio.
Change leadership becomes critical
The journey to collaboration may start within contracting – but, for it to succeed, reassessment and change needs to take root in the organization as a whole, through organizational transformation. The road to change will be a challenging process that needs to start at the top. Additionally, it needs to focus on the adoption of your solution, not just its design.
Once the decision to transform has been made, and your organization is fully on board, the real work begins. It is clearly a process, not an event, requiring competencies that you and your organization may or may not possess. Change leadership becomes critical and changing the context may require some heavy lifting, especially with your stakeholders and staff – while you simultaneously keep the business going.
I say this not to sound discouraging but to acknowledge reality. And to also point out that issues you will face are both predictable and inevitable, and therefore can and should be incorporated into your Transformation Blueprint (below). The good news is that there is a tremendous body of knowledge and practice to draw on to handle these and other challenges.
Ignore context at your peril - context trumps content!
One critical discovery we have made is that transformation efforts that fail have spent huge amounts of time and energy in the design of their solution - and very little on its adoption. It should be the other way around.2 Context always, always trumps content (just Google that term). Our Transformation Blueprint seeks to change the context as well as the content. Unless we do this, all changes to content (i.e. process, tools, new skills and competencies) are doomed to fail. For example, let's say you, as a contracting function, embark on a transformation and reskill all your employees to fulfill the three additional roles of internal consultant, change leader and strategic business partner discussed above (content). Yet the rest of the organization still expects your employees to be efficient process managers and nothing more (context). How effective will your employees be in carrying out these new roles? And were they not set up for failure before they even got started because we changed only the content and not the context?
Extending transformation to trading partners
Of course the transformation to collaborative behavior must also extend to trading partners on both sides. Surprising to a few perhaps, we have found that getting alignment internally around more collaborative relationships with trading partners is a significant challenge. Long held assumptions around "what suppliers may do" or "how customers will squeeze for the last penny" may have calcified the context over a long period.
The goal should be to establish successful trading relationships. We need to recognize that we are all playing the same roles within the same context – we are customers to our suppliers and suppliers to our customers. Organizations' core processes and the competencies required - buy and sell - are essentially the same, and if not they should be. Next Practice companies (those that go beyond Best Practices), have already moved to consolidate the two functions.
TRANSFORMATION BLUEPRINT webinars coming - join us!
For a more robust discussion and deep dive, please join us for a two-part thought-leadership workshop1 series being hosted by Tim Cummins and myself, the continuation of the Executives Only session at the IACCM conference and the recent discussions around Transformation: Maximizing Value through Ccollaborative and Agile Relationships, IACCM's 2016 agenda. We will provide a provocative venue! .
You will walk away with a Transformation Blueprint that you can adapt to your organization to launch your efforts. If you are already in the midst of an initiative, we invite you to share your learnings and perhaps pick up a few short-cuts along the way.
Meanwhile here are some key questions for contracting to consider:
- How many members of your executive team consider your function to be critical and strategic to their success?
- How many times has your organization been raided for talent and future leaders are emerging from your function?
- How many times is your organization called upon to lead critical initiatives beyond the scope of your function?
- How often are you actively participating in strategy formulation discussions at the most senior levels?
- Have you been asked to start managing the overall portfolio risk of trading relationships (both buy and sell sides)?
- Is your organization considered a supplier (or customer) of choice by your trading partners?
- Are investments in your function considered to be strategic and supported by all your stakeholders?
- Do you attract the best and the brightest to your organization because they see tremendous career growth?
- Do your staff have the skills and competencies to play a strategic role within your organization?
- Have you been successful at selling your value to the rest of the organization? And do you have a marketing plan in place to help drive your selling efforts?
Join these important thought-leadership webinars by Dalip Raheja and Tim Cummins:
- Workshop 1: 24 February 2016 - The Why - Contracting Must Change and What Will Happen if We Don't
- Workshop 2: 23 March 2016 - The How - What Does Contracting Need to Change and How
- Maier F. H. (1998, Winter) System Dynamics Review; Moore G.A. (1991) Crossing the Chasm: Marketing and Selling Technology Products to Mainstream Customers; Rogers, E.M. (1962) Diffusion of Innovation Theory. Maier F. H. (1998, Winter) System Dynamics Review; Moore G.A. (1991) Crossing the Chasm: Marketing and Selling Technology Products to Mainstream Customers; and Rogers, E.M. (1962) Diffusion of Innovation Theory.
