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

Contracting Excellence Magazine - Oct 2007

 
 

Contracting excellence and supply chains: a missing link?

 
‘The speed and scale of the digital revolution have been so great that few of us can remember how life was before we could communicate and trade 24 hours a day, seven days a week. And the benefits — in terms of improved access to information, increased freedom and higher economic growth — have been so great that most people who do remember the past would never want to go back. The task we now face is twofold: to build trust by preventing abuse and to create consistent, predictable rules that encourage future innovation.’ Eric Scmidt, chief executive and chairman of Google, speaks for many business leaders when he highlights the need for a new approach to managing our global networked markets. To enable this, the way we define and control trading relationships must change. Traditional approaches to contracting, negotiation and contract management increasingly undermine trust and discourage innovation. This introduction to the Supply Chain issue of Contracting Excellence highlights the challenges that confront those responsible for establishing and managing trading relationships, sell-side as well as buy-side — both of which must take action to provide a more holistic approach that ‘builds trust and encourages future innovation’ through the integration and collaboration that is implicit to ‘a networked world’. TIM CUMMINS, IACCM
 
 

By TIM CUMMINS, IACCM

‘The overwhelming tendency is to think about the supply chain as something that originates with the supply base and moves forward. The unfortunate effect (of this) is that supply chain initiatives typically run out of steam before they get to the end point — and the real point: that is, whether or not they make customers’ lives easier …’

This quote from Reuben Slone, Vice President of Global Supply Chain at Whirlpool Corporation, reflects the challenge facing many buy-side professionals as they seek to better understand the impacts of their actions on markets and customers. Yet a similar challenge confronts many on the sell-side, who often fail to understand the critical link between the commitments they can make and the capabilities created through supply relationships.

Typical comments from senior IACCM members when asked about the term ‘supply chain’ include: ‘It’s not relevant to us — it is just another name for ”procurement”’, and ‘When I think of a supply chain I envision a network of raw material or parts suppliers, subcontractors, manufacturers, distributors, transporters and, perhaps, depending on the industry, installers (for example, of a component part or assembly), all working towards supplying a company with something it will, in turn, sell to someone else in some form.’

The important point is not of course the words we use. It is the fact that 21st century business depends more than ever on the quality of integration between market and customer needs and the capabilities created through supplier relationships. If suppliers are not providing the right goods and services at the right time and to the right quality, we will fail to meet our customer commitments. On one level, this principle is obvious. But in many organizations, the linkages that are necessary to tie market and customer data to supplier commitments and capabilities are missing or broken.

In this issue of Contracting Excellence, we have assembled a series of articles that explore the reasons for this breakage and why it matters. We also highlight how some companies are addressing the challenge of increased integration and market demands for greater speed, flexibility and innovation. In thisevolving marketplace, contracts and contracting disciplines matter more than ever, because it is through them that needs and capabilities are defined, documented and managed. The terms and governance principles that they establish can offer a framework for collaboration, performance oversight and proactive change. On the other hand, contracts that focus primarily on internal policies and procedures, and price and risk allocation tend to result in relationships built on confrontation and management through contention and blame. Which route we follow has a very real impact on operational costs and market effectiveness.

As the articles in this issue reveal, collaboration begins at home. ‘Best practice’ contracts, commercial and sourcing groups frequently act as cross-functional integrators, building internal consensus across a range of stakeholders whose interests, strategies and performance priorities may be tough to reconcile. Of course, if these contracts, commercial or sourcing groups are themselves driven by narrow measurements and functional interests, they cannot offer that reconciliation.

And herein lies much of the problem. Most procurement and sourcing groups — and by extension many of those in supply chain — tend to be driven by very narrow performance criteria that have little to do with overall customer satisfaction — or, in Reuben Slone’s words ‘whether or not they make customer’s lives easier’. And too often, the same applies for sell-side groups, which perceive their primary role as minimizing risk and, in particular, joining the battle on the ‘high risk’ terms. This issue highlights the importance of viewing contracting as a strategic enabler, rather than allowing it to become focused on transactional priorities, such as cost reduction or risk avoidance. Strategic contracting ensures that the relationships and business terms available to the organization align with corporate goals, market needs and product or service offering requirements. It also oversees the integrity of the relationship portfolio — in other words, are the commitments we must make in the marketplace supported by the capabilities we have created through our suppliers; and, if not, how will we ensure they are reconciled?

We selected this theme for our first issue of Contracting Excellence because it sets the strategic framework for much of what our community must aspire to do. Whether we come from buy-side or sell-side, from legal or commercial management, we must dedicate ourselves to establishing the capabilities and competencies that are implicit to ‘supply chain best practices’.

Insight to the future?

We are observing a number of organizations where buy-side and sell-side contracting and sourcing are being integrated into a single business group or function. Sometimes this is within specific divisions — for example, at companies like BAe Systems or BT Global Services and others, it is more holistic, such as at Agilent Technologies, where the Vice President of Supply Chain now has overall responsibility for the corporation’s trading relationships.

Organizational models will be featured in a subsequent issue of Contracting Excellence. For now, please read on and discover the exciting challenges and changes facing our community in the 21st century global networked economy!

Tim Cummins, CEO, IACCM. tcummins@iaccm.com

 
 

 

The secret to risk management is closer to being revealed

 
Globalization, tightening supply markets, and lean management approaches have increased your exposure to risks. But the experiences of top-performing enterprises like Hewlett-Packard, Dow Chemical, and Hess Corporation suggest that successful risk management requires focusing on the risks you can control — like monitoring daily operations, improving demand forecasting, and using risk–reward agreements.TIM MINAHAN Procuri Inc, Blogmaster for www.SupplyExcellence.com.
 
 

Stop planning for catastrophic events, like natural disasters and terror plots. Instead, focus on the risks you can control — like monitoring daily operations, better forecasting demand, and using risk-reward agreements.

I once knew of a guy who was unrealistically terrified of the Year 2000. Certain that the Y2K computer glitch would bring commerce to a halt and turn the city into a post-apocalyptic Waterworld, he bought a safe house in the mountains, stocked it with food, and converted most of his wealth into gold bullion bricks. True story.

Now, most IACCM members would characterize this person as a paranoid crackpot. You might argue that he wasted his money and time planning for the most unlikely of events. And you’d be right.Yet this is exactly what most organizations do when planning for supply chain risks. This, or nothing at all.

In fact, a recent Aberdeen Group Supply Risk Management Benchmark revealed that, while two-thirds of enterprises expect supply risks to increase in the next three years, fewer than half of them have bothered to implement procedures or systems to detect or manage risks.

Where your risks are hiding

To manage supply chain risk, you must first know where to look for it. There are four primary types of supply chain risks:

1. Supply market risks — include supply and capacity constraints, changing tariffs, commodity and transportation price increases, and geo-political instability.

2. Supplier risks — include changes in the financial and operational performance of individual suppliers.

3. Regulatory risks — range from financial and environmental to security screening and sub-tier supply chain reporting.

4. Supply strategy risks — many best practices, such as low-cost country sourcing (LCCS), and lean and JIT inventory management, have made companies more vulnerable to supply disruptions and risks.

What is risk management?

Know where you need to look for risks, how can you best predict and manage them? AMR Research defines risk management as the process of "balancing the probability of demand, the likelihood of reliable supply, the most effective allocation of resources, the probability of success of new product innovations, market conditions, and the opportunity costs of alternative decision paths."

AMR says risk management strategies can involve ‘the transference of risk to another party, risk avoidance or mitigation, and channel risk sharing’. Let’s examine some of these risk assessment and mitigation strategies — including the use of risk-sharing agreements — in more detail.

Key risk management takeaways

  • Start simple — focus on controllable day-to-day risks, such as projecting demand or supplier failure. These procedures will better protect you against unlikely catastrophic events.
  • Commit to a plan — improve demand forecasting and commit purchase volumes with suppliers. This eliminates variation and enables suppliers to be more competitive.
  • Market watch — monitor supply and capacity constraints — including key inputs into your suppliers’ products and services — and adjust your risk profile accordingly.
  • Share risks and rewards — establish agreements that provide incentives to the party that endures more risk.

Start simple

Risk management discussions with supply and contract management executives often resemble a chat with Chicken Little (who believed the sky was falling in). Most are obsessed with catastrophic risks, such as natural disasters or terror plots. Yet companies that have been most successful at managing supply risk have simplified the problem.

‘Most companies spend too much time trying to predict and protect against unlikely risk events,’ said Venu Nagali, head of Hewlett-Packard’s (HP’s) Procurement Risk Management (PRM) program at the AMR Research Supply Chain Executive Conference in May 2007. ‘The geopolitical risk and natural disasters we hear about in the news are low probability events.’

In short, HP and other leading companies are beginning to realize that the greatest risks to supply and business continuity are day-to-day operational risks that can often be controlled, such as better predicting demand and projecting supplier failure or market risks. And many of the same approaches used to combat common risks can serve to protect against more unlikely catastrophic events.

Consider the Procurement Risk Assessment and Mitigation (PRAM) approach from Dow Chemical. PRAM combines financial and operational risk models with contingency planning methods to determine the impact of certain risks to supply continuity, and assigns a probability factor to each risk scenario. Based on this assessment, Dow and its suppliers develop risk mitigation and contingency plans for the most probable risks. Dow then validates each plan in a home-grown risk scenario assessment system and retools its mitigation and response approaches accordingly.

According to a recent Purchasing magazine exposé on the PRAM program, Dow initially focused PRAM on its (US)$5 billion raw materials spend: ‘The goal is to put about $2 billion of raw-material spend through the PRAM by the end of 2007.’ The remaining raw material spend will be risk-assessed by the end of 2008.

Share gains to balance risks

Dow’s program emulates HP’s PRM approach, in which the computer giant tracks three areas or uncertainty:

  1. demand uncertainty of its own products;
  2. uncertainty of future commodity cost and components (that is, market dynamics); and
  3. supply availability (market dynamics)).

As part of its PRM program, HP has embraced new processes, risk-reward balancing agreements, and systems to better predict and balance risk across the supply chain.

‘Risk has traditionally been put on the weakest players in the supply chain — the suppliers,’ said Nagali. ‘Even today, most companies don’t set a forecast. They don’t commit [volume] and just expect suppliers to take on all the risk.’

Nagali says HP’s PRM approach is a generic framework designed to answer three basic questions: How much should I buy? At what price? And for how long?

To answer these questions, HP assesses the probability of its demand forecasts and of the cost or availability of supply required to support it. Based on this assessment, HP determines high, base, and low scenarios for its demand forecasts and the probability that each will occur.

HP uses this probability analysis to define supplier agreements that share both risk and reward. Depending upon the probability and risk of a particular product or supply market, agreement terms range from a fixed quantity with a market-based discount to a fixed quantity, fixed price contract. HP may also use price caps and floors to protect parties even further.

Nagali states simply, ‘The company that bears the risk gets paid for it.’

Risk–reward balancing is a pillar of any successful risk management initiative. Consider Hess Corporation. With the capital equipment and skills required to build new oil rigs and refinery capacity in short supply, particularly in the far reaches of Africa or off the coast of Latin and South America, the oil and gas giant must compete for scarce drill bits or engineering and construction services to expand its refinery capacity.

Such factors have prompted Hess’s supply chain squad to develop better forecasting methods and adopt risk–reward relationship management approaches to become the ‘customer of choice’ to its suppliers. And for good reason — at Hess, failure to attain this choice status could cost hundreds of millions of dollars a day in cost overruns and limit the company’s aggressive growth plans. ‘A customer of choice consistently receives competitive preference for scarce resources across a critical mass of suppliers in its database,’ said Hess Supply Chain Specialist, Carl Tatum.

The pillars of Hess’s customer of choice initiative include:

  • establishing account and category managers to access innovation in the supply base;
  • enforcing consistent strategic sourcing, contracting, and supplier management procedures to present one face to suppliers globally;
  • leveraging electronic sourcing, contract management, and supplier collaboration tools; and
  • improving spend visibility and demand forecasting.

Profits: a side effect of sound risk management

Forward-thinking companies realize that supply risk management is not merely a cost of doing business. Instead, firms like HP, Dow, and others have turned their ability to better predict and mitigate risks into a competitive advantage.

In fact, Denali Consulting estimates that supply risk and performance management methods drive from 3 percent to 6 percent of total supply chain cost reductions, giving companies embracing such approaches an advantage over the competition.

