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

Contracting Excellence Magazine - Dec 2007

 
 

Collaboration: business reality or marketing hype?

 
"Collaboration" is increasingly promoted as the framework for successful business relationships and improved organizational performance. But how does it impact the world of contracting - and does it really work?This introduction to the collaboration issue explores whether the concept is universal, the extent of its adoption and whether there are significant inhibitors to its use. TIM CUMMINS, IACCM
 
 

by TIM CUMMINS, IACCM

As business leaders wrestle with the impacts of today’s global networked economy, they increasingly emphasize the critical role of trust in underpinning successful trading relationships.

Without trust, there is fear and suspicion — which lead to self-protection. This has a major impact on contracts, negotiation and relationship management; because an absence of trust frequently causes the parties to focus on risk avoidance, the negotiation becomes adversarial and the relationship is often destroyed by an atmosphere of blame.

Trusting relationships are more likely to be collaborative in nature and recently ‘collaboration’ has gained extensive promotion as the way forward. Its advocates suggest that collaboration leads to shorter, simpler contracts; that collaborative negotiation focuses on alignment of needs and capabilities; and that a collaborative relationship typically has more open and honest exchanges that support mutual success.

But collaboration can be hard to achieve, because it depends not just on attitude, but also on the parties (internal and external) taking time to know and understand each other - and having respect for their differing views, values and perspectives.

The role of collaboration in contracting and relationship management

Trading relationships are becoming more complex as they take new forms and cross new borders — geographic, financial, legal and of business practice. Executives such as Sam Palmisano of IBM Corporation or Eric Schmidt of Google see an overwhelming need for multinational corporations to promote codes and practices that generate trust, counteract complexity and overcome the threat that, for many, globalization represents.

But does collaboration offer a solution? How pervasive is this enthusiasm for it, and is there even common understanding of the term? In practice, is it really influencing business-to-business relationships? This article addresses these questions and acts as an introduction to this edition of Contracting Excellence, in which we seek to answer:

  • What does collaboration mean?
  • How does collaboration influence behavior or approaches to contracts, negotiation and relationship management?
  • Is collaboration beneficial? Can we demonstrate that it leads to superior results?
  • When should collaboration be used? Is it a consequence of trust, can it generate trust and are there relationships which do not merit its use?

How pervasive is collaboration?

In a poll of IACCM’s multinational Advisory Council, most of the respondents felt that collaboration is increasingly being promoted within their region — but reported mixed results in its adoption. Their replies indicate that regional or national cultures are not the only influence — industry traditions and experiences are also a major factor in driving collaborative behavior.

Vincent Schatteman, who is based in France, summed up the view of many when he wrote: ‘It is essentially the market and the necessary consequences of the global economy which are already creating a shift, even if the reality is still sometimes far away from the concept’. Another European view came from Mark David in the UK, who commented: ‘My sense is that collaboration is probably higher on the business agenda than ever, but there continues to be a disconnect between strategic intent and commercial realization.’ Mark illustrates this by citing a magazine article, published by one of the major procurement professional associations, that was ‘promoting fear as a management tool’.

Writing from the Middle East, Satender Sharma made the point that ‘prevailing market conditions are changing the attitudes [towards negotiation and risk allocation] in this region … without terming it to be ‘collaborative contracting’’. And Bruce Horowitz, in Ecuador, comments: ‘Collaboration has long been a positive concept in Latin American business, but the term was often misused to create a veneer of trust, while in reality seeking a negotiation advantage.’ He continues: ‘Globalization is helping to shift attitudes toward more real collaboration when it comes to negotiation and managing trading relationships.’

Several contributors observed the influence of increased international assignments and training. They highlighted that returning managers seemed far more open to turning ‘apparent’ collaboration into far greater — and more sincere — levels of trust and transparency.

Continuing constraints

Rachel Lin struck a slightly different tone with her observations about practices in China — and indeed in large parts of the Asia-Pacific region. She suggested that collaboration can only occur if both parties invest empowered and knowledgeable resources — and, in her experience, there is a tendency for Asian companies to ‘use purchase departments or technical departments to do all the negotiation, and they usually only focus on [the] technical part or pricing, and would not listen to or be open to negotiate anything else’.

In addition to this issue of having appropriately motivated and trained resources at the negotiating table, several responses highlighted the impact of industry traditions that make it hard for companies to eliminate old behaviors. For example, Carlos Pistone in Brazil described the ‘take it or leave it’ style of most telecom operators. And while many are critical of the narrow attitudes displayed by some procurement groups, sales organizations also come in for criticism. Satender Sharma observes that oil and gas is a ‘very competitive market; nowadays, behavior is very dictatorial by sellers, since today’s market is a sellers’ market’. And Vincent Schatteman emphasizes that trust is a two-way concept when he remarks: ‘Collaboration is misinterpreted and often used by a supplier to sell a solution, but is not translated into practical processes and usually does not lead to very practical consequences.

Definition and conclusion

The belief that collaboration brings benefits has gained ground in most regions of the world. Many executives are espousing greater openness and a spirit of ‘partnering’. According to Carlos Pistone, this means that the traditional use of power in negotiations is eroding, because ‘as companies become more globalized, the old styles will give way to more open-minded behavior. … ‘But, the most important driver for collaboration is that with global opportunities for suppliers and purchasers, companies are not restricted to their local markets and can pursue alternatives.’

For Rachel Lin, collaboration means ‘both parties are open for discussion and would listen to each other, welcoming creative solutions or different options’. Indeed, this seems a reasonable definition of collaboration in practice. More technically, it is ‘the act of working together’ towards some shared goal or objective.

It is clear that a pre-condition for this new world is a shift in attitude and behaviors by both buy-side and sell-side. In particular, goals and measurements must change to support greater honesty, openness and a readiness to embrace broader indicators of mutual success. The disciplines for internal planning, negotiation and post-award measurement and management must also undergo extensive change if they are to create the dynamic, transparent and proactive framework that true collaboration demands.

It is these factors — and how they are being achieved — that will be addressed in the articles that follow.

In summary, defining collaboration, its methods and benefits, is one way that procurement, contract management and legal groups can gain greater attention and deliver greater value. While some have embarked on this road through improved definition of their responsibilities and the development of new tools and organization, most are still struggling to get started.

Sadly, in spite of growing evidence of the superior outcomes it can drive, collaboration in contracting remains the exception rather than the norm.