Vendor banging your head against procurement's door? Here's how to get noticed
It is easy to assume that the procurement function is the gatekeeper for vendor registration. More often than not, it isn't. Procurement personnel at all levels often receive emails or calls from companies trying to get on their company's vendor list. And usually, there is little they can do for them.
In many companies, procurement may process a new vendor request, but they rarely initiate it. And when they do, it is often to formalize a commitment an end user has already made. Sometimes the first they hear of a new vendor is the unpaid invoice with no matching order.
They may not know registration process exists
Whether reacting to an economic downturn, or simply for process efficiency, most big companies are looking to remove vendors, not add them. Even when they are, they may put them through a prolonged pre-qualification and audit process. They may offer a self-registration process through a third-party or maintain an in-house website. Or - even worse in some ways - the company may offer no guidance at all on how to become prequalified, registered, or accepted.
Sadly, self-registration processes are often decoupled from the actual selection process. The person making a selection decision may not be required to choose a registered supplier or even investigate the database. They may not even know the registration process exists.
There are further challenges if you are offering a product or service that competes with something the company buys from someone else. Inertia is your enemy here. Faced with the many pressures of an operating site or a project, an end user is rationally going to stick with the familiar. To win business from an incumbent, you really have to get the end user's attention.
So what to do?
1. Get in early
On a project, for example, preferred bidder decisions can be made a year or more before tenders go out. Get familiar with how your target's project and procurement pipeline operates, so you can make contact at the right point in the cycle.
2. Follow the process
Even if a company's vendor registration process is time-consuming (or frankly broken), it is still often a requirement before a new vendor can be added. Make sure you go through any compliance hoops the company requires, even if it seems pointless. It is easy for an end-user or a gatekeeper to dismiss an application if not all the boxes are checked.
3. Team up
If you offer a product or service that complements the offering of an incumbent vendor (and where there is no suggestion of restraint of trade), consider collaborating with them. Use the existing relationship or an existing project to showcase your solution.
4. Look professional
Many large companies are wary of dealing with smaller businesses. They see them as high maintenance, working to different priorities, and carrying greater risk. So even if you are a sole proprietor, don't look like one. Be truthful about your size and capability, of course, but look corporate. Have a good website. Have business cards. Have client testimonials and referees. Connect yourself to an industry group or association. Get accreditation or certification if it exists in your field. Be visible at conferences and industry forums. Publish.
5. Understand who is really making the vendor selection decisions
Hint: it's not anyone in the C-suite. End-users don't change vendors on an impulse. When they do, it is because they have a problem or opportunity they don't think their existing vendors can help them with, or they have reached an intolerable level of frustration with their current vendor.
Get to know the people who are facing the problems and generating opportunities. Understand their needs. Find ways to help them. Look for ways to give them access to your products and services in a low-cost/low-risk way.
6. Help your end-user get their idea approved
Let's say you run a pilot. It goes well, the end-user is happy, they want to go further. Very likely they will now need to make a business case and go through a change management and approval process to start using a new product or service. Help them make their business case. Give them data and analysis. Build the presentation for them. Show how your offering will solve their problem or reduce costs to the business.
7. Maintain the relationship
Now you are on board as a vendor, you need to maintain that position. Give them reasons to keep you, and not reasons for them to start looking for someone else. Be responsive, be patient, do your paperwork well, make sure your people on the ground are happy and keeping the end-user happy, and keep looking for opportunities to add value.
ABOUT THE AUTHOR
Joanne Simpson is Director of Corvative Pty Ltd, a contract and commercial services consultancy based in Perth, Western Australia. She has 20+ years of procurement, contracts and commercial experience in major studies, projects and operations in the resources industry. She holds Masters Degrees in Business Administration from the University of Western Australia and in Construction Law from the University of Melbourne in Australia.
How to create a great business case for outsourcing agreements
A business case is more than just a set of numbers: in many respects it is the cornerstone of any outsourcing agreement. Missing this vital first step or not giving it the attention or rigor it deserves can put your contract at risk before you begin. A good business case creates a framework that will align your commercial model with what you want to achieve – and avoid unnecessary changes that can be the biggest drivers of value erosion over the life of a contract.
