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

Contracting Excellence Magazine - Nov 2007

 
 

Does the digital world change the goals for negotiators?

 
A recent article in BNET highlighted the challenges our community faces in a world where innovation is moving at an increasingly rapid pace. ‘Perfectionists Despair: In The Digital World “We are always in Beta”’ quoted CEO Jim Buckmaster, who suggests our world today is driven by the need to ‘put speed over perfection: get something out there. Do it, even if it isn’t perfect’. What does this mean to the world of contracts and relationship management?
 
 

In a recent article, commentator Jessica Stillman posed the interesting hypothesis ‘Perfectionists Despair: In The Digital World “We are always in Beta”’. Quoting CEO Jim Buckmaster, she suggests our world today is driven by the need to ‘put speed over perfection: get something out there. Do it, even if it isn’t perfect’. What does this mean to the world of contracts and relationship management?

While we hope that most contracts professionals have abandoned the idea of achieving perfection, the article does raise some serious questions about our process and approach to defining and structuring relationships. Stillman observes: ‘While perfectionists and control freaks twitch in discomfort at the idea, with the pace of business now so fast, speed often trumps the need for a flawless release. Plus, with innovation at a premium, requiring perfection can stifle people’s willingness to play and solve problems creatively.’
The point she makes is that the demands of today's competitive markets place a premium on speed and innovation. But to combine these attributes means accepting that innovation will often come in iterations. Therefore, increasingly, suppliers and their customers become partners or collaborators in realizing innovation and managing the risks that come with it. Writing in Business Week recently, David Armano pointed out, ‘The message traffic that used to flow one-way from marketers to consumers, now moves two ways. It’s a conversation which requires companies who want to appear responsive to consumer back chatter to tweak and revamp their products and marketing rapidly. What does this mean? More and more initiatives are always in beta.’
So what does this mean in terms of the way business relationships are formed and managed?

First, the importance of reputation and trust is endorsed — customers will prefer to deal with suppliers who have a record of success and meeting their promises; suppliers will have a preference to deal with customers who similarly demonstrate success and have a reputation for fairness and cooperative behavior. If either side behaves in a risk-averse fashion (e.g. through one-sided contract terms or negotiating practices), they will constrain or eliminate the potential for innovation and send the message that they are not a reliable partner.

Second, customers who prize innovation will accept that the important characteristics of the supply relationship (and its associated contracts) revolve far more around the way it is managed and governed than around the 'penalties' for failure. Incenting performance through 'sticks' will become far less attractive than having a mutually agreed framework for achieving success. So the focus of the contract moves from the allocation of risk under burdensome terms to clauses that define roles, responsibilities and the objectives that will constitute success, or be deemed to represent failure.
Third, suppliers will have to think of new ways to achieve economic benefit. If they want to reduce their liabilities for failure, they will have to share the risk more equitably with their customers. This means they may have to defer some portion of their revenue flows until their products and services (including any planned innovations) are realized and are delivering economic benefit to the customer. This is perhaps the way that 'gain-sharing' will increasingly be defined.
In summary, speed and innovation are often achieved through a readiness to defer benefits. But this deferral must be a two-way process. And so long as both sides recognize the need for mutual deferral, there is equity — and a visible commitment and motivation to work together collaboratively to achieve better results.

 

 
 

 

Pricing & Contracts: How well are you aligned?

 
What is the 'right' price? How do you make commercial decisions on pricing - and what impact will shifts in pricing policy have in the market? An article from Wharton suggests that most companies lack sophistication in this key area - and that suggestion aligns with IACCM's recent findings.
 
 

 

What is the 'right' price? How do you make commercial decisions on pricing - and what impact will shifts in pricing policy have in the market? An article from Wharton suggests that most companies lack sophistication in this key area - and that suggestion aligns with IACCM's recent findings.

As part of the Capability Maturity Model that we issued earlier in 2007, we explore the alignment between pricing policy and wider commercial terms — and, with benchmark information now covering some 170 organizations, it has turned out to be the second weakest area of performance. 