According to the Purchasing magazine article, the PRAM program has already helped Dow to avoid a number of supply risks that could have affected more than $200 million of its profit. In one instance, Dow uncovered a dangerous single-source situation, in another it detected a raw material that was at risk of being banned by regulators. In each case, Dow quickly took action to seek secondary and alternative sources (and types) of supply.

Similarly, HP has generated more than $445 million in cost savings from implementing its own PRM approach. And risk management approaches are not just for manufacturers sourcing direct materials and assemblies. HP has since used PRM to mitigate risk not only for its electronic components and assemblies purchases, but also for key and volatile indirect spend categories, such as energy and advertising. In fact, Nagali reported that $7 billion of HP’s spending in 2006 was based on such PRM contracts.

‘We help HP take on more risk and save more money,’ said Nagali. ‘But cost savings is not the key objective. Our key goal is to always be certain that we can get the material we need.’

By better projecting demand, understanding market risks, and sharing risk and reward with suppliers, HP, Dow, Hess and others are ensuring that they are managing the most common (and controllable) risks. They are also securing their status as the customer of choice. This has helped these companies not only to cut costs but, more importantly, to boost profits and to gain an advantage over competitors that are using outdated approaches that require suppliers to take on all the risks of an uncertain market.

Tim Minahan,
Senior Vice President of Global Marketing at Procuri Inc., and Blogmaster for www.supplyexcellence.com (tminahan@procuri.com)

Tim is a renowned expert on supply chain and contract management issues and technology strategies, Procuri Inc is a leading provider of On Demand Supply and Contract Management solutions. Tim joined Procuri after heading Aberdeen Group’s supply chain research practice for nearly a decade.

 
 

Breaking down barriers between buyers and suppliers

 
Today’s managers face an ever increasing number of technologies, strategies, and marketplaces that aim to lower costs and foster efficient buyer and supplier relationships. So why does it seem more difficult than ever to build an effective, efficient, and successful relationship? This article explores the most common challenges in connecting buyers and suppliers, why we must continue to break down the barriers, and the steps you can take now to succeed in creating an effective relationship management program. CHRIS HAPP Blue Solutions Inc
 
 

Main points

To create an effective relationship management program today, an organization should focus on creating an ‘analyze-enable-manage’ philosophy.

  • Analyze your internal and business partner’s costs to determine how to best minimize and share the savings.
  • Enable electronic trading relationships using the technologies and capabilities available to us today.
  • Manage the total return on investment of your relationships as opposed to individual components, such as price, and segment your partners by strategic value.

Today's managers face an ever-increasing number of technologies, strategies, and marketplaces that aim to lower costs and foster efficient buyer and supplier relationships. So why does it seem more difficult than ever to build an effective, efficient, and successful relationship? This article explores the most common challenges in connecting buyers and suppliers; why we must continue to break down the barriers; and the steps you can take now to succeed in creating an effective relationship management program.

Why do we need relationships anyway?

As Jim Collins revealed in his best-selling book, Good to Great, his case study companies reached new performance levels through what he termed the ‘hedgehog concept’. They focused on developing their core competencies and, as a natural consequence, needed business partners and trading relationships to supplement those capabilities. Although this is an intuitive outcome, many have in fact struggled to form and manage the efficient trading partnerships critical to successful businesses today. Essentially, what they failed to realize in assessing core competencies was that they lacked a fundamental competency that would prove essential to the realization of their strategy — that is, the ability to make and manage effective relationships.

While this breakdown could be discussed from many perspectives, I will focus on one of the most common challenges my firm is routinely asked to solve today — how do we utilize technology to effectively align our people and processes to support an effective relationship management program?

Why is building an effective relationship so difficult?

To answer this question, it is critical to understand both the supplier and buyer challenges in managing a global or strategic relationship. All too often, tactical roadblocks consume our time and make managing effective relationships near impossible. Let’s take a simple example. Within your organization, can you go to a single place to find accurate information on contacts, phone numbers or addresses for your customers, partners or suppliers? While this seems to be a basic step in managing any relationship, our Fortune 500 experience shows more than half of basic supplier information is incorrect in our customer’s enterprise resource planning (ERP) systems.

Information is often captured in many systems across an enterprise — and the number of technologies and types of information stored is inconsistent and unintegrated at best. A typical approach is the use of differing software packages for each business relationship function. This approach, while offering some value in system functionality, causes data and information to be captured in silos, often owned and defined by the system owner, as opposed to reflecting the needs of a relationship manager focused on managing the ROI of the relationship.

With so much technology available to us, and so many interconnection possibilities between global systems — such as EDI, XML, commerce networks, email, web portals, and so on — it is no wonder both buyers and suppliers are confused about what standards will last and where to make investments. This means that most suppliers we have polled in recent years have been asked to join at least two to five networks supporting anywhere from five to 10 different technology standards. This is expensive, confusing and causes inevitable data fragmentation.

Why should I focus on this now?

In theory, the data and technical capabilities we have today offer enormous potential to free up thousands of hours, allowing our people to focus on more strategic items, such as realizing the true nature and value of our trading relationships. We have seen this first-hand. One of our largest customers is a pioneer in this area, segmenting suppliers and offering the top few hundred global partnerships that guarantee contracts based on jointly developed cost savings opportunities. These strategic suppliers are considered critical to bottom-line success. Collaboration at the highest-level of the organizations occurs on a quarterly basis.  

Much of this success has been achieved through outsourcing transactional processes and systems. This global trend is forcing companies to address their critical need to utilize systems effectively to support tactical processes, in order to make the transition smoother and, ultimately, more cost-effective. We have recently been asked by customers in all industries, but in particular from the financial services and pharmaceuticals sectors, to develop processes and enable electronic transactions for their supply base so they can transition transactional duties, such as invoice processing, to more cost-effective locations.

Achieving a high-value relationship management program depends on cleaning up today’s confused and complex transactional processes. We need the data, available man hours, and a closed loop process supported by global technologies in order to fully focus on why we do business with our partners, how the relationship must change and adapt, and how to optimize and measure the true value it brings.

What can I do to build a program?

Ultimately, relationships boil down to the people who cultivate them. It is no surprise to me that the relationships with our most successful customers come down to the fundamental understanding of the need for a symbiotic relationship. At one of our most successful transportation customers, senior management requires all strategic sourcing personnel to attend effective negotiation training, focused on mutually beneficial trading relationships. This has enabled them to build sourcing scorecards which track overall relationship effectiveness as opposed to purely negotiated price savings. They have long-understood that driving prices down is only a small piece of the equation and they must allow their suppliers a fair margin. This has encouraged a more holistic oversight of the total supply chain and potential efficiencies. For example, they have begun to focus on often overlooked items, such as shipping and logistics, where it is not uncommon for suppliers to make up for lost margins through opportunities arising from the global marketplace and the increased competition technology has afforded us.

The key is senior management’s support of their people driving total relationship cost down, as opposed to focusing simply on price. This allows both buyers and suppliers to consider each other’s best interests. Such organizations have found it is often the supplier who can bring the most innovative cost savings ideas to the table — but there must be a win-win atmosphere providing an incentive for them to do so.

We have an excellent opportunity to define what an efficient supply chain means. As we have discussed, little of it has to do with price. The question of how we accomplish this efficiency is much more intriguing, and I will focus on the three key principles global leaders demonstrate in this area.

Analyze

Understand your population of suppliers as well as your cost of doing business with a supplier. For example, what costs your organization the most money — ordering, invoicing, paying, implementing or supporting? On the other side, while transacting with you, what expenses do your suppliers incur that make their costs rise? Understanding these costs is the first step to eliminate unnecessary expenses from the relationship. One of the most common failures in this area, especially with the increased adoption of procurement technologies, is the notion that spend under management is the primary measure of success. In many cases, it is more of an outcome, as many of our customers have achieved significant savings by focusing on eliminating manual processing of low-dollar, high-transaction items such as office supplies and telecommunications invoices. Sustained reductions depend increasingly on transparency — that is mutual disclosure and discovery of the sources of cost within the overall supply chain. Sadly, IACCM research shows that often even internal data sharing is inadequate to support such disclosure.

Enable

Build an efficient network in which to transact business with your suppliers. Technology, while certainly only a portion of the puzzle, can allow for expensive and inefficient processes to be reduced or eliminated. Creating an effective way of transacting business can reduce transactional costs on both sides, thereby allowing the savings to be redistributed between buyer and seller. One common success we have seen in this area has been the growth of supplier networks, such as those provided by leading e-procurement vendors. Many of our customers have reported 15-20 percent cost reductions due to the expanded adoption of such connection hubs. Of course, challenges remain in adopting standards, interconnection between networks, the cost model employed by the provider, and the ease of supplier adoption. We must ensure we are not adding additional costs to the relationship by requiring network participation unless both sides can share in the cost savings. Too often, we have seen buyers gain disproportionately from this process, forcing suppliers to pass on the additional costs endured.

Manage

Most important, understand the relationship you need to have with your customer or supplier. Categorize them into quadrants and offer them opportunities based on strategic need. Increasingly, our customers are looking for new ways of lowering total cost. As sourcing efforts and global markets have reduced prices, industry leaders are looking for ways to further add value to the relationship process. It is critical to focus on the total cost and understand how savings can be shared between a buyer and supplier. The following table shows one method that could be used for either supplier or customer selection and relationship definition.

High

PARTNER SEGMENTATION MATRIX 
STRATEGIC VALUECreativeCollaborative 
CompetitiveCommon 

Low

PERCEIVED RISKHigh

Supplier challenges

It is critical to remember that any trading relationship requires compromises or concessions — and these are often weighted against the supplier. With each customer having unique perspectives of ‘standard’ processes, suppliers face hundreds of inconsistent demands. For example, in my research, I found that nearly seven out of 10 suppliers have not, or cannot, invest in the technology to handle the range of automated invoicing requested by their customers. With differing back-end systems and connection methods, and multiple customers, the suppliers’ costscan grow exponentially. Each time they step outside their own technology standards, there is an impact on their resources, skills and data transmission. Accounting personnel would need to be trained to not only produce the invoice in their internal systems, but to then replicate it in some other network so that it can be electronically sent to the buyer. 

Ironically, all these suppliers are of course also buyers. The front-end chaos created by such high levels of customization impacts the quality of forecasting and, hence, the management of their own procurement activities. It is this that often drives increased cost and risk throughout the supply chain.

Suppliers are increasingly wary of making heavy technical investments to comply with process changes, fearing that the ‘next big thing’ will hit one year from now, and they’ll have to invest in some other new, must-have change inspired by their buyer contacts.

BuyerSupplier
Best of breed systems approach causes complex integrations, inaccurate or untimely data, and disjointed processesCost and proprietary nature of multiple supplier networks causes additional costs, complex integrations, additional training, and disjointed ordering and invoicing processes
Supplier information, data, capabilities, and performance lives in technical system as opposed to central relationship managerDuplicated effort, data entry, contacts, entry points, and buyer contacts
Focus on technical solutions as opposed to core business value causes lack of ROIGeneral confusion about which of the many supplier networks to join as required by their buyers

What does the future hold?

Today’s systems have in many respects taken us down a blind alley. They have generated concepts of control, but at the same time they have increased inflexibility and confrontation.
 
Progressive organizations are building from this standardized platform to utilize networked technologies that enable teaming, collaboration and relationships that measure return on investment. Procurement tools and systems will be supplemented by enhanced procurement skills — teams that focus more on the quality of relationship management (both internal and external) and contract outcomes. Gone will be the simple mentality of scorecards and ‘Did I better all my KPIs this quarter?’ The future metric will be ‘How is my ROI this year?’ The supply chain of the future will apply these same relationship management principles and technologies to all of our business relationships, including employees, traditional business partners and suppliers. Segmentation principles will be used to ensure appropriate structures and contracts for all partnerships, with the strategic value and relative influence of each party driving the underlying nature of the relationship.

Technology is often an impetus for change and the enabler of efficient relationships. With the number of technologies and capabilities available to us in managing supply chains today, we have a real opportunity to define how to build efficient communication and, more importantly, relationships. If we focus on ROI and clean up the manual tactical processes, we can eliminate much of the cost in the supply chain and instead achieve business value through innovation and leadership. 

Chris Happ, Executive Vice President, BlueSolutions Inc, BlueSolutions Inc is a technical and business strategy consulting firm focused on assisting with supply management, technology and strategy deployments. Chris may be contacted at chapp@bluesolutionsinc.com.