In long-term agreements it is important to create a flexible and scalable model with pricing that can adapt to change. It should also be dynamic and enable you to test the commercial arrangements and pricing structure you're putting in place, to ensure they will deliver the strategic intent of the agreement and form the basis of your contract. Tracking actual performance against your business case will help to keep the agreement on course, enable you to see how your numbers stack up and make any adjustments needed to meet business case objectives.
Although this article focuses primarily on business cases for large scale, long term strategic outsourcing agreements between large corporations and Business Process Outsourcing (BPO)1 suppliers, the five steps that follow will help guide you through the process of building a robust business case whatever your organization or industry.
FIVE STEPS FOR BUILDING A GOOD BUSINESS CASE
Step 1 What will your baseline spend be?
It's vital to ensure you get this right. This may sound obvious, but it's important this critical baseline figure covers the full scope of activities, because incorrect baseline numbers will unbalance the rest of your business case. Remember that large, long-term outsourcing agreements will inevitably change as parties look to create additional value (with future changes likely), service levels and volumes. Changes to the contract or outsourcing agreements to change orders need to be quantified and reflected in your business case as these changes occur. This will ensure that the business case correctly reflects bottom line savings or value created over the lifetime of the contract.
Step 2 How much value will be created?
A well thought out business case should capture and quantify all of the value that will be created throughout the life of the agreement. This should go beyond revenues and hard savings, and include value created through future investment, and other sources of value that may be less easily quantifiable. Quantifiable sources of additional value could include investments in areas such as:
- Service improvements resulting in improved service levels or better customer experience.
- Internal organizational changes resulting in reduced need for oversight of the agreement.
- New technology enabling new value creating go-to-market products or solutions.
- Less tangible activities such as creating a best in class agreement, resulting in improved good will.
Step 3 Ensure your commercial model fits the objectives
After creating a framework for your business case, look beyond the numbers. Defining the strategic intent of the agreement at the outset will enable you to ensure that any future changes align with what you want to achieve. This is especially true of the pricing and commercial terms. It's also important that the pricing model drives the right or intended behavior of the supplier. I have seen many cases where a good deal has gone bad because changes led to the pricing model working against the strategic intent of agreement, for example:
- In an activity-based/transaction pricing model, reducing non-revenue generating transactions (e.g. customer inquiries) actually motivated the supplier to increase the number of queries coming through the door.
- In a model that relied heavily on bonuses or at-risk payments, achieving the bonus or avoiding the penalty actually cost the supplier more in operational cost than the cost of the bonus or penalty.
- In an agreement where customer experience was held to be paramount in driving revenue, the pricing model focused only on driving operational efficiencies and cutting costs - impacting the customer experience negatively.
Step 4 Stress test against future scenarios
We often tend to solve for the here and now, but ignore what may happen in the future. The pricing model needs to be flexible and scalable enough to accommodate future changes so, after building your business case, stress test it with real or expected scenarios to see if it works in practice. Typical scenarios to test or model would be:
- Changes in volume (up or down) - It's important to test the impact of pricing changes with rising or falling volumes: as volume goes up incremental cost per unit should go down significantly. Over time price per unit should reduce as efficiencies are realized. If volume goes down the price per unit may actually go up, but the total cost of business should go down. Testing the model with different growth assumptions can help test these theories.
- Changes in the type or mix of volumes being supported are very common during the life of the agreement. Different types of volume have different inherent complexity and time to resolve. If the pricing structure is not granular or transparent enough this can cause problems for the supplier. If the make-up of volumes begins to skew towards more complex, harder-to-resolve cases, the pricing should reflect an increased cost or price per unit. The way to stress test this is to look at your volume profile and model out potential shifts in the mix, to help you understand the impact on price.
- Changes in how the incentive bonus payout works - Testing out how the bonus penalty works using historical data will help you understand if targets are being set correctly and what sort of financial impact the bonus structure may have on the bottom line.
Step 5 Plan and allow for change
The only certainty is that change is inevitable and to be expected. A poorly designed change management process can increase cost, leading to value erosion, and undermine efficiencies that were built into the original pricing model. Therefore, look at how the contract is written to ensure that:
- the change management process is well documented and structured;
- there is absolute transparency in the pricing model, and
- all of the different drivers of cost are understood and spelled out.