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

 
 

Context for collaboration

 
Collaboration is an appealing concept offering the possibility of remarkable results and is generally considered to be a ‘good thing’ to which everyone can subscribe. As with other appealing terms that are widely used, it can mean many things to many people and justify a wide range of commercial behaviours, not always in a positive manner. Understanding the essence of  collaboration and the need to address the cultural dimension provides a true leadership opportunity for world class performance. MARK DAVID, CommitMentor
 
 

by MARK DAVID, CommitMentor

Collaboration means many things to many people. For Rowan Atkinson and his ‘one man show’ a couple of decades before Mr Bean fame, it meant ignoring his on-stage performance partner Angus Deaton in the promotional material. For many French people, the word still has hauntingly negative connections with the Second World War. In the business world it seems to be a label easily attached to any activity involving more than one party, without real consideration being given to the nature of the relationship, the associated commercial framework and the true commercial purpose.

The essence of collaboration is working towards a shared vision to deliver results that are not achievable either independently or by using an arms-length relationship. This creates the following ‘DEEDS’ challenges:

Deciding when collaboration is appropriate,
Establishing the collaborative contract
Executing on the contract
Delivering the expected business benefits
Sharing the lessons learned to increase future success

The public and private sector commercial professional has, therefore, a responsibility to embed and involve themselves in the strategic aspects of their business. This enables appropriate business relationships to be developed and delivered.

This may sound obvious, but it raises some scary issues if collaboration is to work. A couple of examples to trigger adrenaline production:

  • Procurement organisations need to be more relaxed about being the sole gateway into their company and policing the flow of information.
  • Sales organisations need to allow uncertainty to be shared with a view of ensuring that the delivery mechanisms developed in the pre-contract dance can accommodate such matters in a constructive manner.

When individuals get scared they tend to retreat within their comfort zones or go on the attack. True collaboration means exposure, risk, and creating the possibility of outstanding results. This issue of Contracting Excellence provides expert insights into how collaboration can work, how new attack-free zones can be created, and how to be comfortable with being uncomfortable.

The sessions at the 2007 IACCM EMEA conference ‘Collaborate to Innovate’ in November revealed a recognition that current business processes frustrate deep collaboration to such an extent that it is the exception rather than the norm. One of the messages from the conference was, however, that there are some excellent tools out there, and the articles by Mark Darby, Bill Huber and Jim Groton in this issue of Contracting Excellence provide a useful insight into this. And these tools are being used in the public and private sectors.

The refrain of the conference for me, and highlighted by Ed Dauer of the University of Denver Sturm College of Law; Gill Avery and Mike Vernon of Consulting People Ltd; and Mark Pedlingam of the UK Office of Government Commerce, is that addressing the cultural dimension is essential for the tools to be applied effectively over time. How many change or contracting initiatives have been launched using state-of-the-art processes, only for rejection to occur six to 12 months later?

The British Airport Authority’s (BAA’s) innovative approach to the construction of Terminal 5 (T5) at London’s Heathrow Airport was one of the examples given at the conference of how a collaborative approach is driving project success to time, cost and safety.

T5 is a mammoth £4.2 billion construction scheme with huge logistical challenges — live runways on two sides, existing terminals on another and Europe’s busiest motorway interchange on the other. It required the diversion of two rivers, boring over 14 kilometres of tunnel, a new air traffic control tower, a 600 bed hotel, car park, link road and, of course, terminal building. Pressure on the construction period intensified during the protracted public planning approval process. With 18 major projects valued between £10 million and £200 million, 150 sub-projects and 1000 work packages, BAA realised that it could not take the risk of following usual construction contracting methodologies with the likely budget busting time slippage and construction worker fatality consequences.

BAA’s research identified that major construction projects hit problems because of cultural confusion and the reluctance to acknowledge risk. Understandably, a lot of public attention has been given to the radical departure from convention on risk allocation and risk management. BAA assumed the project risk, realising that, in practice, regardless of whatever liability it could negotiate a general contractor to accept, it would end up facing the consequences if things went wrong — being able to litigate if tunnels subsided and disrupted flights into and out of Heathrow is no real comfort.

BAA therefore established a legal framework to:

  • manage the cause of problems rather than the effect;
  • drive integrated team working aimed at success; and
  • focus on proactively managing risk rather than strategies to avoid litigation.
BAA assumed the project risk, realising that, in practice, regardless of whatever liability it could negotiate a general contractor to accept, it would end up facing the consequences if things went wrong

The commercial model supported this framework, providing mechanisms for contractors to be paid for rightfully incurred costs with pre-determined profit levels, and for teams to allocate incentive funds in a self-managed manner. There was also rigorous attention to driving out costs by eliminating waste in the supply chain and reducing component costs by collaborative action among all the contractors.

It’s interesting that the other key factor identified by BAA for project success is rarely acknowledged as publicly, but is the aspect that enabled the innovative risk and contracting approach to bear fruit — this is the need to consciously and actively work the cultural dimension.

BAA established the following ‘rules of the game’:

  • transparency,
  • a clear mutual understanding of what every party had signed up for;
  • alignment of corporate objectives; and
  • an expectation that every player would achieve world-class performance levels.

BAA also realised that the right behavioural characteristics could not be achieved over night simply by talking about them. There was a heavy investment on individual, process and system levels in the first 18 months to make this happen. This was then followed by conscious and constant reinforcement.

T5 is not yet complete and BAA is yet to fully declare victory until opening day on 27 March 2008. It is clear, however, that progress to date has been remarkable on every critical dimension. The debate around construction for the 2012 London Olympics and elsewhere show that BAA’s achievement is recognised, but that it is challenging to absorb and replicate the success.

This re-enforces the need to contemplate the DEEDS challenges within the cultural context by:

  • arming ourselves with the ability to diagnose the culture cycles in play;
  • recognising the culture cycles necessary to achieve objectives across the value chain; and
  • leading culture cycle transformation where appropriate.

The excitement for me is that this aspect is marbled through many of the thought leaders’ messages and articles in this issue. True leaders will recognise this, identify how to build their cultural capability to avoid the temptation of focusing purely on tools and techniques and build a world class capability to innovate through collaboration.

Mark David, Principal,
CommitMentor.
Email: mark@commitmentor.com.
www.commitmentor.com.