Chris has been a part of more than 50 enterprise supply management and supply-chain strategy consulting engagements for industry leaders in all verticals of the Global 500. He has helped build BlueSolutions into a premier consulting company with a focus on creating market efficiencies in the supply-chain and delivering maximum value to partner relationships. Chris was formerly employed by Ariba as the Manager of Technical Strategy in their consulting organization and PricewaterhouseCoopers in their management consulting practice.

 
 

The global view: how IBM Corporation is responding to the challenges of the networked world

 
This interview explores the strategic role of contracting and relationship definition in delivering 'leadership and trust' in global networked markets M.C. McNEILL, IBM Corporation, in conversation with TIM CUMMINS, IACCM.
 
 
Tim Cummins, IACCM in conversation with M.C. McNeill, IBM 

Main points

  • Ten years ago, IBM recognized the need to build its global contracting and negotiation capabilities to meet the demands and opportunities of global markets.
  • Today, the forces of globalization are further demonstrating the value of an integrated organization that supports internal collaboration and enables external responsiveness.


Contracts have a strategic role. If they are not aligned with the business and with market conditions, they force negotiation and make us harder to do business with. One of our key goals is to avoid repetitive, unproductive work.’

Those are the words of M.C. McNeill, Vice-President of Global Contract Development and Global Alliances at IBM Corporation, describing the task of ensuring that the Contracts and Negotiations (C&N) group delivers high value services across the business. As one of the first major corporations to develop a worldwide contracting process and organization, IBM offers more than a decade of experience in the challenges of coordinating global trading relationships. And it is a challenge that Chairman and CEO Sam Palmisano very publicly plans to master.


A complex world and a complex business

Behind the IBM logo is a complex array of business offerings and services. They go to market as stand-alone items and as elements of multi-faceted ‘solutions’. Often, major customers seek unique answers, demanding new forms of integration and innovative terms and conditions. Managing across this matrix to ensure internal consensus and external capability is challenging — and demands an organization that goes far beyond transactional support.

Added to this is the fact that IBM — like many companies — has grown increasingly dependent on outsourced suppliers and offshore delivery centers. Therefore, market and customer commitments typically depend on a well-orchestrated supply chain, reaching into geographically dispersed corners of the world.

For many companies, such complexity means either rigidity (managed through strict rules and enforced compliance), or it results in mushrooming negotiations and extended lead-times — almost inevitable when a high percentage of deals and relationships have unique or special terms.

So how does IBM handle this environment and seek to balance responsiveness with good business controls?

Building global capability

The C&N group at IBM is consolidated into a global operation. This centralization occurred almost 10 years ago in response to the needs and opportunities of globalizing markets and the increasing trend towards complex, potentially high-risk services. The market sought providers that understood customer needs and was ready to mitigate risks. It demanded consistency and reliability. That could be achieved only through a more strategic (and customer focused?) approach to contracting and corporate policies.

In explaining IBM’s continued evolution, M.C. comments ‘The work by Sam Palmisano, promoting the globally integrated enterprise, has been extremely helpful (to our organization). It supports the central model.’

Freed from debates that condemn so many contracts and procurement organizations to the endless battle over who owns deployment, the IBM team has been able to focus on optimizing service value and delivery. ‘We have specialists whose global deployment ensures rapid access. People are seeing the value of global “centers of excellence”. With the multiplicity of brands, offerings and business units, they recognize the importance of an ability to bring things together fast to integrate globally and to create incentives to cooperate. A fragmented group can’t do that.’

C&N has three core service areas. One is the corporate services group, overseeing company-wide policies, practices and programs. Another is the transactional group — supporting customer negotiations and post-award contract and relationship management. The third — which benchmarks show to be rare — focuses on support to the product and service groups. This group faces the balancing act of ensuring the competitiveness of individual products and services, while avoiding differences that confuse the market or make integration difficult.

‘The key issue is that we must design the ability to coexist,’ explains M.C. ‘We have to avoid contradictions, conflicts and ambiguity. We must ensure that products and services can be integrated — both physically and contractually.’

‘Best practice’?

One of IACCM’s published ‘best practices’ is the alignment of contracting with product life-cycle management. Too often, we see products and services with a value proposition contradicted or constrained by unimaginative or inappropriate contract offerings or supply chain capabilities. So how does IBM ensure that it ‘hears the voice of the market’?

M.C. acknowledges that this can be challenging. Ensuring the right research and data flows is always something IBM seeks to formalize and improve. ‘We have systems to ensure that the experiences of C&N staff working on live engagements are captured — issues, trends and competitive insights. Also, every product and service has an offering owner and goes through a consistent, integrated process — either integrated product delivery (IPD) or integrated service delivery (ISD). C&N is closely engaged in this process — we have a range of standard questions, we monitor these not only during design and development, but based on market experience throughout the life-cycle.’

To manage an efficient and effective global operation, it is critical that everyone understands ‘the standards’ and the implications of variation. But M.C. confirms the focus today is on how to better anticipate change and also how to create more variables and options in advance of release or market changes. ‘We want to shorten cycles. We want to offer flexibility, while recognizing that customization in many markets is not affordable. The brands — product and industry — want help with understanding and managing the standards for affordability and competitiveness.’

‘We are always having to focus on “the next big thing”,’ explains M.C. ‘As we expand into new markets, geographies and sectors, we must have sensitive policies and terms. These opportunities require flexibility, but not at extra cost. We must formulate answers to these strategic needs — for example, when and how to negotiate.’

Managing ‘the next big thing’

That need to handle ‘the next big thing’ has led to the creation of a very specific ‘center of excellence’ It includes a new venture and alliance group that handles not only initiatives or challenges that are new to the business, but also defines and maintains the portfolio of relationship offerings that are available for use in the business. This portfolio is augmented by guidance and experts that together support executive and business unit management in strategy and operational execution. Their work involves supporting contracting issues associated with acquisitions, equity stakes, alliances, joint ventures, distribution and customer, or relationships.

‘When we acquire companies, or form an alliance, we must ensure that we make the transition seamless to customers. Also, we often work with companies on many levels — as customers, suppliers and in distribution or alliance ventures. Our commercial approach has to make sense, and be visibly fair and balanced.’

Reconciling conflicting interests

M.C. agrees that the big challenge — and a key role for the modern contracts organization — is reconciling across multiple stakeholders to ensure integrity and affordability. ‘People have divergent strategies and conflicting measurements. Our job is to bring them to the party and find approaches that are compatible with their goals and interests.’

Today’s networked world means that such conflicts are highly visible in the market and can rapidly undermine or damage trading relationships — so they must be resolved. C&N achieves this is through a management council of senior people from different brands which provides a forum for contracting strategy decisions. ‘C&N is uniquely positioned — not to make decisions — but to take ownership for the fact that necessary decisions do get made.’ In this role, it frequently brokers creative solutions that allow competing interests to be reconciled, ensuring there is a point of accountability for resolution.

IBM recognizes that integration across the supply base is a growing challenge. ‘Internal resources are no longer “the only ship that has to be moved” when adjusting to customer or market requirements.’

M.C. highlights how IBM’s Procurement organization has done a fine, and externally acclaimed, job of managing the supply base and driving cost efficiencies. But as with all companies, there is inevitable tension in balancing the focus on costs with the wish by solution owners to have deeper relationships with key suppliers. C&N has worked effectively with Procurement to build cooperative models in the alliances area — but work remains to be done, especially in support of new solutions and emerging businesses.

‘Helping the businesses to understand their relationship options and how to manage them has been very helpful. In a solutions and services business, this really is a critical skill,’ observes M.C. This environment is creating a growing interdependency between buy-side and sell-side operations — challenging the traditional Chinese wall between revenue generation on one side and expense/cost containment on the other.
Addressing the need for change

‘As I look at procurement organizations today — and we negotiate with many of them — I see a community that is very well disciplined, has good standardization and is delivering highly visible value to the business. But from our experience, we know that change can be challenging. Procurement metrics and skills are not necessarily enabling greater collaboration and a focus on business interests that go beyond bottom-line cost.’

Sam Palmisano has emphasized how the new global corporation must demonstrate leadership and trust. These messages are driving the evolution of  C&N at IBM. Today, they have worked to take leadership and build trust with internal stakeholders; those steps are clearly enabling greater market responsiveness and a desire to build external trust with customers and partners. Key to this change — and to the C&N value proposition — is its alignment with product and service introduction, and lifecycle management to ensure market responsiveness and organizational efficiency.

As pressures to innovate and shorten cycle-times increase, there is recognition that greater supply chain integration and oversight will emerge. While the need is recognized, its form remains unclear — perhaps it will soon be ‘The Next Big Thing’.

Tim Cummins,
CEO, IACCM, In conversation with M.C. McNeill,  Vice-President of Global Contract Development and Global Alliances IBM Corporation.
 
 

 

Prevention beats cure — proactive contractual care for successful supply chains

 
As businesses deal with an increasing number of cross-border contracts and events that can cause supply chain disruption, contract and legal professionals must work together proactively to secure success and prevent problems. HELENA HAAPIO Lexpert Ltd
 
 

HELENA HAAPIO Lexpert Ltd

Main points

  • Proactive contractual care is increasingly important for supply chains.
  • Contracts and contracting processes can be used to prevent problems.
  • Businesses can and should use legal knowledge and contracts proactively.
  • Tools and techniques already exist that help implement proactive contractual care.
  • Through the IACCM and the recently established ProActive ThinkTank, you can get involved in initiatives that help to identify the skills, practices and tools that are required, and to share and strengthen them.