The change management process as it relates to pricing should be very clear and prescriptive, linking back to the guiding principles of the pricing model and the strategic intent of the agreement. Understanding cycle times, cost per unit by delivery location, utilization rates etc. can give you all the information you need to make changes to pricing that are logical and fit the original pricing model intent and efficiencies. It's therefore important to envision likely change scenarios, and how they should be handled, and document these in the change management process. Good examples include:
- Changes in service levels - Increasing service levels may well decrease your utilization rate, increase your cycle times, or both. Understanding how these variables interact and drive cost will enable you to adjust them up or down, using the existing pricing model to derive a new price in relation to the magnitude of each change.
- Policy changes that could impact suppliers - These typically involve a change in the number of steps that need to be done in a given transaction, for example the extra steps to a process needed because of new rules around controls and compliance. In a typical contract change management process this would result in a new team being created to focus on these steps. In a global agreement particularly, this could lead to a very inefficient way of handling this change. It would be better to understand the extra steps and how they impact the cycle time and cost per unit, to enable both to be adjusted.
- Adoption of new business - The impact can be priced out initially assuming similar drivers and costs as applied to the original businesses. Changes can be made over time as more becomes known.
Track your performance
A good business case will help you to avoid many of the pitfalls common to large scale outsourcing agreements, leading to value erosion. By tracking your actual performance against a good business case you can make sure you are not leaving anything on the table, and take corrective action if things start to veer away from the original intentions of the agreement.
Tracking performance against the business case is a good way to make sure it is living up to the strategic intent of the agreement. It also reminds you of what you set out to achieve, including the less tangible value drivers that may get pushed to the back burner. In short, the business case is in many respects the cornerstone of any outsourcing agreement - and should be approached with the attention and rigor it deserves.
- Business process outsourcing (BPO) assigns one or more business processes to a third party or an external provider that owns, administrates and manages the processes based on measurable performance metrics.
ABOUT THE AUTHOR
Kimber Riley has over 17 years' experience in outsourcing and financial modeling. He currently works for Microsoft in procurement designing large scale and strategic outsourcing deals with Microsoft's biggest and most strategic partners. He has an MBA from the Kelley School of Business with a concentration in Finance and International Business.
Disputes, claims and high-stakes contracts - these tips can save your day
Engineering and plant construction contracts are seen as being increasingly risky. Whether or not that is the reality, their high value, long gestation periods and complex technology put tremendous pressure on both parties when it comes to negotiation. While owners want contracts with most stringent conditions at the lowest possible price, contractors want the best possible price with the most liberal contractual conditions. Eventually they narrow down their differences and enter into a contract – leaving many loose ends likely to result in claims. In the US alone during 2014, businesses generated claims worth US $30 million, taking an average of 16 months to resolve per claim1. And beyond the cost, the biggest worry is wasted time.
Claims - an opportunity to redress the balance
Claims can come from either side, often for the same underlying reasons. These could be demands for compensation, waiver requests, or assertions of contractual rights or obligations arising from changes in contract conditions, such as changes to the scope of work or site conditions, extensions of time or changes in performance parameters. While contractors see claims as an opportunity to recover margins that were lost during initial contract negotiations, owners view claims as an opportunity to get additional work done or recover some value from the contractor. Such conflicting objectives end up in serious disputes, which severely strain relationships.
In Engineering Procurement Construction (EPC) contracts, fixed fees tempt owners to demand better specifications or changes in scope without having to sign up for any corresponding increase in contract value. When contractors submit a change order request and owners dispute them, further disputes result.
Not all changes result in a claim
Although any change could result in a claim, not all do. For example, changes in the scope of work initiated by the owner may lead to intense negotiation over pricing, but will rarely lead to a dispute. Even when initiated by the contractor, most of the time a change in scope creates some tangible, economic value for the owner, as well as for the contractor (i.e. re-work). As long as any changes can be attributed to external agencies or events (such as changes in statutes etc.), or to the owners themselves, owners will generally accept those changes and negotiate on the cost implications. This is not the case with changes initiated by the contractor, which are much more likely to result in a disputed claim.