Mark David is the founder and principal of CommitMentor, a consultancy providing innovative commitment management coaching, training and operational services. Mark has over 25-years’ commercial experience living and working in multiple cultures in 31 countries. Mark has been involved with IACCM since its inception, been a board member since 2000 and was the association’s chairman in 2003 and 2004.

 
 

 

Getting serious about collaboration

 
This article by Jonathan Hughes and Jeff Weiss from Vantage Partners is the special sponsoring contribution to this Collaboration issue Collaboration is a hot topic — yet it remains aspiration more than reality. To enable true collaboration with customers, suppliers, and other business partners, leaders must help their organizations recognize and address the deeply engrained barriers to collaboration that exist within their organizations. JONATHAN HUGHES AND JEFF WEISS, Vantage Partners
 
 

by JONATHAN HUGHES and JEFF WEISS, Vantage Partners

MAIN POINTS

Collaboration requires dismantling traditional ways of thinking about and managing simple trading relationships.

Cross-firm collaboration requires a high degree of collaboration and coordination internally from both partners. Lack of internal alignment and coordination is a major barrier to effective collaboration.

Over-emphasis on short-term and overly narrow measures of value is endemic to most companies, and especially sales and purchasing functions. Companies need to change what they measure and how they reward people if they are serious about enabling collaboration.

What does it really take, and is your company willing to do it?

Collaboration is a hot topic —yet all the talk about its importance and an extensive body of literature on it has failed to transform the way most companies do business with one another. According to our research, somewhere between 60 percent and 70 percent of alliances fail.[1] When it comes to relationships between customers and suppliers, the story is much the same — collaboration remains more aspiration than reality. According to a study in 2005[2] conducted by Industry Week and IBM, more than 62 percent of purchasing executive respondents said that supplier collaboration was the most effective means by which to reduce costs and increase profitability —this was significantly more than those who named global sourcing, and nearly twice as many as those who named spend analysis. Nonetheless, most companies continue to keep their suppliers at arms length, and treat their strategic suppliers in ways that are only marginally or intermittently different from the way they treat their arms-length commodity vendors. Suppliers often reciprocate by continuing to align their efforts, polices and incentives around sales objectives, rather than maximizing the value they deliver to key customers.

The collective behavior exhibited by most companies suggests deep ambivalence when it comes to collaboration.

Very few companies have made the changes in organizational culture and policies required to systematically transform the way they and their business partners interact. While many companies have implemented formal alliance management, strategic account management, and supplier relationship management programs, few have changed or eliminated old policies, procedures, metrics, and incentives — and perhaps more fundamentally, old ways of thinking — that constrain, and in many cases actively undermine, effective collaboration.

Almost every company … has a number of business partners … with whom true collaboration is the key to unlocking tremendous incremental value.

Moreover, collaboration requires dismantling traditional ways of thinking about and managing simple trading relationships (including the majority of licensing and channel relationships). In situations where there is little opportunity to create value beyond an efficient exchange of goods and services, true collaboration is probably not worth the effort. Almost every company, however, has a number of business partners, often more than they realize, with whom true collaboration is the key to unlocking tremendous incremental value. Such relationships are characterized by significant opportunities to create value subject to the following caveats:

  • close integration of planning and operations between partners (for example, extensive sharing of information, extensive integration of processes and coordinated decision-making) is required;
  • both sides need to make significant investments (in time, effort and/or capital); and
  • efforts to realize potential value also entail a high degree of risk — notably, the risk of opportunistic behavior from the other side, and various forms of competitive risk.

Expanding the scope of interaction between business partners

When interactions between companies occur primarily or exclusively between sales and procurement, significant value is bound to be lost. Engaging in joint product development, sharing and aligning technology roadmaps, reengineering business processes for greater efficiency and the like are all modes of interaction that require perspectives and competencies from across the enterprise (R&D, manufacturing, logistics, marketing, finance, contracts, and so on) on both (or all) sides of a partnership.

Kraft Foods

At Kraft Foods, significant incremental revenue and cost savings have been achieved by systematically expanding the scope of their relationships with suppliers beyond traditional purchasing and fulfillment interactions. Rather than continue to rely primarily on in-house solutions to technical challenges and then source to defined specifications based on price, Kraft has adopted what it terms a non-prescriptive approach — engaging its suppliers as true partners in jointly developing optimal solutions. For example, technical staff from Kraft and a key supplier, along with one of the supplier’s suppliers, worked closely from the outset of a major development project. The result was commercialization of Snack ‘n’ Serve, a patented packaging system with an innovative re-close feature. Beyond the initial patent granted, five additional patents are pending. Benefits for Kraft included 5 percent incremental sales growth for Chips Ahoy! Chewy cookies, and exclusive rights in perpetuity to the technology in the cookie category. The supplier was granted an initial price increase (with both sides agreeing to an aggressive plan for next generation cost reductions) and gained significant opportunities to commercialize the technology with other customers in different market segments.

Successful collaboration with business partners requires effective ‘internal’ collaboration

Companies are not monolithic, yet much of the literature on collaboration tends to gloss over this basic reality and treat partners as if they were simple, homogenous entities. And while most advice on partnerships highlights the fundamental importance of trust, it rarely delves into what our research and experience indicate are the biggest barriers to building and maintaining trust between companies — mixed messages, broken commitments, and unpredictable, inconsistent behavior from different segments of a partner organization.

Successful efforts like those at Kraft depend on engaging a broad range of parties inside both customer and supplier, as well as an open exchange of information about plans, capabilities, technology, costs structures and joint investment. Such cross-firm collaboration requires a high degree of collaboration and coordination internallyfrom both partners. Our research indicates that lack of alignment and internal coordination of customers and suppliers is a major barrier to effective collaboration.[3] Similarly, in our analysis of alliance management best practices, the ability to create and maintain internal alignment of various stakeholders was cited as one of the most critical drivers of alliance success.[4]

Risks that constrain collaboration

The case for greater collaboration is compelling, but it is not exactly new. The more interesting story emerges in analyzing what stops leaders and decision-makers at many companies from acting to make collaboration a reality.

One sourcing executive at a microchip company described a situation where his company had entered into a closer, more collaborative relationship with a key supplier. ‘They had great technology and talented engineers. We saw the potential to move beyond a traditional purchasing relationship to one where we actually worked together on the design and development of new technology. We did so with initial success, and then found ourselves very dependent upon them. Sure enough, once we gave up competitive leverage and lost the ability to switch them out, their prices began to rise precipitously.’ This story mirrors one that the head of strategic account management at a packaging supplier recently relayed to us. His company made an enormous investment to create a dedicated joint innovation center for a top customer. Within a year, that customer put most of its business with this supplier out to bid, after it had realized significant innovation gains. Sadly, such stories are all too common.