In today’s networked economy, timelines get shorter, requirements tighter, and inventories are kept to the lowest possible level. Each day, companies become more dependent on each other. If one point in the supply chain fails, everyone is likely to be affected. Personal and business relationships suffer, and the damage to reputation can be permanent. But that does not have to happen. Proactive contractual care can prevent problems from occurring, keep differences of opinion from developing into disagreements, and help manage disagreements in ways that prevent them from escalating into disputes and legal action.
From reactive to proactive, even in legal care
Lawyers are often accused of seeing contracts primarily as a potential source of breach, trouble and dispute. The view has developed through generations of contracts that have failed, disputes, litigation and case law. When discussing contracts, lawyers tend to use the language of law, risks and failure, rather than the language of business, opportunities and success. A language and culture barrier has developed, keeping lawyers out of many teams where they could have made a valuable contribution.
Traditionally, the steps in providing legal care have resembled those of medical care — diagnosis, treatment, and referral — all steps that happen after a client or a patient has a problem. Care has been reactive — you get sick, you seek treatment. You encounter a dispute, you turn to a lawyer. As lawyers and as clients, we need to move away from that model. Supply chains benefit from a proactive approach focusing on how to secure success and help everyone stay out of trouble.
Supply chains do not become stronger when the parties spend hours drafting and negotiating clauses dealing with breach and remedies — they benefit much more if those hours are spent on clauses that enhance communication, clarify tasks, and help secure successful performance.[i]
The good news is that a growing number of contract and legal professionals are beginning to adopt the proactive approach. They want to help prevent issues that can adversely impact relationships by promoting better performance and sound business practices. This is underpinned by a strong belief that legal knowledge is at its best when applied before things go wrong. To exercise proactive contractual care, consider the following.
·        Whether working on the sell-side or on the buy-side, give consideration to a commercially justifiable allocation of risks.
·        Encourage success by giving incentives for good performance and aim at arrangements where rights, responsibilities, risks and remedies are effectively identified, assessed and managed.
·        Based on an understanding of the business critical issues, use well planned contracting processes and documents to help produce common, explicit knowledge that can be shared and understood within and between organizations.
·        Contracts serve the best interests of all involved and lay the foundation for long-term trust and loyalty when theyprovide the script for successful implementation,align expectations, define desired outcomes and allocate tasks clearly.
The proactive/preventive law approach
In the context of practicing law, the idea of prevention was first introduced by Louis M Brown, a US law professor and legal practitioner. He published the treatise Preventive Law in 1950, followed by numerous other books and articles on the topic. Proactive Law is a Scandinavian approach built on Preventive Law. Both approaches have similarities with preventive medicine and its methods of preventing the occurrence of disease — here, ‘disease’ refers to legal trouble, disputes, and litigation.
The proactive/preventive law approach provides tools and techniques for the early detection and prevention of potential problems. If problems do arise, the approach offers mechanisms to resolve them quickly, before they develop into disputes. Still, the focus is not just on preventing problems or ‘legal ill-health’. The goal is to promote ‘legal well-being’: embed legal knowledge and skills in corporate culture, strategy and everyday actions to actively promote success, ensure desired outcomes, and balance risk with reward.
Proactive contractual care
Proactive contractual care refers to the use of contracting practices that merge proactive/preventive law with good contract, project, quality and risk management practices. The goals are:
  • first, to promote successful performance and relationships and to eliminate causes of potential problems;
  • second, to minimize the risk, problems and harmful effects when problems do arise; and
  • third, to manage conflict, avoid litigation, and minimize costs and losses where they are unavoidable.
The construction industry has used dispute prevention and resolution techniques longer than most industries. This has been a matter of necessity. Once the building process has begun, the work cannot be interrupted or delayed without serious cost consequences. Accordingly, the industry has placed a premium on quick solutions to problems. Those in charge of supply chains in other industries can learn a lot from the techniques used in the construction industry. Not surprisingly, one of the most powerful ways to prevent and control disputes has proven to be allocating risks realistically, by assigning each potential risk to the party who is best able to manage, control or insure against the particular risk.[ii]
If something is not in the contract, is it in the deal?
When documenting deals, it is quite common to use words or omit items that appear self-evident to the document creators (but not necessarily to others). Prior to outsourcing becoming common practice, and when contracts often involved two companies only, it was simpler to resolve an issue, even when questions about omitted items arose. If lawyers got involved, they looked for the answers in the contract, such as whether it contained an exclusion of implied warranties for fitness for purpose. Today, with companies often relying on long chains of suppliers, it is not so simple when contracts and work scope are not explicit. There can be complicating factors when the supply chain members reside in different countries. In some countries, to be valid, contracts need to be in writing — in others, they do not. A number of different laws may apply and fill the gaps in the contracts. The question of which supplier (if any) has to do what was left out, and who is to pay, may cause a major chain reaction. In such circumstances, the outcome of a dispute is difficult to predict.
While lean contracting and shorter contracts certainly have advantages, they should be used with caution. Leaving important items unaddressed can be dangerous: Who knows what will be passed on in the supply chain if rights, responsibilities and remedies are not itemized in the documents (and are thereby left to the default rules of the applicable law).
  • Will all relevant tasks be recognized, resourced and priced?
  • Do the people involved know what obligations, liabilities and remedies exist in case these have not been specified?
  • Whose warranties and laws apply?
  • How do the people who are completing the orders, performing the services, invoicing, or instructing third parties know what is expected, where and when, or what the acceptance criteria will be?
Finding the answers after the fact can be costly. Knowledgeable organizations use well thought-out contracting processes and documents to provide the required clarity.
Is back-to-back the answer?
Best practice corporations have addressed the integration of buy-side and sell-side contracting. Yet many companies are still struggling with weak interfaces between sales and procurement. They acquire third-party software under licence terms that fail to reflect the onward offerings they make to their customers, or procure products that lack the appropriate warranty or service terms. As a result, they are left with a range of exposures.
In theory, ‘back-to-back’ sounds simple. The philosophy is that in a supply chain, the sub-supply contract should, as far as possible, be consistent with the supplier’s obligations under the main supply contract. The supplier’s obligations and risks relating to the main contract should pass through to the sub-supplier. In theory, it should work well in both long-term supply arrangements and in one-time supplies for major projects. Yet there is truth in the saying (attributed to Yogi Berra): ‘In theory, there is no difference between theory and practice. But in practice, there is’.
‘Back-to-back’, when used carelessly, may create more problems than it solves. Not everybody understands what ‘back-to-back’ means. For example, a supplier may be asked for a price, and give one. Then when the work is about to start, the buyer may say that they are looking for a back-to-back contract. What the buyer is requesting may sound reasonable: the supplier should accept the same terms and conditions the buyer has accepted towards its customer. Yet if ‘back-to-back’ was not discussed when the price was set and if the supplier does not know the end customer’s terms and conditions, the supplier may be in for a surprise.
‘Back to back’ means different things to different people. The buyer may have referred to it meaning ‘pay when paid’ (or ‘pay if paid’). The buyer may want the supplier to accept the same (unlimited) liabilities and remedies it has accepted. There may a be general reference under ‘definitions’, where ‘the Agreement’ is defined to include not only the agreement between the parties but also the buyer’s agreement with the end customer (as it may be amended from time to time). To know what it is agreeing to, the supplier would need to see the entire end-customer agreement, which takes time and adds to the cost of contracting. It may not be possible to pass those provisions on to the supplier’s suppliers. The process may take so long that it is tempting to commence work without a signed contract — which adds to the risk. If a dispute arises, a myriad of legal, technical, financial and factual issues become involved.[iii] Again, the outcome is hard to predict.
Existing contract management solutions can help a great deal in aligning sell-side and buy-side contracts. They can be designed to notify of impending problems in a supply chain before they become a disaster. When getting the early warning signal, people can do the right thing at the right time. Not all tools need to be high-tech. Let's use task allocation as an example: if it is unclear, problems will follow. Our hand tool is designed to prevent them. It lists (on each finger of each hand for both buyer and seller) the trivial-sounding but crucial questions that must be answered when creating or reviewing obligations: who/which party shall do — what — where — when — how — and, last but not least, what if / what if not.

 

 

This simple hand tool has proven to work in practice, both on the sell-side and on the buy-side. If the parties in a supply chain remember to go through the questions and address them when creating, amending or passing on contractual obligations, a number of potential pitfalls can be avoided. Much more sophisticated tools and checklists exist — yet few are as easy to remember and carry around.
When contracting in supply chains, a balance needs to be struck between the different (often conflicting) requirements, such as the need for lean contracting on one hand, and clearly articulated responsibilities and remedies on the other; and the need for certainty on one hand, and flexibility on the other. A commercially and legally sound solution needs to be found so that inbound and outbound obligations, liabilities and remedies become aligned and the risks as well as the cost of contracting remain within acceptable limits.
Proactive contract and legal professionals know how to work together to strike the required balance. They know how to use the contracting processes and documents to clarify requirements and to avoid negative surprises. Using the good old rules of risk management and dispute prevention, you can begin the process by identifying the risks: what, why, and how problems may arise. Be mindful that implied (invisible) obligations are not easy to fulfill. To be able to perform, supply chain participants need to know what is expected. By asking the right questions, you can clarify goals and task allocation and be better prepared — not only for contingencies or legal problems, but also for successful performance.[iv]
Helena Haapio, LL.M., MQ (Master of Laws, Master of Quality),  International Contract Counsel, Lexpert Ltd, Helsinki, Finland.
Helena supports corporate clients in succeeding in cross-border contractual (ad)ventures, helping them use contracts to get better business results and stay out of legal trouble. She is a member of the IACCM Advisory Council and the founder and coordinator of IACCM Finland. She is actively involved in the development of the ProActive ThinkTank and the Nordic School of Proactive Law. She also acts as arbitrator.
Helena.Haapio@lexpert.com, www.lexpert.com
 
Further information: proactive / preventive law and ProActive ThinkTank
In respect of proactive/preventive law and proactive contracting, a body of practice and literature already exists; see the Nordic School of Proactive Law (NSPL), www.proactivelaw.org, and the National Center for Preventive Law, www.preventivelawyer.com. The work of the NSPL has chiefly been carried out through periodic international conferences. The 2005 Conference, Fusing Best Business Practices with Legal Information Management and Technology, was organized in Stockholm, Sweden. Conference papers were published in Volume 49 of the Scandinavian Studies of Law Series, ‘A Proactive Approach’, sisl.juridicum.su.se. The most recent conference, Commercial Contracting for Strategic Advantage was held in Turku, Finland in June 2007. IACCM Finland was one of the organizers, and the proceedings will be co-published by the IACCM and Turku University of Applied Sciences. As an outgrowth of that conference, various leaders in proactive/preventive law, together with a number of practitioners who seek to expand the field beyond legal concerns met to form the ProActive ThinkTank (www.proactivethinktank.com; web site under construction). The mission of the ThinkTank is to provide ‘a forum for business leaders, lawyers, academics and educators to discuss, develop and promote the proactive management of relationships, contracts and risks, and the prevention of legal uncertainties and disputes’. The website will provide a venue of collecting and sharing such information as best practice tools and techniques, case studies, articles, and reports on ongoing research. If you wish to join the ProActive ThinkTank or obtain additional information, please contact the author.


[i]. In the ‘Top Ten Most Frequently Negotiated Terms’, the yearly survey of the IACCM, limitation of liability has retained its Number 1 status each year. The list is dominated by risk containment clauses, and the survey shows little evidence of time being spent on defining parameters that increase the likelihood of success. See IACCM 2006 Top 10 Negotiated Terms. www.iaccm.com//library/full.php?linkid=1458.
[ii]. Groton, James: The “Up Front” Prevention, Control and Early Resolution of Disputes: Dispute Prevention and Management Lessons that Businesses Can Learn From the Construction Industry, from the proceedings of the conference ‘Commercial Contracting for Strategic Advantage — Potentials and Prospects’, Turku, Finland, June 13–16, 2007.
[iii]. For the legal and commercial complexities of back-to-back clauses in international construction contracts, see Bergmann, Hans: International Industrial Plant Construction Contracts in Finland. Back-to-back Clauses and Compulsory Law. http://bjl-legal.com/forum/pdf/FinIndustrialConstructionE.pdf. For governing law and dispute resolution procedures, see also Brown, Nicholas: When in China, Watch Your Back ... -to-Back, Pinsent Masons Press Article April 2006. http://www.pinsentmasons.com/media/904729527.htm.
 
[iv]. For empirical research supporting this view, see Argyres, Nicholas S; Bercovitz, Janet; & Mayer, Kyle J.: Complementarity and Evolution of Contractual Provisions: an Empirical Study of IT Services Contracts. Organization Science, Vol. 18, No. 1, January-February 2007, p 3–19.

 
 

Technology as an enabler for global contracting

 
What is next for Oracle Corporation after having successfully implemented a Global Single ERP Instance, global business processes and policies, and a consolidated, off shored back-office processing center? The answer, continue to drive cost out of the process by assuming a greater risk appetite and achieve greater economies of scale by leveraging our spend. GREGORY TENNYSON Oracle
 
 
By GREGORY TENNYSON Oracle Corporation
The following is Oracle Corporation in a nutshell:

ORACLE PROFILE
Revenue(US)$18 billionEmployees70,000
Acquisitions since December 0435 plusAmount spent on M&A activity.$20 billion +
Indirect spend$2.3 billionTravel & Entertainment (T&E) card spend$0.54 billion
Percentage of indirect spend under management (1) 90-95%

Percentage of indirect spend on-contract transactions (2).
Percentage of goods-related transactions on-contract is approximately 90%.

US: 75%,
Global: 55%
Percentage of POs sent electronically (3) 70% Percentage of invoices received  73%
Most recent FY savings $260 million Savings over the last seven years. $1 billion
Turnaround times  Purchase requisitions into a PO occurs within two days 80 percent of the time.  

Numbers stated above are approximations.

Notes on above
(1) Percentage of indirect spend which is influenced by sourcing, Oracle procure-to-pay technology solution and contracts process.
(2) Percentage of purchase requisitions that are submitted against a contract. We measure this by catalog content purchase requisitions, which is a system-generated measure.
(3) Percentage of purchase orders (POs) sent electronically — XML, email or autofax to the supplier.
(4) Percentage of Invoices that are received electronically — XML, flat file upload, Oracle internet supplier portal or system import.
Approximately seven years ago Oracle Corporation embarked on a project to globalize its business processes. A few of the principal benefits are listed below:
  • increased economies of scale;
  • enhanced operating efficiencies;
  • improved corporate governance; and
  • simplified how we do business by assuming a greater risk appetite.
Key to the project was creating a global single ERP instance, based on global policies, processes and a uniform setup of the applications. In general, we do business locally the same as we do globally. We have allowed for local exceptions, provided the exceptions are codified in law.

The technology solution, coupled with a consolidation of our back-office functions, first into regional shared service centers, and then to a global shared service center, allowed us to optimize the intellectual capital retained to perform the work at the most reasonable labor arbitrage.

The result is a procure-to-pay process that provides for complete visibility as to what gets acquired; by whom — Oracle cost center and line of business hierarchy; and from which suppliers — price point and the governing terms and conditions. Purchase requisitions are routed for spending approval using a global workflow, so transactions are subjected to the same requirements. Once approved, the system transacts on-contract purchase requisitions without buyer involvement. The Tactical Purchasing Team reviews off-contract purchase requisitions against the purchasing policy and takes the appropriate steps to secure supplier qualification, competitive bids, contracts, and so on. To complete the solution, we mine purchase orders, invoices and supplier data using web-based business intelligence tools.