Delays the top cause of disputes
Delays and disruption claims lead to more disputes than any other type of claim.2 The most disputed events are requests for extension of time or compensation because of delays with price escalation and without levying liquidated damages. Other seriously disputed changes arise from disruptions or delays caused by the owner, or changes in site conditions that involve rules governing content of tenders etc.
Owners tend to vigorously resist claims for extension of time, or requests by the contractor for price escalation or compensation because of delays. Too often it will not be possible to pinpoint the exact cause or origin of the delays. Everything then becomes contributory delay, and a “psychological barrier” to the owner in acknowledging, let alone accepting the claim. On the one hand, an owner might have already suffered due to the delay, and on the other, claims for escalation or even waiver of liquidated damages will further add to the owner's financial woes. Further delays and disruption will likely be caused while attempts are made to resolve the original issues, multiplying the number of disputes they will have caused.2
The question is – what can the contractor do in these circumstances?
Effective claims management the best solution – but act fast
While changes in contracts are unavoidable, the objective must be to prevent them from escalating into claims - or worse, disputes – eroding margins and the bottom line. The best way to do this, IACCM advises, is to adopt a systematic, focused and disciplined approach to claims management, that reintroduces many of the skills, strategy and tactics of the original contract negotiation, and allows the contractor to assert their own claims as well as defend any made against them.3 The key to success is to decide on the range of responsibilities in advance, and set out negotiation tactics and strategy. It's also vital to act quickly. The other party should be notified as soon as any change is made. The longer a change remains “hidden,” the more unfavorable the results will be, and if left until the end of the project a complete settlement may no longer be possible.
A survey conducted in the UK among construction and consultancy organizations drives this point home. Over 60% of respondents agreed that contracting parties were unable to deal with claims that were not reported immediately.4 Typically the key people involved will no longer be available, accuracy of the facts leading to the delay have been distorted by time, and circumstances and promises made forgotten, making delayed claims complicated and unmanageable to resolve. Once the project is complete and the plant commissioned, the owner loses motivation to settle any claims: negotiations are prolonged and lead nowhere. Finally, the contractor agrees an unfavorable settlement out of frustration and desperation.
Communication and prompt action offer best chance of success
Keeping the above objectives in mind, the following best practices can adopted:
- Notify the other party as soon as possible
about any changes in the scope of work or delays and their implications, regardless of the reasons.
- Track and report any claims throughout the life of the contract
The key is complete and cohesive documentation, including documentation relating to any delays eg. weather reports or verbal instructions received from the owner's representatives etc.
- Provide continuous follow-up
to prevent claims from becoming "stale" and unresolvable.
- Ensure you meet your contractual obligations regarding claims
to prevent a claim being rejected on procedural grounds. These include adhering to timelines for submission of changes, mode of communication etc.
- If delay is anticipated
issue an early warning and recovery plan. The owner will surely appreciate this, and it will be of great help during the negotiations.
- Keep a record of all changes and exchange this regularly with the owner
e.g. once a month or as mentioned in contract. This will help both sides in anticipating a claim.
- Ensure regular feedback from the contract execution team to the bidding team
This is essential so that you can systematically capture lessons learned from past and present contracts and use this intelligently in the future bidding process.
Prevention is better than cure
Of course it is far better to avoid claims and disputes from arising in the first place. The whole contractual system “should be aimed at the early resolution of any queries at the time the claim arises, and with the strong likelihood that the plant, manpower, experts and witnesses are still on the site, in order to avoid prolonged disputes,” as well observed in the judicial point made by Justice Sanders.5
Do this by clearly spelling out in the contract:
- the scope of work;
- input and output specifications;
- technical specification of items to be supplied;
- performance guarantees;
- acceptance criteria; and
- a baseline schedule setting out assumptions and the owner's obligations.
Note that the scope of work appears at the top of this list. It is vital to emphasize the importance of this during the contract negotiation stage, and failure to define the scope of work fully will inevitably lead to disputes. The irony is that although scope of work is the top, most important negotiated term in IACCM's recent survey, it slumps to only 11th in the list of those most frequently negotiated.6
Disputes can arise from the way settlement is made
Agreeing and carefully defining your mode of operation (modality) in the contract will also help to ensure transparency in the process and build trust with the owner. Often, even if the owner accepts certain changes in principle, disputes can arise from the way the settlement is made, and agreeing a price mechanism well in advance will prevent the owner from feeling that the contractor is taking undue advantage of the situation. For example, you could agree to reimburse any addition to the scope of work at the contractor's actual documented cost plus a certain percentage as the mark-up towards the contractor's overhead and profit.