The fear of being extorted acts as an enormous barrier to collaboration. It makes companies reluctant to share information, enter into long-term contractual arrangements, or work with partners in ways that reduce leverage and create greater dependency. Companies like Kraft Foods that regularly and successfully engage in such efforts have codified ways to analyze and manage the attendant risks of collaboration. They weigh the probability-adjusted risks against the upside benefits of collaboration. Such companies also expend the time and effort required to put in place innovative contracts that go beyond traditional purchasing boilerplate and address issues of intellectual property ownership, clarify exclusivity and non-compete obligations, and include risk and reward sharing provisions. More subtly, they focus less on avoiding loss of leverage, and more on ensuring that dependence is mutual, and that clear opportunities for future joint gain act as a strong disincentive to opportunistic behavior.

Focusing on long-term value versus short-term gains

Building and sustaining collaborative relationships requires a willingness and ability to consistently avoid actions that create short-term benefits but which significantly undermine a greater potential to realize long-term value. Yet, according to a McKinsey and Company survey (The View from the Boardroom, 2005) a majority of managers acknowledged that they would forgo an investment that offered an attractive return on capital if it meant missing quarterly earnings targets.

The over-emphasis on short-term and overly narrow measures of value is endemic to most companies, and is especially prevalent within sales and purchasing functions. This is not to say that short-term results don’t matter. Of course they do. But focusing only on this quarter’s, or even this year’s numbers is like trying to drive on a winding road by keeping your eyes firmly fixed ten feet in front of you. According to our research, 90 percent of both buy- and sell-side respondents report that interaction with key suppliers is driven to some extent by a focus on price rather than total value. This is a devastating indictment.

Of course, procurement is not solely to blame. The typical sales organization is also focused on hitting quarterly and annual revenue numbers with at least as much single-minded intensity as the average procurement organization is focused on price reductions and short-term cost savings. Even strategic account management groups are typically part of the overall sales organization and reporting line, and subject to similar short-term revenue and margin pressure.

The bottom-line is simple. Metrics and incentives drive behavior, and behavior drives results. Metrics and incentives at the vast majority of companies systematically act to limit collaboration and constrain investment (in time, effort and capital), without which major opportunities to realize incremental value cannot be realized. Creating relationship scorecards that focus on measurement of new forms of value through collaboration with partners is a good start. But until companies radically change not only what they measure, but also how they reward the people who interact with, and make decisions that affect, their partners, they will continue to be disappointed by lost value.

Metrics and incentives at the vast maority of companies systematically act to limit collaboration and constrain investment (in time, effort and capital), without which, major opportunities to realize incremental value cannot be realized.

Creating a collaboration-competent organization

There is great deal of good advice available about how to form and manage collaborative business relationships. But most companies have attempted to implement such advice as an overlay to existing policies, processes and incentives. The underlying barriers to collaboration need to be addressed, and this means significantly changing deeply engrained ways of conducting business. Here’s how to get started.

  1. Create a context conducive to mutual investment in the relationship — actively build and sustain trust. Maximize consistency and predictability of behavior toward partners.
  2. Implement long-term contracts with partners that address the specific issues of collaborative relationships (for example, IP ownership and exclusivity) and that incorporate risk and reward sharing mechanisms.
  3. Create a culture of respect for partner capabilities, and eliminate policies and incentives that contribute to ‘not invented here’ ways of thinking and acting.
  4. Realign the incentives of those who make decisions about, or interact with, business partners so they are aligned with the goals (total long-term value) and drivers (for example, treating partners fairly, and with respect) of enhanced collaboration
  5. Clarify roles and define or adjust processes and policies to increase internal coordination.

J. Hughes, J. Weiss, S. Morton and C. Kim, Key Customer-Supplier Collaboration Study, Vantage Partners, 2007. (Study involving over 300 companies and over 500 individual survey responses from both buy-side and sell-side executives and relationship managers.)

Jonathan Hughes,
Director and head of Sourcing and Supplier Management Practice,
Vantage Partners,
Email: jhughes@vantagepartners.com,
and
Jeff Weiss,
Email: jweiss@vantagepartners.com.
Director and head of Alliance Management practice area.

Endnotes
--------------------------------------------------------------------------------

[1]. Managing Alliances for Business Results. Vantage Partners. 2006.
[2]. “2005 Industry Week Value-Chain Survey” Industry Week in conjunction with IBM Business Consulting Services with assistance from APQC, September 2005.
[3]. Key Customer-Supplier Collaboration Study. Vantage Partners. 2007
[4]. Above note 1.

About Jonathan Hughes: As an expert in negotiation and relationship management, Jonathan has worked with leading companies across a range of industries to help develop and implement strategies that depend on intra-organizational collaboration and external collaboration with business partners. Jonathan has worked nationally and internationally with corporations including Johnson & Johnson, IBM, the Canadian Imperial Bank of Commerce, Monsanto, The New York Times and Hewlett Packard. His work has ranged from helping clients structure and launch new alliances, facilitating complex negotiations, to helping companies transform their approaches to managing key suppliers as business partners and a source of competitive advantage, rather than simply as vendors. For further information, visit: www.vantagepartners.com.

About Jeff Weiss: Jeff Weiss is a founder and director of Vantage Partners. He works with Fortune 500/Global 1000 companies to help them select, negotiate, and manage their most strategic partnerships. In addition, he works with a number of clients on building processes to more effectively manage internal conflict and decision-making across internal divisions, functions and geographies. Prior to founding Vantage Partners, Jeff was a member of the Harvard Negotiation Project and helped to set up Conflict Management Group, a non-profit organization that engages in dispute-resolution work around the world. His recent publications include: Making Partnerships Work: A Relationship Management Handbook and Managing Alliance Relationships: Ten Key Corporate Capabilities. For further information, visit: www.vantagepartners.com.

 
 

 

Structuring a collaborative relationship

 
This article discusses the reasons to pursue collaborative contract relationships, and describes a successful approach to achieve them. BILL HUBER, TPI
 
 

by BILL HUBER, TPI

Main points
  • Collaborative relationships enable higher levels of value creation.
  • Collaborative relationships are necessary in contracting for more complex services.
  • Successful collaborative relationships can be achieved through a focus on culture, relationships, incentives, a flexible contract and effective governance.