Automating the procure-to-pay transaction
The charter for Global Procurement includes a ‘commitment to innovative and use proficient methods to obtain the total lowest cost for the highest quality goods and services necessary for business operations … achieving cost savings goals, whilst meeting or exceeding customer expectations in a timely, efficient and professional manner’. To this end, we have revamped our approach to supplier enablement, billing and payment.

Electronic content
The focus is on increasing the amount of catalog content accessible to our requesters via the iProcurement self-service requisitioning tool. Through the implementation of additional punch-outs (real time interfaces with key suppliers) and increasing the number of electronic catalogs provided via spreadsheets, Oracle has been able to increase overall electronic content usage to 75 percent of all requisitions processed in the US in FY2007. The use of electronic content has allowed for improved enforcement of procurement standards and greater cost savings, as purchase orders for catalog content are automatically created and sent to the supplier via XML or email.

Invoice efficiencies
There has been an aggressive drive the transform accounts payable invoice entry from a manual, paper-based model to an automated, eCommerce solution. Over the three previous fiscal years, Oracle US alone was responsible for the entry and payment of over 400,000 invoices. Of that number less than 40 percent were processed electronically, those that weren’t were primarily ‘flat file’ invoices that required some degree of manual review and error resolution.

In Fiscal Year 2005 the team developed a plan to implement XML invoicing with certain key, high volume and 'technically competent' suppliers concurrent to the enrollment of lower volume, less tech-savvy suppliers in the iSupplier Portal invoicing program. The XML solution utilizes the Oracle supplier network, a trading marketplace accessible via the internet, to allow suppliers manage their accounts with Oracle and deliver invoices via the internet using standard XML formats.

The self-service component allows the suppliers to resolve billing issues directly and, more importantly, immediately, thus reducing the probability of delayed payment. Additionally, by using the iSupplier portal (an external web portal with a 'view' into a supplier's account with Oracle Accounts Payable (AP) and Purchasing) the suppliers can confirm receipt of invoice, determine when payments are scheduled and whether any invoice holds must be resolved. Added functionality in the iSupplier portal allows certain suppliers to even submit invoices directly to Oracle AP. By using this tool, suppliers are able to ensure that their invoices are booked quickly and accurately within the scope of their purchase order, with no additional cost to Oracle. At the end of FY2007, the number of invoices processed electronically has surged to over 180,000 per year, setting the high mark at 73 percent of the total invoice volume in the US.

Payment solutions
In FY2004, Oracle US made 2800 payments per month to suppliers and employees for payment of invoices and expense reports, less than 10 percent of which were executed electronically. While it may be convenient to receive a check in the mail, there are a number of disadvantages to the issuing and receiving parties, including mail fraud, missed discount opportunities and the requirement throughout the US for companies to turn over funds from uncashed checks to the individual states on an annual basis. By encouraging current suppliers to adopt settlement via electronic funds transfer (EFT), Oracle is increasingly able to take advantage of early payment discounts, ensure funds are received by the right people and otherwise tighten supplier relationships. By the end of FY2007, the number of checks cut per month had dwindled to less than 1700 and the percentage of payments made via EFT had climbed to 58 percent of all payments made.

Requisite skills:
Our procure-to-pay process has allowed us to separate the strategic and tactical roles. This focused approach to roles allows us to not only obtain greater leverage and arbitrage, but to focus staff development on those areas essential to strategic, tactical and overlapping skill areas.

We continue to invest in the development of staff, as intellectual capital — as well as our technology solution — will help to define the success of the team in achieving a best-in-class procure-to-pay process.

Future of the organization:
We are committed to sustaining the solutions and successes we have achieved. Our strategy falls into three areas, each of which are interrelated and dependent on the success of the other:
  • Technology: On an ongoing basis, existing business partners are being transitioned to the new eCommerce model comprising punch-out or catalog content, XML or email PO, XML or iSupplier portal invoice and electronic payment. The seeds sown in the US are already bearing fruit on a global basis; and as electronic content, billing and payment gain traction, Oracle will continue to reap the rewards from these efforts.
  • Intellectual capital: Strategic roles are aligned by commodity to draw on staff’s subject matter expertise and knowledge of industry price points, trends and practices. Tactical roles are empowered to identify and introduce changes that drive operating efficiencies and provide for career progression.
  • Risk appetite: This is our current focus to better meet our internal customer’s needs and timetables. Oracle, like most companies, generally does not allow sufficient time for the procurement process and, as a result, we have had to enhance our operating efficiencies and assume risk to expedite the process. We have found that the mutual assumption of risk has improved buyer/supplier relationships as well as remove cost from the process, because we openly collaborate and form relationships based on trust.
Our challenge, as with most companies, will be to stay in front of shifting customer and market requirements. Our ability to anticipate or read the market will be determined by our ability to collaborate — engage our customers in the process with open and honest dialog; and stay current with industry trends by remaining well read — current.

Conclusion
Technology is the enabler that has removed ‘touches’ from the process and automates how we procure. Our procure-to-pay transaction expense has been reduced to the same scale of a procurement card transaction with the benefit of an automated workflow and data mining capability. In my opinion, we have achieved a best-in-class process. To take the next steps of becoming world-class we must assume a greater risk appetite to meet our customers’ (internal and external) needs and expectations.

Gregory Tennyson,
Vice-President, Global Procurement,Travel & Disbursements Oracle Corporation, gregory.tennyson@oracle.com, www.oracle.com
 
 

Business continuity planning for contracted manufacturing relationships

 
Protecting the supply chain is synonymous with protecting revenues. Your ability to develop agreements that provide for visibility and flexibility is critical to assuring effective protection should key suppliers be unable to deliver. This article details how business continuity planning can reduce business risk and enhance your readiness to deal with disasters’ PAT SCHAFER Intrasphere Technologies
 
 
PATTERSON SHAFER Intrasphere Technologies

Main points

  • Business continuity planning is about sustaining revenues.
  • Contracted supply and distribution relationships present added risks.
  • Contract provisions may have a big impact on the ability to mitigate supply chain risk.
  • Long-term planning and contractual foresight are key to protecting complex supply chains.
  • Monitoring key predictive factors is critical to assure effectiveness of the business continuity plan. 


Business continuity planning overview

Business continuity planning includes identifying risks to business processes and taking steps to minimize or eliminate impacts to the business, should those processes be interrupted. The most often cited causes for business interruption are natural events such as hurricanes, fires or floods, and political events such as coups or terrorist actions. While business continuity planning might be considered a general fiduciary responsibility, many companies wait until they are faced with losses or legislative pressures (such as Sarbanes Oxley) to do what they can to protect revenues.

In contracted environments, there is added complexity; less visibility, control and flexibility; and more exposure to a range of risks beyond those typically addressed in business continuity plans (BCPs). Issues such as contract disputes, ineffective quality control, and a supplier’s financial condition can all disrupt supply.

Typical BCPs are limited to site-based processes. The focus is on protecting those processes, and restoring them as quickly as possible in a logical sequence to resume operations. In most cases, this is reasonable. Outages are measured in hours, maybe days, and supply continuity is not impacted. In those less frequent instances where a facility is disabled for a longer period of time, or where the supply chain is significantly disrupted for other reasons, corporations are generally less prepared.

BCP development

The common approach to developing BCPs is to perform a business impact analysis to determine which processes are most critical, and a risk assessment to identify risks associated with those processes. Once risk mitigation strategies are developed, key personnel are trained and the plans are communicated and tested.

In delivering services, business continuity planning focuses primarily on systems. In the manufacturing realm, where the output is a physical product, production, inventory and logistics issues are added. When considering the manufacturing supply chain, one approach is to look at inventory as a ‘buffer’ should one part of the manufacturing process fail. These inventories can include raw materials, in-process inventory and finished goods. Any of these inventories can provide a safety net, depending on where the interruption occurs. The question is: ‘How do you balance lean manufacturing principles and the desire for low inventories with the desire to protect continuity of supply?’ Constraints on building physical inventory can include capital, logistics space, and ‘shelf-life’ (a factor in fashion, pharmaceuticals and likely many other industries).

The permissible ‘supply gap’ (the amount of time the company will tolerate an interruption in supply) will vary from product to product, and will depend on factors such as revenue interruption, availability of substitute products, competitive positioning, patent life, and other strategic elements. 


  

 

BCPs include three basic elements:
  • long-term planning;
  • post-event response plan; and
  • monitoring key predictive factors.
Long-term planning
Long-term planning includes determining the permissible supply gap for each product, and defining the appropriate strategy and investment for optimizing inventories or making available alternative capacity. If no alternative capacity has been made available, then efforts must be made to reduce or eliminate the long cycle times associated with selecting an alternate supplier, negotiating an agreement, setting up production capability and starting the production run. The goal is to minimize the time in which product is unavailable by leveraging the then current inventories and launching alternate production capacity as quickly as possible.

Post-event response

The BCP includes two distinct post-event phases — notification and assessment, and recovery.
  • Notification and assessment focuses on communicating the disruption and determining the magnitude of the outage.
  • Recovery addresses the subsequent restoration or reassignment of impacted processes or sites.
Recovery is typically categorized into three levels depending on the severity of the disruption: level 1 being outages of a day or less representing little or no impact to supply, level 2 lasting up to one month, and level 3 of a month or more and likely representing material risk to the continuity of supply.

Monitoring serves two purposes: first to assess ongoing inventory and capacity that impact the effectiveness of the BCP, and second, to predict those events that could have a catastrophic effect on the availability of raw materials or finished goods. While natural disasters or infrastructure failures are usually impossible to predict, many factors are that may disrupt the supply chain, such as bankruptcy or political action.

In addition, the business environment will affect the business continuity planning strategy and targets for each response plan. Business factors that should be proactively monitored include competitive risks and opportunities, and potential regulatory issues that may change the value of the product.

Business continuity planning in the contract manufacturing environment
Developing BCPs for contracted processes, whether manufacturing, services or outsourcing, is more challenging than for internal processes. The broader range of possible causes for interruption is complemented by the increased complexity in managing and mitigating those risks. Contracted relationships require heightened oversight, communication, cooperation and flexibility.

While suppliers may have their own BCPs, the company should evaluate them and determine whether they are adequate to protect the company’s access to raw materials, packaging or other upstream dependencies. Suppliers’ BCPs will be irrelevant in cases where contractual issues or the supplier’s financial viability impede the supply chain, or where other external factors, such as regulatory or capacity issues, impact their effectiveness. Also, the company must evaluate appropriate actions to support effective implementation of suppliers’ BCPs.

One approach to supply chain risk mitigation is to build inventories. Who will determine appropriate inventory levels? Who owns the extra raw materials or in-process inventories? Where will they be stored? Will your company have visibility into inventory and supply chain status?

Another approach is to establish alternative capacity — doing so, however, can result in significant cost. Even if some suppliers are willing to qualify additional lines or facilities for production, redundancy within the supplier does not mitigate many of the financial risks. The time required to identify and come to an agreement with alternative suppliers must be added to the time it takes to qualify a new line for production. In some cases, companies have made sizeable investments in their suppliers’ facilities to assure continuity of supply. In one case, the company purchased the supplier outright.

Some contracts specify guaranteed minimums, take-or-pay levels, or threshold pricing that will make alternative sourcing impractical or very expensive at best. In cases where the supplier utilizes its own intellectual property, contractual provisions may make alternative sourcing impossible.

Case study: pharmaceutical products

Pharmaceuticals are a good case study because they present challenges in manufacturing complexity, logistics and regulatory requirements. Building an inventory buffer can be expensive, and is limited by ingredient or product shelf-life, cold chain storage requirements, or unique market specifications that limit flexibility of distribution. On the other hand, dual-sourcing can be cost prohibitive.

Prioritization

As a result of the above constraints, only high-value products merit investment in robust supply-chain protection. One approach is to prioritize by criteria, such as annual contribution to revenue and profits, value to a portfolio of products, or goodwill based on perceived medical necessity. Once the business impact analysis and risk assessment have been completed, the decision can be made as to how much will be invested, and where, to mitigate supply chain risk.

The figure below demonstrates a possible supply chain (constructed from elements of existing products to protect confidentiality). Highlighted risks include a single in-house facility producing the active pharmaceutical ingredient (API) and sole-sourcing of a critical raw material.
 