The Wharton article (http://knowledge.wharton.upenn.edu/article.cfm?articleid=1813#) focuses on the major upset created by Apple's decision to cut the price of its iPhone. In a public apology (seemingly an increasingly common aspect of the executive role), chief executive Steve Jobs also offered a partial rebate to existing customers.
A recurrent theme today is the issue of reputation and trust. In recent weeks, we have published comments from a range of senior business executives emphasizing the importance of these characteristics in today's global economy. We have highlighted the role of contracting practices and terms in building — or undermining — the perceptions of our customers and trading partners. The Wharton article highlights the critical role of pricing practices in this equation.
In the case of the iPhone, Wharton marketing professor Stephen Hoch comments: ‘People have strong positive feelings about Apple. They feel they are part of the Apple family.’ When Jobs announced the price decrease, ‘people felt betrayed. I don't know whether they should or not. It's not as though this is the first time a technology company lowered prices.’
The challenges of pricing and discounting policy go far deeper. As companies do business in global markets, they often face the challenge of balancing global prices with local opportunities. This difficult balance may be most extreme when it comes to consumer products, but is severe for many in b2b markets as well. Pharmaceuticals is an obvious example, software is another.
One way to achieve and justify differentiated pricing is to offer differentiated terms and conditions. The 'economic value' of the package of commitments can clearly represent a good basis for market segmentation. Yet, the research undertaken by IACCM shows that far too many contracts and commercial groups are not well aligned with product or service development and marketing groups, and therefore opportunities are often missed or overlooked.
Transactional approaches to the market inevitably limit flexibility — time and affordability constrain how creative you can be in structuring one-off deals. That is why 'commitment value' must be planned and strategic. To be effective, according to Wharton professor David Reibstein, price discrimination schemes are successful only if companies are ‘open about the economic reasoning behind the decision’.
IACCM research indicates that most companies today do not have a clear understanding of the economic consequences linked to term and condition (or 'commitment') options. They may have a general understanding of the cost (that is, the downside risk to them of offering a particular term), but they rarely have any sense of the value (that is, what might the alternative approach be worth in terms of cost saving to them or their trading partners).
Too often, pricing is negotiated and set in virtual isolation from the remaining terms and conditions. The contract is something you get to after the basic financials are agreed — implying that contracts have no economic significance. This approach essentially reinforces the idea that contracts are primarily a legal instrument that focus on the allocation of risk, rather than a financial instrument that seeks to maximize and distribute economic value.
These are very different concepts. Risk allocation conversations tend to be somewhat divisive and confrontational. Economic value conversations can often be far more constructive and collaborative in their tone and vision.
 
 

Hidden values Of Contract Management are emerging

 
There are many people in contract management who would like to get management’s attention in order to drive investments that would improve the process. The problem is, there often is no real process, because executive management hasn't understood the need. Steadily, good data is starting to emerge.
 
 

 

There are many people in contract management who would like to get management’s attention in order to drive investments that would improve the process. The problem is, there often is no real process, because executive management hasn't understood the need. Steadily, good data is starting to emerge.

Without good data, it is hard to get management’s attention. But getting good data depends on having a process that can be analyzed.

One of the key questions people want answered is what sort of return they will get for their investment in terms of time and money. How will change make us more competitive? Will it result in savings or new revenue sources?
We have extensive evidence that the answer is yes — a well-managed contracting process does indeed generate significant returns in all of these areas. We have benchmark data and specific examples. For instance, one company I met with recently could show higher win rates and lower levels of discounting in situations where the sales team was equipped with the necessary information (and skills) to demonstrate differentiated value through more creative offering terms. And they were not talking trivial numbers — the benefits included average prices 12 percent higher as well as improved win rates.
Now that is what you call a compelling ROI! (and it is reflected in growth of the commercial / contract resources and their status in the company).
Another instance is in the cost reduction opportunities, which were highlighted in a webcast series sponsored by Selectica and in which IACCM is participating (Buyer's Guide To Contract Management Software). Research has unearthed the following statistics related to the sell-side process and these were among the many items discussed during the program:
  • 18 percent of the selling cycle is consumed by the contracting process;
  • proposal creation and authoring are repetitive without being efficient;
  • contract authoring process is fragmented across multiple functions and approvers; and
  • an average of $215,000 is lost to each day of the contract process for large organizations
So for those who resist metrics and who deny that contracting can ever really be viewed as a replicable process, we can only hope that these statistics will make you think again. We can gain management attention for the right reasons — that is, our strategic importance to the business as agents of efficiency and change.
 