Some might describe the notion of collaborative buyer-seller relationships between large companies as a sort of Holy Grail, the pursuit of which has defined many careers, but the attainment of which has been shrouded in mystery and lore. The theory behind such relationships is that bringing together the creative talents of various companies, combined with their differing insights and core competencies, will result in the synthesis of innovation. Presumably, this innovation will result in more efficient operations, faster problem resolution, improvements to quality, the ability to reduce costs and/or greater ability to respond to market needs with new or enhanced products and services.

What would a collaborative relationship look like?

From the buy side, the service provider would:

  • anticipate the buyer’s challenges and opportunities;
  • bring new ideas to the table;
  • be candid and communicate proactively when encountering quality or delivery problems; and
  • be responsive to the buyer’s concerns or suggestions.

From the sell side, the buyer would:

  • be open in sharing information about its goals;
  • not constantly re-compete requirements but, instead, would commit to a long-term relationship with a level of predictable revenue for the seller; and
  • have an efficient approach to evaluating and acting upon the seller’s recommendations.

Why structure this kind of relationship — what are the benefits?

Non-collaborative relationships are perfectly suitable for most business transactions. However, by their nature, they lead to a commoditization of the goods and services being exchanged. This is because, under non-collaborative relationships, what is bought or sold can be defined strictly by an implied or actual set of specifications — they are relationships of convenience and will be sustained only until they are replaced by an alternative offering of superior value to one party or the other. Collaboration de-commoditizes relationships through delivery of value that is above and beyond ‘specifications’, such as an improvement to a product design or a more efficient business process. Accordingly, collaboration introduces a degree of ‘stickiness’ to relationships that over time can enable innovation and differentiation.

Additionally, collaboration is a fundamental requirement to buy or sell certain complex goods and services. For example, complex services are difficult to fully specify, and usually require a level of adaptability and judgment above and beyond what can be defined in a statement of work or service levels. Companies find it valuable to take advantage of specialization in core competencies and to contract for an increasing array of capabilities that others can perform more effectively. As companies seek new opportunities to drive efficiencies, one option is to explore sourcing of higher-end services with a greater complexity of interaction, as well as a greater potential for value creation, since such value creation is driven not only by labor arbitrage and efficiency, but also by expertise, specialization and scale.

Finally, continuous improvement is necessary to compete effectively over time, and improvement can only be optimized when undertaken across the entire value chain. Whether utilizing a Six Sigma ‘COPIS’ model or another methodology, each partner will bring unique insights to their piece of the process, and it is through collaboration that the overall process can be best improved.

Alignment of interests — is it really possible?

There are many reasons why buyers and sellers often fail to align their interests, the simplest example being the seller’s objective to maximize the price and the buyer’s to minimize it. While a case can be made that the long-term maximization of the relationship will result in higher profitability for all parties in a collaborative relationship, implementing behavioral changes must overcome tremendous institutional hurdles, including different strategic goals, incentive structures, corporate cultures and organizational priorities. According to a survey by CIO Magazine(‘CIO's Exclusive Outsourcing and Innovation Survey’, 25 September 2007, http://www.cio.com/article/141066) ‘cultural or communication issues’, at 54 percent, was the most frequently cited barrier to innovation by outsourcers. As a result, it is not surprising that those companies who successfully achieve collaborative relationships do so through a proactive structure designed to overcome these issues.

Examples of collaborative relationships

Toyota

Toyota, famous for its collaborative supply chain approach, increased collaboration via a target cost management-systems and collaborative co-design approach, resulting in over a 30 percent reduction in component costs. While some of its competitors set broad, across-the-board cost reduction mandates from their suppliers, some of these measures ultimately have had the opposite effect. Toyota, on the other hand, has achieved better results through collaboration. Toyota utilizes pre-production collaboration several years prior to vehicle launch to address details down to the level of component packaging design to optimize the interface with the supplier’s shipping process and Toyota’s plant processes. Toyota also continues to increase its equity investment in many of its suppliers to increase the alignment in joint success

Bristol-Myers Squibb

Pharmaceutical giant Bristol-Myers Squibb (BMS) outsourced much of its ‘pharmacovigilance’ (the collection and analysis of information on adverse reactions to therapeutic goods) and clinical data management to an offshore business process outsourcer. BMS takes a partnership approach to its outsourcing relationships that includes joint operating and steering committees, dedicated subject matter experts (SMEs) with relationship management responsibility, and strong emphasis on culture change.

Wachovia

Wachovia established a ‘synthetic captive’ offshore outsourcing relationship where the service provider was effectively integrated into multiple levels of the client management structure, and specific mechanisms were put in place to enable shared standards, participation in recruiting key individuals, training, cultural integration, socialization and an intricate governance structure to oversee the overall relationship and project. The relationship was initiated with a carefully designed master services agreement with a minimal defined scope of work, but a detailed mechanism for identifying opportunities and defining scope and costs, and with the objective of growing the relationship to a substantial level over time. Within several years, the relationship had grown to nearly a thousand FTEs, surpassing expectations. According to one executive, referring to the lack of significant problems or surprises arising during transition, the process was going ‘scarily well’.

Creating a relationship that is open to collaborative approaches

Establishing collaborative relationships requires commitment at multiple levels of the corporation. Strategic objectives for the relationship must be promoted and embraced at the executive level, but these objectives must then be institutionalized into measurement and reporting, as well as personal relationship building and cultural integration in order to grow.

The selection of the right individuals to manage the relationship is also critical. If the manager with responsibility for ‘keeping the lights on’ is assigned the responsibility for developing a collaborative strategy, participation is likely to focus on risk mitigation rather than on innovation.

Structuring a contract for collaboration and innovation

Collaboration must be designed into the contract so that it can reflect an evolving relationship over time. The contract is a key element of the infrastructure of the relationship and should, therefore, have effective and efficient mechanisms to manage change, including upward and downward changes to scope, statements of work, specifications, service levels and pricing that will minimize risks to both parties and ensure that economic parity is not lost or obscured by the changes. These mechanisms will enable the parties to incorporate changes more quickly than in a standard contract. Additionally, governance and socialization structures should be formally built into the contract so that these elements are expressly foundational to the relationship. Typically, the more that there is executive alignment at the time of structuring the contract, the greater will be the willingness by both parties to build flexible mechanisms into the contract.