These risks are aggravated by the fact that batches are qualified for specific markets, so should something happen to a facility or to a batch, there is limited flexibility in reapportioning the inventory to meet individual market needs. In regulated environments, the cost and complexity of switching manufacturing facilities, or even lines within a facility, are prohibitive. Qualifying new facilities for each target market is a slow, painstaking process.

Mitigating contracting risk

The answers to protecting supply may be in the terms and conditions of supply agreements. Tiered pricing may point to an inventory build-up of semi-finished or finished product to allow sufficient time to identify and qualify a new supplier. Intellectual property (IP) escrow provisions may allow your company to pre-qualify a supplier’s proprietary process on internal lines as a back-up should the supplier be unable to meet supply commitments.

Contracts may be inherited following the acquisition of another company, the supplier may have a unique process that is essential to the product formulation. However, in many cases there are opportunities to negotiate terms that mitigate risk. In some cases, these may lead to solutions that help both companies.

How can contract managers support supply chain continuity? The following negotiating guidelines or terms can directly impact supply chain risk.

Take-or-pay provisions

Minimum purchases or take-or-pay provisions greatly limit flexibility. No supplier will want to let lines sit idle in anticipation of a catastrophic event elsewhere. Possible compromises include tiered pricing that provide sufficient return for the supplier regardless of volume.

Access to IP

A supplier’s proprietary intellectual property (IP) can be a severe constraint when looking for alternative sources. In the pharmaceutical industry, even packaging details need regulatory approval for each market. Options include escrowing IP or other obligations to transfer IP in the event that the supplier is unable to deliver as promised. However, long qualification lead times may limit the effectiveness of such provisions. Provisional qualification or licensing IP may be a workable solution in these cases.

Agree to support transfer of capacity

If a supplier is hit with a catastrophic event, the concerns will be safety, stabilization and, last, recovery. The supplier may focus first on its own products, or it may have other, higher-priority customers. Be sure that there are no contractual impediments to the rapid transfer of software, data, equipment, raw materials, or other critical elements to another facility.

Guaranteed alternative capacity

Contractual provisions for guaranteed provisional capacity may be helpful, but only if they are effective. Financial insolvency or commitments to other suppliers may make such guarantees meaningless.

Visibility

Visibility into the production environment is critical. Access to systems provides contract managers the ability to accurately assess capacity and inventory, and to anticipate or understand quality issues that may impact availability of product. Physical access is also important. Contract managers or other company representatives should be able to audit key systems, such as air quality, fire suppression and inventory storage, to assure that all risks are managed as effectively as possible. For example, a company that is relying on inventory as a buffer to supply chain interruptions will be in trouble if the inventory is stored in the same facility as the production line, and that facility is affected.

Access to upstream suppliers

Supply agreements vary greatly. In some cases, the company will provide raw materials to the supplier; in other cases the supplier supplies critical raw materials. Be sure that your company has access to critical raw materials in the event that the supplier is unable to continue operations.

Technology/systems sharing — win/win

In more constructive partnerships, companies may share data and even supply chain and logistics systems with suppliers to optimize the flow of information. Inventory data may impact other buying and distribution decisions, and better distribution information may allow the supplier to better manage production and pass along savings. However, sharing systems, even data, can be an expensive proposition, and there will likely be added security and confidentiality issues that must all be addressed in the contract.

Relationship management

The quality of the relationship can directly impact the effectiveness of the BCP, and the outcome, if there is a catastrophic event. Face-to-face meetings go a long way to ensuring that risk avoidance and recovery measures are in fact viable. During recovery processes, a close working relationship and first-hand knowledge of the situation cam make the difference between a complete loss and a successful workaround.

Practical implications

There are several practical implications to business continuity planning. Good relationships go beyond the letter of the contract, and are essential for effective risk mitigation. Some of the key issues to consider in choosing and managing relationships include:
  • Lean manufacturing versus mitigation afforded by extra inventory and/or capacity: There is a cost to adding protection and flexibility. However, these costs may be off-set by being able to take advantage of unanticipated opportunities.
  • Relying on parties with differing priorities: Suppliers are responsible first to their shareholders. Not to yours. Be sure your BCP, and the contract, allow for this.
  • Negotiating power may be limited: When the supplier has greater power, due to an inherited contract, proprietary processes or other circumstances, your ability to win concessions will be limited, likely increasing supply chain risk. This should be factored into your BCP.
  • Cooperation is key: Suppliers should be aware of and support your BCP. They should participate in training and testing, and provide access to information to support monitoring key predictive factors. Reciprocal agreements may make participation more attractive. Communication and visibility may allow for efficiencies that will benefit both sides. 
Patterson Shafer, Management Consultant, Intrasphere Technologies, patterson.shafer@intrasphere.com, www.intrasphere.com.

Patterson brings communications, operations and finance experience to strategy development and implementation. Domain expertise includes contract management, business continuity planning, program management, finance, business process reengineering, change management and quality management. He has worked with Global 500 companies in the manufacturing, professional services, financial services and pharmaceutical sectors.
 
 

 

The re-emergence of the group purchasing organisation

 
This article looks at how hybrid outsourcing is contributing to FORTUNE 1000 spend management. DAVID B. CLEVENGER Corporate United
 
 
DAVID CLEVENGER Corporate United

Main points

  • While technology and consultative solutions continue to improve the efforts of strategic sourcing and contract management professionals, they are not efficiently covering the breadth of what companies require to effectively manage their indirect spend.
  • By entering into an engaged, cooperative relationship with other like-minded organizations, companies are able to solve resource dilemmas by taking advantage of a unique type of leverage.
  • The group purchasing organization (GPO) is a critical element of supply chain excellence, not because it shows companies how to generate savings, but rather because of its ability to create a platform for participants to build a collaborative strategy to develop increased capabilities and advanced, informed thinking.
  • The GPO provides participants with a new solution to their modern problems. 


For years, group purchasing solutions were looked upon as quick remedies to identify cheap sources of supply for commodities using volume as leverage. While these approaches seemed attractive at first, difficulties with collaboration, short-sighted goals, and reluctance from suppliers led to the demise of most buying consortia.

The legacy of group buying included focusing on piece-price reductions, ignoring the opportunity to impact a company’s supply chain. Cleveland, OH-based GPO Corporate United is one of the organizations re-inventing a more sophisticated approach that focuses on more than just an initial savings potential.

Corporate United focuses not just on collaboration among participating buyers, but also between the group and the supply bases with whom it works. By creating a transparent platform the group of more than 100 Global 2000 companies is able to work with their members to achieve levels of standardization that allow the suppliers to more deeply penetrate their own supply chains.

The result is a more effective and sustainable buyer-supplier partnership. The leverage, when applied strategically, works to the benefit of buyers and suppliers. The net effect is that GPOs like Corporate United are re-emerging as a valuable component of corporate supply chains around the world. 

In some notable cases the GPO has re-emerged as a hybrid-outsourced solution providing resource flexibility, savings and speed to market unparalleled by internal or other third-party procurement efforts.

The lessons learned by the recent failures of the large, well-funded vertical purchasing groups (such as, Covisint and the O’Hare Group) have helped to re-shape the industry, and the survivors are delivering substantive value to companies with the foresight to participate.

Before examining how companies are successfully making purchasing through GPOs an important component of their overall supply chain strategy, it is important to understand the context in which organizations are making the decision to employ these solutions.

The resource–performance dilemma

Economic pressures have driven most major companies to trim their operational budgets. While many have saved money through traditional methods, like right-sizing their workforces and outsourcing production and back-office work to emerging markets, these options have limitations and most companies have already maximized their potential.

In an effort to achieve bottom-line improvements while managing risk, organizations have turned to their spend management department to help close the gap by attacking large corporate operating budgets. The problem is that many of these departments are ill-equipped to manage this work. They lack the tools, know-how and staff. But with responsibility for bottom-line relief shifting to them, they need to become more creative in how they reach their goals.

Real leverage and total cost management

This effort to find bottom-line relief often starts with the search for external solutions. Companies are prone to join GPOs based on their ability to achieve hard dollar savings. In principle, while there is nothing misguided about that approach, many of them were missing the true value of the leverage that GPOs could offer.

Leverage of piece-price savings alone represents the same kind of limited value proposition that right-sizing and outsourcing offers. The prevailing attitude among participating firms was that once line item pricing was rationalized across participants, nothing more could be done. However, initial savings are not the beginning of the end, but the end of the beginning.

Companies are now realizing that price reductions are merely the tip of the iceberg, and that the true value of leveraging enables not just savings, but knowledge of best practices, enablement of supply chain organizations, contract management, supplier development and continuous improvement.

Early purchasing groups represented themselves as a single body and rarely (if ever) acted in a truly collaborative manner. Request for proposals (RFPs), for example, were issued at a common time but spend and specifications were never truly aggregated. These organizations took requirements to the market at the same time, but issued separate RFPs simultaneously, rather than standardizing on certain specifications to take advantage of suppliers’ cost drivers and leverage greater savings. Cost savings ensued in some cases, but since no true leverage was being applied, the results were sub-optimized.

Today’s more sophisticated approach finds companies truly interacting with one another and subsequently finding a much greater return. In addition to aggregating their spend to take advantage of the natural cost drivers in the categories they are sourcing, companies are working together to manage their suppliers on a long-term basis. So, companies are not only going to market at the same time, thereby generating increased interest from the supply market, they are also standardizing certain specifications to help the suppliers become more aggressive in their approach. To cite a very simple example, by creating a market basket of office products in which all participants have standardized specifications for BIC pens, participants allow the suppliers to negotiate with the manufacturer to drive better pricing.Additionally, through the sharing of best practices, participants in these new models are learning ways to improve sourcing and spend management; and using that knowledge to impact their own indirect spend portfolios. The knowledge obtained through these efforts helps to better equip companies to tackle their goals.

Furthermore, and perhaps most important, the application of leverage extends beyond the award process. Participating members are able to use their power to manage suppliers with the authority of a much larger organization; forcing continuous improvement initiatives, stronger compliance, issue resolution, and general responsiveness. In short, cooperation allows these organizations to achieve superior supplier partnerships.

Supplier response

Another important aspect of understanding the value of shifting from a piece-price rationalization to a total-value approach comes in the recognition of suppliers as consultative partners. Clearly, supplier involvement is a crucial element in the stability of a group purchasing model, and the historic approach described above was (understandably) unattractive to most vendors.

Today, progressive suppliers view the group purchasing model as an excellent channel to obtain business in an efficient way, in addition to retaining that business at a higher rate. Although corporate buying groups are still very different from their healthcare and public sector counterparts, the shift in group purchasing philosophy has transformed the consortia from a seller’s obstacle into a substantive opportunity.

In order for this natural fear on the part of suppliers to be assuaged, however, participants in GPOs have to be serious about respecting supplier partnerships. All too often, buyers and suppliers give lip service to wanting to establish partnerships, but few on either side of the equation are willing to do what it takes to make those relationships fruitful. The modern GPO focus on total cost and long-term partnerships allows suppliers to take a less defensive stance, and therefore provide more value (including continuing cost improvements) to participating members. 

Credibility and functional alignment

Difficult economic times bring new dilemmas to spend management professionals — mounting pressure to deliver savings combined with slow-downs in production. In this environment, attention naturally turns to indirect spend, but this approach is not without its obstacles.

Perhaps the most significant barrier with indirect spend is ownership of it, and the fact that large indirect spend contracts (for example, staffing, benefits, IT, telecom, facilities and transportation) are controlled outside of the supply chain function in the majority of organizations. Here, the utilization of a sophisticated group purchasing approach provides users with a multi-faceted advantage.

By providing access to a broad array of relevant agreements created by a network of like professionals, procurement has a reason to open a meaningful discourse with their colleagues in human resources, IT, marketing, and other strategically important functional groups. Once that discourse is established, the group involvement allows for the demonstration of credibility that is paramount in creating relationships that will lead to greater penetration into these new spend areas. For example, while procurement historically may have had difficulty penetrating HR, they may open doors by introducing a leveraged agreement in contract labor. This can help to establish a productive relationship, and procurement may later have an opportunity to source a benefits category that was previously outside their reach; thereby better enabling procurement to reach their savings goals.).

By strategically employing a group purchasing partner, corporate procurement resources are afforded the knowledge, products and resources that will enable them to reach savings goals which may have otherwise been unattainable.

All of these efforts are powered by knowledge, and that knowledge also comes from the GPO and their participants. Understanding the ‘why’ behind these efforts is reasonably simple, but identifying the ‘how’ has been challenging. Being part of a network actively facilitated by a third party means having access to more than the knowledge of a broad spectrum of professionals — it means having the results of that knowledge.