Changes are inevitable …
Whether we like it or not, changes are inevitable in contracts. However, we can prevent them from becoming disputed claims by putting a proper claims management mechanism in place. One of the most important jobs of the commercial and contracts manager is therefore to ensure any changes are resolved as soon as they occur to prevent them from becoming disputed claims.
- Arcadis Global Construction Disputes Report 2015
- Approaches to Delay Claims Assessment Employed in the UK Construction Industry, Braimah, Nuhu; published in Buildings September 2013 issue, ISSN 2075-5309 by MDPI.
- CCM study material by IACCM.
- Approaches to Delay Claims Assessment Employed in the UK Construction Industry, Braimah, Nuhu; published in Buildings September 2013 issue, ISSN 2075-5309 by MDPI.
- Article (.pdf) Title: A.G. Falkland Islands v Gordon Forbes Construction (Falklands) Ltd (No2)  F.I.S.Ct. (BLR 280 – 2003).
- Survey results of IACCM Top Negotiated Terms 2015.
ABOUT THE AUTHOR
Rajesh Moolanghat Variyam is working with ThyssenKrupp Industrial Solutions (India) (Formerly Uhde India) and has around two decades of experience in commercial and contracts management. He has successfully negotiated and implemented several domestic and international contracts of varied nature. He has handled several high value claims preparation and negotiation. He is certified at Expert Level in Contract and Commercial Management from IACCM.
Contracting key to India's new economic revolution
With India now positioned to assume the role of “second engine for the world economy,” demand will be high for sophisticated commercial knowledge and creative contracting skills to support its rapid growth and enable innovation and change.
Contract and commercial management will be key to supporting India's emergence onto the world stage, and therefore offers an exciting and challenging career path for many now entering the workforce. For existing contract management practitioners, there is tremendous opportunity. To grasp this opportunity, we must commit to learning international methods and be ready to move from a purely operational support role to becoming strategic enablers. The support of our professional and international associations is going to be vital in achieving this.
With its new Central Government, India is poised for a second wave of economic reforms. The facts about India's fast-growing, vibrant economy speak for themselves. Increasing openness to change, more transparency and less bureaucracy are opening it up to more international business, more entrepreneurs and business “start-ups,” especially in the IT sector.
My report tells the story … You can read more about the vast potential of India and the Indian workforce in my full report including a summary by Tim Cummins at the end of this article. Both may be downloaded below. The report tells the story of recent economic reforms in India, how these are transforming business and employment – and asks how best contract and commercial professionals and their international associations can contribute to the cause.
Such an environment demands commercial and contracting skills to support its rapid growth, ensure integrity and provide control, but also to to enable innovation and change. Good contract management is about safeguarding value, protecting relationships and reputation. These factors are crucial to sustainable growth and wealth creation. A flourishing economy needs sophisticated commercial knowledge and creative contracting skills.
We have a knowledgeable, disciplined, energetic and eager commercial and contracting professional workforce. Although this is currently relatively small, I have great confidence in the abundance of talent available in India and our ability to grow individuals with the necessary skills.
The Indian Council of Contract & Project Management1 has close links with IACCM and a membership of over 2,000 such professionals. With its membership of over 37,000, representing more than 160 countries, IACCM offers a perfect fit as the international association to support our cause, providing experience of demanding economic negotiations, volatile business conditions and an experienced team and member network, including professionals from the academic world.
The world economy today is too enormous to run on a single engine (in the US). It needs other drivers … and India looks best placed to provide the second engine. Our skills as negotiators and as drivers of commercial change will be of major importance in bringing reality to the Indian dream.
- The Indian Council of Contract & Project Management is a LinkedIN professional networking forum, founded and managed by the author of this article.
ABOUT THE AUTHOR
N. Balachandar has a bachelor degree in chemical engineering; an MS in engineering management and a post graduate diploma in management. With more than 25 years of professional experience in process engineering, proposal management, business development, risk analysis and mitigation, project management and contract administration and management, he is employed today by TECHNIP, India.