Maintaining incentives and preserving market forces

Additionally, the relationship must be structured so that both partners are economically rewarded for successful collaboration, whether it is through continuation or growth of the relationship, or through joint investment or other means. Collaboration involves a certain level of risk, and in order to be incented to collaborate, both parties must be rewarded for their risk. The supplier who has the opportunity to sell will be incented to bring new ideas to the table, but a structure that includes effective pricing transparency and performance metrics, along with the right level of governance, will help to ensure that these ideas are limited to those of true value to the customer.

Necessary governance structures

Successful collaborative relationships often have two layers of governance. The first is at the operational level — managing service delivery, financials, contracts and performance, as well as the day-to-day relationship. The second is at the strategic level — focusing on the overall relationship objectives, managing change and cultural alignment, ensuring that the right resources and individuals are in place and removing barriers to success. If the relationship is an important one, both layers of governance should be at a relatively senior level, with executive management comprising the strategic governance committee. Additionally, a regular meeting schedule should be established for strategic governance — typically quarterly.

Overcoming obstacles

Although not all companies have ‘collaborative DNA’, often when companies fail to implement or sustain successful collaborative relationships, the causes can be traced to insufficient leadership support or to underdeveloped collaboration skills. Effective change management is critical, and should be target stakeholder groups at various levels throughout the company. For example, while leadership support is sometimes a difficult variable to manage, targeted efforts to increase awareness and executive alignment will usually result in significant improvement. Similarly, a sustained combination of training, experience, compensation design and placement of the right people in the right roles will remedy a skills gap over time. Companies have different cultures: strategies need to be customized, and will not be successful in all cases. However, those companies that become successful in consistently structuring and sustaining collaborative relationships are likely to be among the winners in the long haul.

Practical implications

  • Collaboration enables companies to pursue a broader range of value creating relationships and to achieve higher value from its existing relationships.
  • Companies that are effective at collaboration outperform their peers.
  • By planning for a collaborative relationship, and understanding the key elements, companies can avoid pitfalls and achieve results more quickly.

Bill Huber is Director – CPO Services at TPI and was Chairman of the Board of IACCM from 2005-2007.

Email: bill.huber@tpi.net.

Bill was formerly Senior Vice President and Director of Strategic Sourcing for Wachovia and has held other leadership positions in the aerospace, technology and financial services industries.

 
 

Zero disputes? Collaboration lessons that businesses can learn from the construction industry

 
Industries and businesses can learn valuable lessons from the construction industry, which uses innovative techniques to keep them out of court. JAMES P GROTON, Sutherland, Asbill & Brennan LLP (Retired)
 
 

by JAMES P GROTON, Sutherland, Asbill & Brennan LLP (Retired)