 

Commitments taking new shape

 
IACCM's October e-zine, Contracting Excellence, highlighted the growing importance of supply chain integration to support market demands for faster and more extensive performance commitments. As if to emphasize the point, Wal-Mart announced its intent to actively monitor the ability of its suppliers to support its 'green' policies. More tough contract negotiations - or will suppliers have to find new ways to demonstrate their 'green credentials'?
 
 

IACCM's October e-zine, Contracting Excellence, highlighted the growing importance of supply chain integration to support market demands for faster and more extensive performance commitments. As if to emphasize the point, Wal-Mart announced its intent to actively monitor the ability of its suppliers to support its 'green' policies. More tough contract negotiations - or will suppliers have to find new ways to demonstrate their 'green credentials'?

It is at present unclear what weight Wal-Mart will give to green criteria in selecting its suppliers and to what extent it will build these into its contracts. However, as we highlighted following comments by Google CEO Eric Schmidt on data privacy (see article ‘Voluntary Codes: the framework for 21st century business?’ in the IACCM News), this is just another example of the growing importance of trust and integrity in trading relationships and brand image.

To what extent companies will start to enforce those 'trust' issues in their supply chain relationships will be influenced by many factors, but it is clear that the world of contracting is becoming both more complex and fuzzy. Will we finish up with two distinct documents — for example, one with the legalese and one with the 'customer/supplier promise'? Or will they merge into a single document that sits outside the traditional and increasingly anachronistic legal system, perhaps subject to arbitration / mediation and divorced from specific jurisdictions and courts?
IACCM sees this issue as one for major debate; and indeed a growing number of member companies are starting to actively explore the wider implications of creating trust and reputation in today's business environment. It is clear that the old methods really do not work well in today's fast-moving global economy. So what will happen next? Here is the recent Supply Excellence blog regarding Wal-Mart, which may perhaps get you thinking!
Attention Wal-Mart suppliers: get green
by Tim Minahan at 10:19 am, 27 September 2007.
After making commitments to reduce energy consumption, packaging, and waste within its own operations, mega-retailer Wal-Mart this week announced plans to green its supply chain. Following in the footsteps of other multinationals — such as Hewlett-Packard and Airbus — that are using environmental and social responsibility as part of their supplier selection and performance measures, Wal-Mart is now looking for suppliers to produce more environmentally responsible products. The initiative, while only in the pilot stage, could have dramatic implications for manufacturing, product engineering, and supply management strategies across multiple industry sectors.
Wal-Mart says it will begin measuring the energy and resource consumption of about 30 of its key suppliers, including CPG giants, Procter & Gamble, Unilever, and Dial Corporation. The nation’s largest retailer will also encourage suppliers to use more environmentally friendly and sustainable materials and manufacturing methods.
Company officials stopped short of saying that Wal-Mart will use these eco-audits to select suppliers. However, other commitments by the retailer suggest that this is a forgone conclusion.
As reported here earlier this year, Wal-Mart has committed to cutting packaging waste at its stores by 25 percent within three years. The retailer also vowed to double the fuel efficiency of its truck fleet within 10 years and eventually operate entirely on renewable energy. More recently, Wal-Mart agreed to participate in the Carbon Disclosure Project, an investor group that is pushing greenhouse-gas emissions disclosures on the basis that they have a tangible impact on a company’s financial performance. Such measures would require Wal-Mart reduce the carbon footprint of its supplier operations as well as its own.
The impact of Wal-Mart’s green plans are already visible in the market and on its store shelves. Earlier this year, Wal-Mart worked with suppliers of its private-label toys to eliminate excessive packaging. The retailer found that each year these actions save $2.4 million in shipping costs, 3,800 trees, and one million barrels of oil.
Wal-Mart, which sells 25 percent of liquid laundry detergent in the U.S., also used its muscle to encourage CPG giants Procter & Gamble and Unilever to replace bulky plastic jugs with concentrated versions of all its liquid laundry detergents. Concentrated detergent saves on water. The smaller package saves on cardboard and plastic packaging, energy, shipping costs, and shelf space. This week, Wal-Mart, announced plans to extend this strategy to all its detergent vendors.
In the end, Wal-Mart views these moves as money savers for customers, its own operations, and its suppliers. In making the announcement this week, Wal-Mart CEO Lee Scott said, ‘We simply don’t want our customers to have to choose between a product they can afford and an environmentally friendly product.’
The implication to the broader business community is vast. If history is any indication, Wal-Mart’s sustainability strategy will likely spur (dare I say, force?) other companies — particularly those in the consumer goods and food and beverage sectors — to develop, manufacture, and source in a more environmentally and socially responsible manner.
 