TECHNIP, India, is the Indian arm of TECHNIP Group with annual global revenue of over 10 billion euros. The organization is today a world leader in project management, engineering and construction for the energy industry, spanning sub-sea oil and gas developments to the largest and most complex offshore and onshore infrastructures. The company employs over 38,000 people and operates in 48 countries.
Sting in the tail of change programs that forget about tax
Big changes in international tax law are around the corner to ensure profits stay in the country that generated them. But as multinationals put their change programs in place to prepare for the Organisation for Economic Co-operation and Development (OECD) reforms1 they may be unaware of silos and gaps in communication that could expose them to big tax risks.
In the recent Deloitte survey on the impact of the OECD reforms,2 75% of respondents agree or strongly agree that double taxation will occur as a result of unilateral tax law changes being made in anticipation of the OECD recommendations - and there will be greater scrutiny. As a contract manager or specialist you may be the only person within your organization whose cross-functional role has visibility of oversights that could have big tax implications down the line.
Company silos may spell trouble
Corporations operating across multiple jurisdictions have been busy putting procedures, policies and appropriate people in place as they respond to these preliminary national tax law changes now underway to prepare for the OECD reforms.
But in complex organizations, where separate functions are likely to be delivering different aspects of the change program, it is all too easy to miss important aspects, especially if a recent reorganization or merger has occurred. In a scenario of this complexity gaps may occur in specific knowledge or awareness that only the cross-functional perspective of a contract manager can identify - as the case study below shows.
Inter or intra-company: transfer pricing is easily overlooked
Transfer pricing principles are central to the OECD aim of ensuring that taxable profits of multinational enterprises are not artificially shifted out of their jurisdiction.3,4 But they are easy to overlook when addressing the difficult contracting issues that arise when creating agreements between legal entities within the same enterprise (intercompany agreements) or between two or more entities within the same legal entity (intra-company agreements).
In simple terms, transfer pricing concerns transactions such as the provision of goods, services or intangibles between separate legal entities within associated enterprises, or their overseas branches or subsidiaries. If the recipients would otherwise have had to perform the services themselves, or outsource to a third party, they must be charged for the services (the arm's length principle).
When legal entities within the same capital group are providing services to one another, legal and transfer pricing issues can become extremely complex, especially if offshoring centres are involved. “Shared services” could occur among head office, branches and subsidiaries, and newly acquired businesses that may not be part of the shared services function.
Transfer pricing adjustments may trigger further implications, such as a withholding tax, if it turns out there was overpayment or undercharging, not to mention lack of a specific agreement covering such transactions. Your unexpected tax bill could climb still higher with tax geared penalties.
Cross-organizational v cross functional - case study shows the risks
This case study illustrates what happened when a major corporation acquired a global company with offshoring centers that were providing services for multiple branches and subsidiaries.
Each company put a massive change program in place to deal with its own, specific regulatory requirements, such as data protection, bank secrecy, tax and transfer pricing. But each was focused on either the legal or the tax side of the project – with no opportunity to view the issues in a holistic way.
Strong support from a number of cross organizational functions alone was not enough to identify significant issues that a contract specialist's cross-functional perspective could have avoided. These included:
- Potential double taxation of the same profits, once in each territory associated with the transaction;
- Double VAT in certain scenarios;
- Imposition of tax geared penalties (typically up to 100% of the tax arising on any transfer pricing adjustment made);
- Interest on tax paid late as a result of a transfer pricing adjustment;
- Management and statutory accounting issues related to reporting;
- Greater issues later in addressing the transfer of post-merger agreements.
The two-track approach also risked duplication, delays and inefficiencies including:
- Added complexity in the processes of approvals, governance, and contract review;
- Uncertainty for users on which agreements should be signed (e.g. just legal, tax or both at the same time, and who should make that decision).
- Duplication of work on inter/intra company contracts;
- Double the number of documents held in the repository;
- Less efficient addressing of regulatory and compliance concerns, causing compliance, regulatory and standardization issues later;
- Decentralized metrics, policies and subject matter expertise.
CM intervention brings scopes together
In this case, thanks to the involvement of contracting and subject matter experts directly impacted by the transfer pricing arrangements, the two projects were brought together, with enough time to:
- Identify commonalities;
- Set project boundaries to ensure no overlap of scope;
- Agree on the approach to address legal and fiscal requirements in a set of contract templates;
- Start work on a common repository and improved governance.