Main points
       The construction industry has invented successful tools to prevent, control and manage problems before they turn into disputes.
        Organisations both in the public and the private sectors in any industry can use these tools.
       Realistic allocation of risks, open communication, incentives for cooperation, and partnering help to keep problems from arising.
        Step negotiations and the use of standing neutrals to provide ‘real time’ control and management of problems keep problems from escalating into disputes that would otherwise have to be resolved by litigation, arbitration or mediation.
Construction is a high-risk business with a high potential for adversarial relationships. Every project involves a multitude of players, all with potentially conflicting interests, but whose mission it is to plan, design and build a structure, on time and within budget. Once the building process has begun, the work can’t be interrupted or delayed without serious consequences. ‘Time is money’, so the construction industry places a premium on quick solutions to problems and the prevention of disputes. To achieve this, it has developed some remarkably successful collaborative techniques that have broad application to the public and private sectors of other industries.
Prevention/cooperation techniques
Realistic allocation of risks
Research has shown that one of the most powerful ways to prevent and control disputes is to allocate project risks realistically, by assigning each potential risk to the participant in the project who is best able to manage, control or insure against it. It is now well recognized in the construction industry that when lawyers seek to negotiate ‘the best deal’ for their clients, they often craft contract provisions that unrealistically and unfairly allocate risks to project participants who are unable to handle the risk, often creating problems of a far greater magnitude than those they sought to solve. Realistic allocation of risks improves productivity, lowers costs, and creates better relationships among participants. The result is fewer disputes and a greater chance for project success.
Open communications
The best construction project results are obtained through good communications among project team members, so that incipient problems can be identified and solved before they become serious. Channels need to be developed to open up dialogue between all parties.
Incentives to encourage cooperation
The construction industry uses incentive plans to encourage multiple parties to work together towards a common goal. For example, a general contractor or construction manager who needs to coordinate the activities of multiple subcontractors who have the potential of getting into conflict with each other, can establish a ‘bonus pool’ which is based upon the need for cooperation and the attainment of specific project goals, will be shared among all of the subcontractors. Under such a system the bonus is payable only if all of the subcontractors avoid conflict and meet the assigned goals — it is payable either to everyone, or to no one. This places a premium on teamwork, provides all participants with a common goal and incentive to work cooperatively, and reduce conflicts.
Where an organisation is contracting with a number of other parties with diverse interests, it can be helpful to structure a system of incentives. Well-conceived incentive programs can be an effective means of aligning the goals of all, can encourage superior performance and discourage conflict. They encourage participants to subordinate their individual interests to the legitimate needs and success of the enterprise as a whole, for the ultimate benefit of all participants.
Partnering
In the construction industry, partnering is a team-building effort in which the participants in a project establish cooperative working relationships through a mutually-developed formal strategy of commitment and communication. 
Partnering on a long-term basis involves the development of a strategic alliance which maximizes the effectiveness of each participant’s resources. The relationship is based upon trust, dedication to common goals, and understanding each other’s individual expectations and values. The expected benefits include improved efficiencies and cost effectiveness, increased opportunity for innovation, and continual improvement of products and services.
When used on a project-specific basis, partnering is usually instituted at the beginning of the relationship by holding a retreat among all participants who have leadership and management responsibilities. Assisted by an independent facilitator, they become acquainted with each other’s objectives and expectations, recognize common aims, define mutual goals, develop a teamwork approach, initiate open communications, and establish non-adversarial processes for resolving potential problems. The initial retreat is followed up by periodic evaluations and meetings to ensure the communications and teamwork are continuing.
In any common business enterprise, if individual parties are left to their own devices in trying to achieve their own goals, they are likely to be guided primarily by narrow self-interest, which at some point may conflict with those of other participants. Sharing mutual goals creates a community of purpose that serves to minimize disputes and encourages the formation of synergistic relationships which leverage the whole process to the advantage of all. The focus is on ’fixing the problem,’ not ‘fixing the blame’
For example, a large company had several divisions operating independently that were unwilling to give up power and behaving like a dysfunctional family. A partnering facilitator was brought in, the leaders and key employees in each division participated in partnering exercises, and the result was an alignment of interests between all divisions for the overall good of the company. The same process could be employed to achieve alignment among the employees of entities that have been brought together as the result of a merger or acquisition.
Dispute control and ‘real time’ early resolution techniques
Step negotiations
Negotiation is the time-honored method by which parties resolve disputes through discussions and mutual agreement.
A construction industry improvement on negotiation is the ‘step negotiation’ procedure, a multi-tiered process that can be used to break a deadlock. If the individuals from each organization at the lowest project level who are involved in the dispute are not able to resolve a problem promptly at their level, their immediate superiors are asked to confer and try to resolve the problem; if they fail, the problem is to be passed to higher management in both organizations. Because an intermediate manager is not likely to be as closely identified with the problem, the manager’s interest in demonstrating to higher management that he or she has the ability to solve problems and to keep them from bothering higher management is a built-in incentive to resolve disputes before they have to be referred to the level of management.
This technique can be easily adapted for use in the early resolution of problems in any business relationship.
Standing neutral
One of the most promising developments in controlling disputes in a construction project is the concept of having a respected pre-selected or ‘standing’ neutral expert to be a dispute resolver throughout the course of the project. This standing neutral, or a board of three experts called a dispute review board or (DRB), is jointly selected by the parties early in the project; briefed on the nature of the project; furnished with the basic documents; provided with progress reports; and occasionally attends jobsite meetings with the parties to get a feel for the dynamics and progress of the project relationships. The DRB or standing neutral is expected to be available on relatively short notice to make a recommendation to the parties as to how to resolve any disputes the parties are unable to resolve themselves.
Three critical elements are essential to the success of the standing neutral technique:
  • early mutual selection and confidence in the neutral;
  • continuous involvement by the neutral; and
  • prompt action on any submitted disputes.
Although the standing neutral’s decisions are typically not binding, experience has shown that their decisions have almost universally been accepted by both parties as the basis for resolving a dispute, without any attempt to seek relief from a tribunal. This technique has been successful in resolving over 95 percent of all disputes presented to a standing neutral, in addition to having been credited with keeping many other potential disputes from ever being presented to it.
By providing a ‘dose of reality’ that encourages parties to be more objective in their dealings, while at the same time giving the parties an opportunity to construct their own solutions to problems, the standing neutral process tends to strengthen the relationship and create trust and confidence.
The standing neutral concept is appropriate for any type of continuing business relationship. Examples include joint ventures, long-term supply contracts, corporate governance, or any other type of long-term business relationship. The standing neutral, who could be a trusted experienced business person, expert accountant, or neutral attorney, would serve as a ‘standby’ resource to assist in the resolution of disputes. The standing neutral should be initially informed of the purpose and nature of the business relationship, provided with progress reports or attend meetings with the parties to keep up to date with the project. If the parties should later have a problem that they cannot readily resolve by themselves, they can call ask the standing neutral to provide an expert opinion as to how the problem should be resolved.
The existence of a pre-selected standing neutral, already familiar with the business relationship between the parties and its progress, avoids many of the initial problems and delays that are involved in appointing one after a controversy has arisen. The fact that the standing neutral will hear every dispute which occurs during the life of the relationship, and particularly the speed with which they can render decisions, provide powerful incentives to the parties to deal with each other and the neutral in a timely and frank manner. The standing neutral serves not only as a standby dispute resolution technique but also as a successful dispute prevention device. Even though some expense is involved in the process of appointing, orienting and keeping the standing neutral informed about the relationship, the costs are relatively minimal when compared to the potential costs of resolving a dispute in arbitration or litigation.
Practical implications
     The construction industry, probably the world’s most adversarial, is able to achieve zero disputes on projects, through the use of tools that prevent, control and manage problems in ways that keep them from escalating into disputes that need to be litigated, arbitrated, or mediated.
      Organizations in the public and private sectors can benefit by including in their contracts these same tools to improve their business practices and help to preserve valuable business relationships.
 
James P. (Jim) Groton, LL.B, FCIArb, FCCA, Fellow of the Chartered Institute of Arbitrators, Fellow of the College of Commercial Arbitrators).
Email: jim.groton@sablaw.com.
Jim is an arbitrator of international construction disputes and an advocate of adapting construction industry dispute prevention and control principles and techniques to other industries and business relationships. He is active in the work of the Dispute Resolution Board Foundation and in dispute prevention work for the International Institute for Conflict Prevention and Resolution. He is a retired partner of Sutherland, Asbill & Brennan LLP.
 
 

 

Collaboration is key to success of category management at Chevron

 
At Chevron, supply chain management has profoundly benefited from the implementation of ‘category management’, which has improved decision making and project execution through better planning, collaboration and communication. This article demonstrates that the key component for the success of category management is collaboration with business partners and suppliers. GRAEME MCKELLAR, CHEVRON WITH OINDRILLA CHATTERJEE, ASHRAFUL KHAIR, LUIS RIVAS AND OMAR IDUNDUN
 
 

by GRAEME MCKELLAR, Chevron

Main points
        At Chevron, supply chain management (SCM) collaborates with business partners and suppliers to leverage and manage annual spend of over $30 billion on services and goods, with a focus on safety, reliability, efficiency and total cost of ownership (TCO).
       Planning, collaboration and communication are the catalysts of effective category management, which ensures business partners achieve their operational goals and business plans. Category management promotes effective management of suppliers and segmented spend across major categories of services and goods.
        Category planning, strategic sourcing and supplier management are then utilized to ensure safe, reliable and efficient delivery of services and goods.
 
SCM vision and mission
Our vision and mission are to elevate Chevron’s supply chain business processes and organization to world-class standards in order to deliver value and achieve a sustained competitive advantage for operating companies and the Chevron global enterprise.

Guiding principles towards world class supply chain management

Using standardized processes and technology, results are delivered through a highly competent organization. Internal and external stakeholders recognize SCM as a joint partner in our business. We measure and manage our progress through the use of category management and, most importantly, we have governance processes in place for all third-party spend.