 

Output-based contracts

 
Earlier this year, IACCM conducted research on the use of output-based measures in contracting. We explored levels of adoption, plus the benefits and inhibitors. Now, IACCM member Blake Newport has expanded on that research in an article published by the British Computer Society.
 
 

Earlier this year, IACCM conducted research on the use of output-based measures in contracting. We explored levels of adoption, plus the benefits and inhibitors. Now, IACCM member Blake Newport has expanded on that research in an article published by the British Computer Society.

Most contracting professionals agree that output based contracting (that is, measurements based on outcomes)is far more effective than contracts that are based on rigid definitions of how things must be done. Output definitions typically result in less contention — but, more importantly, they do not stifle change and innovation and they are more likely to result in requirements being met.

There is evidence that output -based metrics are more likely to lead to success through collaborative relationships, in which the parties agree governance methods that are directed at resolving problems rather than fighting over them. A key issue here is the extent to which they link damages or service level credits to non-performance. If this is the primary remedy associated with the metric, then it is once more self-defeating - because the supplier incentive is now to assemble evidence that the failure was not their fault, rather than devoting time to finding a fix.

The truth is that performance is rarely one-sided. Any successful relationship requires input and contribution from both sides. Traditional contracts - and in particular service level commitments - frequently ignore that reality and hence they make dishonesty or cover-ups almost inevitbale. Thsi obviously distracts from the real goals of the contract.

It is therefore disappointing that adoption of outcome-based approaches is not as pervasive as these benefits would lead us to expect, and the original IACCM article (available in the Member Library) explained why.
Blake Newport, an IACCM Corporate Member, has expanded further on this with a more detailed description of output-based contracts and the pre-requisities for success. You can read their article at http://www.bcs.org/server.php?show=ConWebDoc.14510
 
 

Voluntary codes: the framework for 21st century business?

 
Eric Schmidt, CEO of Google, wrote in the Financial Times (19 September) about global privacy standards. He is just one of a growing chorus of CEOs commenting on the role of trust in the global economy — and recognizing the inadequacy of traditional (legally-based) systems and remedies.
 
 

Eric Schmidt, CEO of Google, wrote in the Financial Times (19 September) about global privacy standards. He is just one of a growing chorus of CEOs commenting on the role of trust in the global economy — and recognizing the inadequacy of traditional (legally-based) systems and remedies.

There is no global legal framework regulating privacy and data protection. Nor is there likely to be one any time soon. Meanwhile, consumers and businesses want to trade across borders. They are not about to wait for some new supra-national agency that will develop standards and oversee compliance.

So enter the multinational corporation, or the global trade association, or the worldwide community of practice. People want standards. They want a framework that inspires trust and on which they can rely. And the only way this will emerge is by leaders who promulgate such standards.
Mr Schmidt is using Google's global presence to make advances in their area of interest. He wants his company to be a beacon of integrity and trusted behavior. It is a vision very much in the spirit of IACCM's goals and aspirations. We too represent a global community that holds the strings of many of the diverse policies, rules and practices that can support or destroy trust in our global trading system. It is an exciting mission — and we welcome the enthusiasm of business leaders like Eric Schmidt in grasping this new imperative.
 