Bringing the two project scopes together addressed or completely mitigated potential risks, and the work became much more effective:
- Agreements were matched with the actual charges, while also addressing the purely legal requirements;
- Various group policies and regulatory requirements could be addressed at once; and
- Important links were established for future roll-outs of post-merger projects.
In a constantly changing business world with mergers, acquisitions and work moving cross border, it's vital that project management teams include people involved in contracting within the same capital group, to minimize regulatory and financial risk.
Contract and transfer pricing subject matter experts and project managers should keep their eyes and ears open, collating information that will enable them to react and exchange information with appropriate people. And even if you are not directly involved in risk mitigation on transfer pricing, you can be the eyes and ears of other functions within your organization.
For this reason it's important to maintain relationships across the various business functions so you can see the big picture and understand the implications of information you may receive. Always stay vigilant, challenging positions and approaches, and using your insights in a creative way, communicating issues early so that business around you is more robust, flexible and compliant.
- Organisation for Economic Co-operation and Development (OECD) reforms are aimed at tackling tax avoidance by ensuring profits are taxed in the countries where the value is created and profits generated http://www.oecd.org/ctp/beps.htm
- OECD's BEPS initiative – second annual survey: key findings (see below) http://www.deloitte.com/global/en/pages/tax/articles/beps-global-survey.html
Public-private partnerships - what goes wrong and how to put it right
A report published recently in IACCM's Journal of Strategic Contracting and Negotiation (JSCAN)1 highlights the real reasons for the often stark public-private sector imbalances seen in government contracting. It reveals the truth behind outsourcing decisions that are often taken for ideological or political purposes - leaving public sector organizations unprepared.
With values often exceeding US$2 billion, Public-Private Partnership (PPP) contracts may be in place for 40 years or more. But the private sector typically brings far more expertise and knowledge to the table than their government partners, who often have no previous experience in managing PPPs. And they are being implemented on a case-by-case basis by both state and local agencies.
Now that so many public sector organizations the world over are adopting the PPP model, it's becoming increasingly important to understand the underlying issues and their causes, and what can be done to overcome them.
Titled Developing Government Expertise in Strategic Contracting for Public-Private Partnerships2, the report looks behind the scenes at the actual experience of two government transportation agencies in designing and implementing contracts for PPPs. Although this research is US-based, the experience described will resonate with public sector organizations worldwide and inform their approach and practice.
Seeking strategic advantage through contract design
Used as a method for jointly funding and operating public services, PPPs are unlike typical government contracts, where the government develops a design and identifies a contractor to build it (“Design-Bid-Build”). Instead, PPPs are knowledge-intensive, arms-length, transactions, delegating multiple roles to the private sector, including the design, financing, construction, and, in this case, operation of transportation facilities.
The PPP's success depends very much on how this contract is constructed. Errors in contract design may lead to projects that do not meet public expectations, prioritize private earnings over public values or leave the public sector with too much risk.
However, the report suggests, partners may seek strategic advantage not only in contract design and implementation, but also through the content of industry-sponsored PPP knowledge and information provided to inform government decision-making. A key challenge therefore is to develop government capabilities to scrutinize and make sense of that information and leverage that knowledge effectively.
Look outside or learn from experience
Little has been known until now about how governments go about developing their own internal capacity and knowledge in contract design and implementation. With little in-house expertise available, and no opportunities to gain experience, public managers involved with PPPs must either look individually outside their organization to identify and leverage knowledge - or engage in the PPP and learn directly from experience.
The report examines the ways public managers leverage lessons from their own organization to improve their approach to contracting for PPPs. It presents a four-part framework of organizational learning with internal management reforms that will both support this approach, and address the related organizational challenges identified. It also contributes to better understanding of the cultural change needed in public agencies involved in PPPs to address and overcome resistance to those changes, and apply the new knowledge that has been gained.
- JSCAN, IACCM's Journal of Strategic Contracting and Negotiation or http://jscan.sagepub.com/
- Developing Government Expertise in Strategic Contracting for Public-Private Partnerships (PPPs) by E.J. Boyer and K.E. Newcomer.
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License. Based on a work by Revitas, Inc. at www.revitasinc.com/blog