Leading GPOs are able to synthesize the information that exists within their groups to identify pragmatic solutions and lead participating members to grow their own successful spend management practices. 

Savings and speed to market

With all of this said, saving money remains the name of the game. So even if someone knows what areas of spend to attack, how do they do it and does it have the acceptance of the functional groups that control the budget? And where do they find the time to source and manage the categories?  

Indirect spend can span well over 100 different categories, ranging from the fairly commoditized products (such as office supplies) to complex services (such as legal counsel). Almost no spend management organizations are prepared to manage that kind of workload, nor should a company be expected to have in-house expertise in so many categories that are not their core competencies.

Here again, the GPO provides a unique solution. Participating members are able to leverage the resources of a third party to identify immediate cost savings by taking advantage of pre-negotiated agreements. The savings are important, but the resource flexibility attained by taking advantage of leveraged contracts allows the corporate procurement staff to manage a far greater percentage of their overall indirect spend portfolio.

This type of hybrid-outsourcing affords companies the advantages of retaining their data and maintaining direct relationships with their internal customers and suppliers, while saving the time and resources associated with sourcing and tactical supplier management. No other solution allows organizations to simultaneously enjoy these types of advantages.

It also provides companies with an unparalleled opportunity to manage risk via the collective power the GPO holds within the supply community. Rather than exercising this strength to drive suppliers out of business, which was a hallmark of early corporate purchasing groups, the modern GPO is using its power to derive more value from its supply chain, thus giving members access to a level of performance they could never achieve on an individual basis.

David B. Clevenger,
Vice President, Corporate United, dclevenger@corporateunited.com, http://www.corporateunited.com
 
 

The evolving legal response to supply chain management concerns

 
Businesses have embraced supply chain management concepts as a way to increase efficiencies and improve profits, but their law firms haven’t necessarily kept up with this trend. The following are some strategies for making legal counsel an effective partner in the supply chain management model. GREGORY M CHABON Womble Carlyle Sandridge & Rice PLLC.
 
 
GREGORY M. CHABON Womble Carlyle Sandridge & Rice PLLC

Main points

  • Businesses have recognized the value of supply chain efficiency, but the traditional structure of law firms doesn’t necessarily mesh with this new way of doing business.
  • Lawyers must view their work as a piece of the whole, not as an isolated function. Furthermore, they must gauge how their work will impact their client’s overall operation.
  • Supply chain management counsel isn’t new law—it’s a new approach to well-established law.
  • Legal counsel well-versed in supply chain management concepts may help businesses with strategic alliances, intellectual property, global logistics and contract management issues.
  • Above all, building relationships is vital in today’s global economy, it is more important than contracts. Lawyers must realize this reality and become facilitators in these sorts of business partnerships. 

The value of efficient supply chains is by now well-accepted in the business world. The mantra that companies now compete ‘supply chain versus supply chain’ is all but axiomatic in business and management literature. But law firms, by and large, have been slow to reflect this trend and catch up with their clients and, more importantly, adjust their legal services model to better integrate with, and serve as a value-added partner to, their clients for whom supply chain management is a key profitability component.

Traditionally, lawyers in large corporate law firms have been grouped according to the type of law they practice, not the type of work performed by the client. For example, if a client needs legal counsel on a board of directors issue, they consult with their firm’s corporate lawyers. If their transportation department needs to negotiate a contract with a vendor, they consult with transportation lawyers. And if the company has a regulatory compliance question, they consult with lawyers specializing in regulatory law.

But for businesses, the cycle of receiving, producing and distributing goods is a single, organic process, not a series of unconnected steps — all the moving pieces work in harmony. Too often, the lawyers are viewed as the final ‘gatekeeper’ to be passed before action can be taken. In fact, lawyers are largely trained to view items in discrete elements, and having a document ‘tossed over the transom’ for review at the 11th hour is all too commonplace.

With our headquarters in the Piedmont Triad of North Carolina (home to many logistics companies, a new Federal Express hub, and outstanding rail, highway, and port infrastructure), it was a natural fit for our firm to focus on ways to better assist our clients in the area of supply chain management. We created a supply chain management initiative whose team members cut across traditional practice groups based on what our clients told us were the key elements of their supply chains.

We realized that we couldn’t meet all of these needs by ourselves, so we partnered with Dr Rob Hanfield, director of N.C. State University’s Supply Chain Resource Consortium, and one of the nation’s leading experts on supply chain management, as a consultant on these issues.

Changing business climate means changing legal needs

Changes in the business climate are reflected in the coordinated, integrated approach to supply chain management that businesses have adopted in recent years. As a business lawyer and former engineer, I recognized the increased focus on supply chain management and the need to integrate legal analysis as one part of the process. It was also apparent that if lawyers were to be effective and add value, they had to understand how any individual contract, analysis, regulation, and so on affects, and is affected by, the company’s overall supply chain. A lawyer sitting in his or her office and waiting until the process is largely complete before offering an opinion is not advancing the goal of optimal supply chain management.

Supply chains are far more complex than they were 20 years ago. Much of this complexity has crept in over time, so that a particular company may no longer have a clear understanding of where the ‘pressure points’ in its supply chain are, and what risk mitigation should be implemented to ensure the supply chain can withstand disruptions.

One example of taking an integrated approach to supply chain management is our work with a client whose supply chain grew substantially in the last decade. This growth included the addition of multiple domestic and international locations, the creation of a logistics subsidiary, and expansion of product lines involving additional and more exotic components. 

This company has a long and excellent history of operations, but over the past few years its understanding and management of its supply chain has not kept pace. Our approach, based on our meeting with the company’s general counsel, was to meet with the senior management team from across the company. Our team comprised a lawyer versed in overall supply chain integration, contract management and corporate structure; a lawyer specializing in import/export regulations and duties/tariffs; and a lawyer specializing in freight and transportation issues.

After gaining an understanding of the company’s issues, we presented it with several initiatives, including supply chain mapping which aids in the identification opportunities for risk management and tax efficiency; a contract management/standardization module; and an import/export compliance module. 

This integrated set of tools, involving legal and non-legal expertise, is a good example of how outside counsel is adapting to assist companies facing increasingly complex supply chain management issues. The general counsel’s willingness to work with outside counsel shows how both can effectively collaborate to achieve better results than has been the case with stereotypical relationships, such as sending the work to outside counsel with little interface.

Added value of legal counsel

How can a law firm assist a company’s supply chain management efforts? With few exceptions, the law involved supply chain management issues is not new — it is the law of commercial transactions, shipping, and duty/tariffs. The ‘new’ component is understanding the supply chain and how individual aspects of it affect other parts of the chain — that means not viewing any issue in a isolation. Fully serving clients means taking a fresh, coordinated approach to these well-established legal practices.

A good supply chain management legal team should include lawyers with expertise in commercial contracts and transactions, intellectual property, antitrust, trade regulation and international law. Of critical importance is that both the lawyers and the client take some time to review the supply chain and understand important criteria about the company and its supply chain (for example, is the key issue speed, redundancy, cost or some other factor?). The lawyer needs to be able to see the whole picture.

Working with Dr. Handfield and our clients, we have identified key areas where lawyers can have a substantial impact on supply chain management issues:
  • Strategic alliances — Partnering with another business, whether international or domestic, carries a certain amount of risk. Companies must determine the scope of such partnerships; negotiate terms such as oversight, payments and obligations; craft exit strategies; and manage tax liabilities
  • Intellectual property — More than ever, guarding intellectual property across the supply chain is a prime concern for companies. They must be able to share sensitive data along the supply line while still maintaining an adequate level of protection. A company needs a proactive plan to protect its patents, copyrights, trade secrets and other intellectual property.
  • Global logistics — Doing business in different countries means dealing with the cultural and legal differences. Increased security measures in the wake of 9/11 have put even more pressure on supply chains. A law firm should be able to assist a company to navigate these waters.
  • Contract management— Successful supply chain management is grounded in strong contractual relationships, from raw materials purchases to end-user sales.
Other supply chain-related legal services include business continuity, risk assessment, transportation concerns, outsourcing of legal services, information systems issues, environmental challenges and industry-specific regulation, such as the guidelines governing the pharmaceutical and banking industries.

Value of relationships

Perhaps the most important role a law firm can play in the supply chain management process is in helping companies to build relationships with their business partners.

There’s a saying in contract law that, ‘The process of negotiating a contract is more important than the contract itself’. A well-negotiated contract has limited value if the negotiation process has alienated the parties, or has placed all the risk on one party.

Relationship-building is particularly important in today’s increasingly global market-place. Contracts can be difficult to enforce in some jurisdictions, meaning a company’s best defense against unforeseen problems is a solid relationship with its business partners. But building those relationships internationally often requires extra work, given the cultural differences and language barriers involved.

Lawyers are often viewed by business leaders as ‘speed bumps’ on the road to progress. We must change that perception by adjusting our approach to become value-added counsel. That means working with our clients from the outset as true partners, not as occasional consultants. Our goal is to be our client’s ‘trusted advisor’ — one who understands the client’s goals, challenges, and processes and can add value up front, rather than being a ‘gatekeeper.’
Meeting the legal needs in supply chain management is an evolving process. The first, most important, step is simply understanding that every step in a company’s the supply chain directly impacts the entire process. So our approach must respect that reality and our goals should be aligned with those of our clients — to keep the supply chain moving along efficiently and effectively.

Gregory M. Chabon, Co-Chair, Supply Chain Management Team, Member, Womble Carlyle Sandridge & Rice PLLC, GChabon@wcsr.com.

Greg practices in the firm’s Greensboro, N.C. office. He is a frequent speaker on issues pertaining to supply chain management and the law.
 
 

Financial supply chain management — changing dynamics

 
There are a number of key factors that are helping to shape the rapidly evolving world of financial supply chain management. This summary outlines a number of them and helps to provide understanding of how opportunities can be better quantified and then realised within the organisation. PAUL ROBINSON, HSBC Global Transaction Banking
 
 
PAUL ROBINSON, HSBC Global Transaction Banking
This is a modified version of the 2007 guide to Financial Supply Chain Management, by Paul Robinson, the PDF of the complete version can be accessed below.

What is the financial supply chain?
Ask the chief financial officer (CFO), the treasurer, the chief procurement officer (CPO) and the logistics director what the financial supply chain (FSC) is and you will probably get a different set of answers. Similarly, if you ask your bank, third party logistics (3PL) partner or systems service provider the same question, they too will have their own particular perspective on this subject. As with supply chain management (SCM), there is no single definition or right answer.

For some, the FSC is simply the flow of cash between businesses along the supply chain, be it in the form of a payment between buyer, broker, carrier, 3PL, agent and suppliers, or in the form of finance, either from a bank, financial institution or a supply chain partner willing to lend in the form of an early or extended payment.

An important cornerstone of effective FSCM is the migration of paper flows to a more efficient electronic environment. Electronic invoice presentation and payment (EIPP) processes and broader purchase-to-pay dematerialisation projects can be regarded as key enablers within a broader FSCM program. Indeed, FSCM is better understood within some organisations as the management of purchase-to-pay (P2P) or source-to-settlement (S2S) processes within buying organisations and the management of order-to-cash (O2C) processes in a supplier organisation.

There are two other important dimensions to financial supply chain management (FSCM) that need to be considered when discussing the evolution of the supply chain. The first relates to risk management and the second to tax.

Risk management
Risk management is a critical part of SCM as low-cost sourcing, contract manufacturing, off-shoring, managed services and outsourcing have all increased the complexities involved along the chain. The risk of bottlenecks and disruption and incurring unforeseen cost are greater in cross continent and global supply chains. The growing incidence of natural disasters resulting from climate change, terrorist acts, embargoes, fraud, money laundering and economic volatility all adds to the risk profile of a global supply chain.

Coordinating the different facets of risk management within an overarching FSC program is seen as a key priority within a number of organisations. Compliance requirements are getting tougher for both importers and exporters alike. OFAC, Green-lane status in the US, Sarbanes- Oxley, Basel II for banks are all examples of compliance related initiatives that need to be taken seriously and require investment. An investment that will yield greater returns if it is integrated into a broader program of dematerialisation, that is, the migration to electronic document and data exchange. Compliance and the compliance team should be an integral part of the FSCM program. FSCM is not a new concept. It has been recognised as an important element of the broader SCM discipline for at least a decade. What has changed in the last 18 months is the determination by a number of large corporates to convert the conceptual opportunities into deliverable benefits.