 

Is contract management software already a thing of the past?

 
There was plenty of movement in the contract management software industry in September, with the announcement that Versata acquired Nextance and that Ariba will be acquiring Procuri. Many will ask whether this spells the end of an era - is contract management software dying, or have bigger players recognized its potential and are snapping up the early developers?
 
 

There was plenty of movement in the contract management software industry in September, with the announcement that Versata acquired Nextance and that Ariba will be acquiring Procuri. Many will ask whether this spells the end of an era — is contract management software dying, or have bigger players recognized its potential and are snapping up the early developers?

As IACCM's recent Market Sizing Report indicated, the market for 'pure play' contract management solutions is growing — though still far behind the analyst forecasts of past years. It remains a fragmented market, with numerous small players and a confusing portfolio of functionality. There are solutions focused on legal, procurement and intellectual property; some are industry specific and then there are the growing claims of the major ERP providers that they too have contract management offerings (or will have 'very soon'). All these providers are competing in a market where user technology sophistication is not especially high and where lack of process definiition (or standard operating procedures) means that software is extremely hard to sell, let alone implement.

IACCM believes that automation is fundamental and of critical importance. Many of the applications may not be perfect — too many are focused on control and compliance, rather than controlled empowerment; many are tactical and transaction-based when the need today is for innovation and change through improved knowledge management and portfolio insights. The result of all these factors is that providers are struggling to drive high volume and high value sales. Inevitably, a number have simply slipped away and others remain marginal players. But several have continued quietly to build their customer base. And for each company that disappears, new providers emerge (we know of at least three on their way to market). The ERP providers know they must repond, but contract management is in many respects counter-cultural — it is about enabling flexibility and change, rather than imposing and monitoring compliance.
I have not spoken with Versata or Ariba, but I suspect that they sensed a real market opportunity. They know that managing supply chains and trading relationships is a growing core competency and they want to have offerings — and in particular the methods and know-how — to respond to those opportunities. They spotted the chance to enter the market at relatively low cost and with an established customer base that they could grow. To me, that is a smart move — and indicates a growing maturity in the market.
 
 

Collaboration: theme of November's edition of Contracting Excellence

 
How organizations can benefit from a collaborative culture, and even turn around their fortunes, will be the theme of the next issue of Contracting Excellence in November.  Authors contributing to this issue, through their own stories and case studies, discuss how you can use collaborative methods to achieve competitive advantage.
 
 
How organizations can benefit from a collaborative culture, and even turn around their fortunes, will be the theme of the next issue of Contracting Excellence in November.  Authors contributing to this issue, through their own stories and case studies, discuss how you can use collaborative methods to achieve competitive advantage.

Topics will include:

  • The pre-conditions that are necessary to provide the best chances for success, the associated cost, time, resource, effort, as well as the benefits. 
  • Recognizing and addressing the factors that affect collaboration. 
  • Negotiating collaboratively to create mutually beneficial outcomes.
  • Ways of reaching alignment of interests. 
  • Structuring a contract for collaboration and innovation.
  • Necessary governance structures for collaboration.
  • The use of service design as a basis for successful commercial contracting — ensuring contract terms reflect the expectations of the buyer and the commitments of the seller — is uniqe to each company and entails internal coordination and cooperation for it to make a difference. 
  • Collaborative Technology: how current technologies -- CRM, purchasing, supply chain, inventory planning, sourcing/auctions can enhance trust and enable collaboration across the value chain. 
  • Using metrics to ensure collaboration pays off —how organizations are measuring their collaborative projects with internal and external stakeholders, what metrics they use, how they measure results, and what types of incentives (or penalties) they use. 
  •  An industry study of how the construction industry includes techniques for preventing and controlling disputes in its contracts, mainly through encouraging collaboration among participants, and how the rest of the business world can use these same contract techniques to prevent and control disputes in all kinds of commercial transactions. 
 
 

 
 
 
Disclaimer
This newsletter is intended to keep readers abreast of current developments in the field of contract and commercial management. It is not, however, to be used or relied on as a substitute for professional advice. Before acting on any matter in the areas, readers should discuss matters with their own professional advisers.
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