Tax
A number of large multinationals with sourcing and production activities across the globe want to better manage their tax liabilities by re-engineering SCM processes and responsibilities to optimise customs duty, corporate and value added tax liabilities. Tax efficient supply chain management (TESCM) is an important offering for a number of accounting and management consultancies and may be considered part of a broader FSCM program.

Growing importance of FSCM
The lines of demarcation between financial and physical supply chain management (PSCM) are becoming more and more blurred, particularly around the management of the increasingly digital information integral to both. FSCM cannot and should not be regarded as a pure science or as a standalone discipline.

The common assertion that PSCM focuses on the profit and loss account (P&L) and FSCM on the balance sheet, is also a little naïve. Both disciplines seek to reduce the cost of goods sold, to better manage risk and to improve both customer service and supplier relationships. It would be counter-productive and damaging to shareholder value if both chains were treated as separate processes and managed independently. Our experience suggests that organisations that manage physical and financial supply chains as an integrated program and jointly help shape global information systems strategy, stand the best chance of sustainable improvement going forward.

Effective management of the FSC
The focus to date for many organisations has been the physical supply chain. Supply chain managers have worked hard to build cross-functional teams bringing together managers from sales and marketing, operations, procurement and logistics. Internal and external collaboration with suppliers and supply chain partners, particularly around logistics, has been the business priority.

Typically, finance and treasury have only tended to get involved either at the very beginning of the process around risk mitigation and at the end around the payments. As performance improvement around the supply chain extends into information and financial flows, the need for the CPO or the treasurer to get more directly involved in end-to-end SCM has been recognised. For many supply chain managers, they simply have not got the bandwidth or resources to drive FSC related initiatives and are increasingly looking for finance and treasury to take a leadership role.

Driving costs out of the supply chain
The cost-down approach has many of the features associated with a more adversarial relationship between buyer and supplier. The focus has been to reduce the costs for the buyer, typically at the expense of the supplier or the service provider. This approach is still prevalent but increasingly SCM and FSCM teams are choosing a different method. The current mantra for sustainable performance improvement is to focus less on pushing cost down the chain onto weaker parties, and more on driving costs and inefficiencies out of the chain and for the benefit of all partners - creating that illusive ‘win-win-win’ scenario.

Moving from manual, paper-based processes to electronic documents and data management works best when there is benefit not just for the buyer but for the supplier and the supply chain services providers including the banks.

Another increasingly important business priority, namely improving working capital, is also being considered from a different perspective. As per the collaborative ethos outlined above, the new challenge is less about just reducing the cost of finance within the buying organisation and more about reducing the cost of finance across the supply chain for all players. This is not simply an altruistic gesture from the buyer; if they can help suppliers get cheaper finance then there is a negotiating lever for unit cost reduction.

Paul Robinson,
Supply Chain Strategy Manager, Global Transaction Banking HSBC, UK, paulrobinson@hsbc.com>.

To Access the HSBC Full Report, Click here.
 
 

Member Spotlight

 
Congratulations to IACCM member, Sharon Rowe, for coming up with the name of our new e-zine. We asked members to submit names they felt worthy of our new magazine. We initially received well over 200 nominations. We then asked members to vote for the name they felt would best fit the image and mission of IACCM. Sharon’s submission of the name ‘Contracting Excellence’ won hands down. I recently had a chance to speak with Sharon about the name, some of the challenges she faces in her role as Manager of Supplier & Contract Management at W.W. Grainger, Inc, and the benefits she receives from her IACCM membership.
 
 

Congratulations to IACCM member, Sharon Rowe, for coming up with the name of our new e-zine. We asked members to submit names they felt worthy of our new magazine. We initially received well over 200 nominations. We then asked members to vote for the name they felt would best fit the image and mission of IACCM. Sharon’s submission of the name ‘Contracting Excellence’ won hands down. I recently had a chance to speak with Sharon about the name, some of the challenges she faces in her role as Manager of Supplier & Contract Management at W.W. Grainger, Inc, and the benefits she receives from her IACCM membership.

‘Excellence is what we should be striving for if we want to be the best in our field. “Contracting Excellence” seems to encompass the idea that to be the best you must strive for continuous improvement of your skills and practices,’ explains Sharon.

Sharon’s challenges are similar to other organizations that have a continuous improvement focus. She and her team have been able to demonstrate their value to the organizations they support, and with the recognition has come greater demand for their services. Sharon’s team is challenged to meet the tactical demands of the day without losing focus on the more strategic role they’d like to play.

I asked Sharon what specific IACCM services she uses to help her in her role at W.W. Grainger, Inc, a leading distributor of facilities maintenance supplies. She said, ‘I use the IACCM website religiously, I participate in studies and use the results. I sometimes participate in IACCM “Ask the Expert” calls and webinars. I find IACCM to be an excellent external reference point.’

 
 

From the front line

 
Your letters and questions.
 
 
Your letters and questions

Escaping commodity status: hardware as a service
An article in The Channel Insider (August 16th) describes yet another initiative to take products into the solutions and services realm (‘Hardware as a service: a non-starter?’). It appears to illustrate the importance of the IACCM 'best practice' regarding alignment of contract terms within the product development and life-cycle management process.

The report describes efforts to package hardware with performance monitoring services, charging for the combined package on a quarterly basis. ‘The concept itself is simple enough: Solution providers that charge customers monthly, quarterly or yearly fees for various IT services, such as remote systems monitoring and management, would add physical equipment — the routers, servers, laptops and storage systems — to the equation. Rather than buying hardware upfront, the customer would pay for it through a leasing arrangement as part of an overall recurring IT services fee.’
 
The article suggests that several offerings will come to market in the next few months, many of them promoted and delivered via distribution channels.

While discussing the challenges in finding sources of funding for this bundled hardware and services approach, the review does not discuss the possible implications to terms and conditions. For example, what impacts does such an offering have on customer flexibility in their use and disposal of equipment? What performance levels are suppliers planning to underwrite? To what extent will the sales effort be able to demonstrate a winning mix of improved performance and lower operational cost?

It would seem many buyers will be skeptical of these bundles and question whether they deliver real value. If indeed the marketing direction is to promote through distributors and re-marketers, it seems unlikely that there will be meaningful performance undertakings or flexibility in product content. So this may well suffer the fate of other 'bundles' packaged and marketed as 'solutions'.

Offerings of this type are clearly aiming to escape the 'commodity' status of hardware (and increasingly of unpackaged services). But often it seems that providers fail to think through the risks and values of their revised offering(software as a service is a similar example). If product management groups launch these ideas into the market without consideration of the commercial terms, the likely result is either failure of the offering, or extensive case-by-case negotiation. Buyers rightly want value - not simply slight of hand.

Tim Cummins
,
CEO, IACCM.
 
If you have any questions to which you need answers, or opinions you would like to share with Contracting Excellence, please send them to the editor ktarrant@iaccm.com for consideration, entitled ‘From the front line’..
Don’t forget that you can post your questions at www.iaccm.com/forum/forum.php. This column will feature a couple of recent members’ questions and answers from the forum.

Question 1
Daryl Doyl:
I am wondering if anyone has been able to engage FedEx in a single global agreement? We currently have agreements with this vendor in every country that we operate. We hope to leverage our global spend in one single agreement. 

Responses
Ingrid Lehnert  Check with someone from the big consultancies: Accenture, KPMG. They're the most likely to have done that
Ariane Pannell: My understanding is that they are able to give you a global discount program on pricing, but that separate contracts are required because of FedEx's legal entity structure
Jim Bergman: My experience (two years ago) was that FedEx Ground and FedEx Air are separate entities sharing the same branding badge. They negotiate their contracts separately between the Ground and Air side of the businesson

Question 2
Mary Dockter: I am not sure how many of you utilize consignments in your company but I would like to know if you do what process you go by in getting an agreement intact. I have composed an agreement for our hospital and sent it through legal so it has been approved. I am needed assistance on what you would do if you had a vendor that their product is what the doctors want and he has put the items in on consignment but is stalling to sign the agreement. I have been working on getting him to sign this agreement for about 3 months and I cannot ask him to remove the product because it is used in surgery for trauma cases.

Just wondered if anyone else had ways to cope with vendors that think they don't have to sign contracts?

Response
Tim Cummins: I had an interesting discussion on this with one of our members recently. Maybe this story will offer some insights and ideas on the problem you are describing.
Suppliers offer trial or consignment equipment to demonstrate its capabilities. In companies like IBM, they used to require that it was not used for full production purposes - in part because they did not want customers then complaining about performance. After all, it is a trial and its purpose is to establish whether it works for you.
Unfortunately many customers these days are so driven by using their standard terms that they overlook the intent behind these consignments or trials. They forget the fact that the supplier gains no economic benefit from the period of trial or consignment. And they seek liability and indemnity clauses as if this was an acquired asset. Not unnnaturally, suppliers do not want to sign such undertakings (though given the fact that there has been no consideration, I wonder if they are really exposed anyway?).
In the case I mention, the supplier rejected the customer terms and suggested amendments. The customer said 'it will take so long to get these through Legal, and we really need the product trial to go ahead - so we will just buy it instead - even if we then throw it away'. Interesting approach - especially when the unit in question cost $250,000. Who says that contracting practices have no real cost associated with them?

Question 3
Mike Lovejoy: I am interested to know how members might be addressing the issue of insuring that application software providers keep their products current with new releases of underlying OS, database, middleware, etc. software in a timely manner - for example, when Oracle releases a new version of its' DB software.
Does anyone address it contractually with a clause that requires the application software provider to make their product compatible with a new release of underlying software by a specific timeframe?

Response
Tim Cummins: We asked some of the major software providers for their thoughts on this question.

‘This is an issue that comes up from time to time. We are now facing it on both ends of the software spectrum - as both an applications provider and as a database provider. Software implementations are extremely complex where you could have dozens of pieces of software from different vendors involved in a customer's footprint. We cannot put in our licensing agreements that software would work in a particular environment because it is always changing. You have v2.3.5.1.00 of an OS and you do a patch, so now the middleware might break and your applications don't work. Is it an OS issue, a middleware issues, or an Apps issue?’

Obviously as a customer it is frustrating when your supply chain simply points up or down the chain ... most of us have had that experience in other areas, especially telecoms. But of course, it is part of the price of a multi-vendor environment. If your television stops working and you call a technician, then discover that there was power surge, you don't blame the TV manufacturer or your cable company

As a buyer, you make choices. I fyou selct a multi-vendor environment (whether through choice or because you must), then you also have to decide whether you can manage that environment effectively. Many vendors are prepared to offer consulting or multi-vendor support services, in which case they takre responsibility for integration and operation. But of course there is a price associated with that service.

As one supplier comments: ‘This is more of a consulting implementation issue. Some customers that are truly concerned with this issue will put fixed deliverables and acceptance testing into their services agreements. Even this will only ensure that the implementation will work. If the customer updates a piece of 3rd party software it may impact the other pieces of software. So if your internal IT department doesn't fulfil this role, bring in outside consultants. Pay someone else to make it all fit together and then sign off when it meets your needs. Have them maintain it and oversee changes, fixes, upgrades.’

Or increasingly you have options like ASP or SaaS, in which a service provider (like Oracle/Siebel CRM On Demand) hosts the application for you. Then you would have potentially much higher service level standards and interoperability assurances.
 
 
 


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Editor
Kerrie Tarrant

Consulting editor
Tim Cummins, CEO, IACCM

Vice President of Research and Advisory Services, and Advertising Sales enquiries
Katherine Kawamoto

Editorial Panel
Mark David, CommitMentor, UK.
Rose Gazarek, BAE Systems, US
Craig Guarente, Oracle, US
Helena, Haapio, Lexpert Ltd, Finland
Christof Hoefner, IBM, Germany
Bruce Horowitz, Attorney/Arbitrator, Ecuador
Doug Hudgeon, Macquarie Bank Ltd, Australia
William Knittle, BP, UK

Automation and technology panel
Mark Darby, Alliantist, UK
Jacob Fagerland, CMA-Contiki, Norway
Ashif Mawji, Upside Software Inc, Canada
Tim Minahan, Procuri, US
Terry Nicholson, Selectica, US

Address: International Association for Contract & Commercial Management (IACCM), 90 Grove Street, Ridgefield, CT 06877 USA. Ph: (1) 203 431 8741, www.iaccm.com.

Editor: ktarrant@iaccm.com; Sales enquiries: kkawamato@iaccm.com.

This issue may be cited as (2007) 1(1) Contracting Excellence.

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