Overview of category management

Using category management as a foundation has effectively allowed SCM to transform itself through better planning, collaboration and communication with business partners and suppliers.
Traditionally, SCM was considered an administrative and non-strategic role; it was viewed as tactical and focused mainly on requisition fulfillment and materials procurement. Suppliers were not considered to be partners and were kept at arms-length, with minimal alignment and collaboration between the company and supplier. Internally, business partners also kept SCM at ‘arms-length’ and did not actively engage them in the selection or management of suppliers. The bidding process was mainly focused on price and minimal focus was placed on safety, reliability and efficiency.
Within Chevron, SCM has evolved tremendously with the implementation of category management, which has improved decision making and project execution through better planning, collaboration and communication. In order to align with the SCM vision, mission and the guiding principles, SCM has identified in conjunction with its business partners the following three critical areas within category management:
        category planning;
        strategic sourcing; and
        supplier management and integration.

These three areas are described in the subsequent part of this article, which highlights how collaboration plays a key role in the effectiveness of each area. As mentioned above, the overall objective of category management is to improve safety, reliability, efficiency and proactively manage spend. In order to attain this objective Chevron has aligned SCM efforts with the needs of the business partners by jointly developing strategies and initiatives to support its business plans of all strategic business units (SBUs). These strategies are then shared with our suppliers in order to align our goals with theirs. SCM has standardized processes for category management which ensures company-wide consistency; however, the practical implementation through planning, collaboration and communication with business partners and suppliers is necessary to deliver the expectations of category management.

 

Category planning

Category planning is the mechanism used to determine the current state and identify initiatives for the desired state. It is a structured way to manage categories across Chevron with cross-functional category teams. Category planning consists of identifying the category structure (see Figures 1 and 2), category strategy, category overview, vision and objectives, demand and spend analysis, supply market analysis, and supplier management. It also identifies opportunities and initiatives to leverage collaboration by bridging relationships with business partners and suppliers
Figure 1 shows the Chevron Global Upstream Logistics Category Structure and Figure 2 shows the detailed structure for the Global Upstream Aviation sub-category. As can be seen in Figure 2, the sub-category for Aviation impacts 13 SBUs; therefore, in order to build an accurate category plan, its necessary to work with the business partners in each SBU to build their category plans, which then allows the overall category plan to be developed. This allows us to identify and prioritize initiatives for the next two years and also leverage spend across SBUs. The benefit of constructing category plans through direct interaction with the business partners promotes collaboration and joint accountability for effective planning and results.
Note: Detailed spend data, and number of vessels/aircraft and supplier segmentation information has not been provided due to confidentiality.
Strategic sourcing
In Strategic sourcing, rigorous methodology is followed in supplier selection and contract award through planning, collaboration and communication with business partners. In the past, price was the main focus for any bidding process; however, with the advancement of SCM in Chevron, now the main focus of any sourcing effort is based mainly on safety, reliability, efficiency and total cost of ownership (TCO). Due to this change in focus, it is critical that SCM collaborates with its business partners to understand the key requirements that need to drive the sourcing initiative.

Figure 3 provides an overview of the strategic sourcing process, which is captured in phases 1 through 3. The key deliverables identified under each phase can only be achieved through collaborative relationships with business partners, internal and external stakeholders and suppliers.

 

 


 

Early involvement with the business partner has proved to be critical in this process, as it ensures understanding and alignment of the process which delivers improved decision making and project execution.

It is important to note that even with such a rigorous and well defined process, the one element that is required to guarantee success is collaboration and continuous cycling of information, and feedback throughout each of the phases.
Supplier management and integration
The supplier management and integration (SM&I) process, as outlined in phases 4 and 5 of Figure 3, adds value by ensuring that a collaborative relationship exists between the supplier and Chevron. The first component of SM&I consists of developing a joint business plan which is used to identify the key initiatives that need to be addressed by both the supplier and Chevron. The second component is the development of a joint performance scorecard which is used to measure the performance of both the supplier and Chevron. Figure 4 includes an example of a performance scorecard.
SM&I can only be accomplished through building a strong relationship with business partners and the suppliers. The critical component to a successful SM&I is developing a truly collaborative relationship with the supplier in order for them to be empowered to deliver discretional superior performance. This will enable the supplier to identify improvements and opportunities that deliver value for Chevron. To ensure continued collaboration, a structured advanced supplier relationship must be established which will include business partners and supplier representatives from all SBUs that utilize the services and goods provided by the supplier.
It is essential to plan, collaborate and communicate with suppliers to develop and maintain a well balanced relationship with business partners at both SBU level and strategically across Chevron Global Upstream to ensure alignment and sharing of lessons learned and best practices.
Benefits of collaboration for category management
The most critical factor of category management is its successful implementation. The process is designed for a collaborative approach and, once initiated, SCM must engage its business partners and suppliers to:
         determine the current state and identify initiatives for the desired/future state;
         provide a structure to manage categories;
         identify best practices and share them globally;
         facilitate relationships;
         align goals and objectives between Chevron and its suppliers;
         assist in measurement of both Chevron and supplier performance to ensure that agreed key performance indicators are achieved if not exceeded;
         understand business objectives and identify opportunities;
         communicate and apply proven processes and tools to capitalize on opportunities;
         have committed and joint accountability for results between Chevron, its business partners and suppliers;
         focus on the entire supply chain rather than only first costs;
         expand emphasis on TCO and value chain integration opportunities;
         promote strong executive sponsorship and governance; and
         achieve value-added business benefits supported by measurable results.
Conclusion

The processes, procedures and policies in place that define category management will not ensure effective implementation. The key component for category management to be successful will be dependent on collaboration with the business partners and suppliers. ♦

Graeme McKellar
Chevron Global Upstream SCM,
Category Manager, Logistics.
Email: grrm@chevron.com

 
This article was written in conjunction with my colleague:s Oindrilla Chatterjee, Ashraful Khair, Luis Rivas and Omar Idundun.
 
 
 
 

Achieving success with collaborative negotiation is about more than just negotiation

 
The purpose of this article is to offer readers help with their collaborative negotiation activity; and also to recognise that collaborative negotiation is not in itself enough for success. MARK DARBY, ALLIANTIST
 
 

 by MARK DARBY, ALLIANTIST

Main points

        Achieving success with collaborative negotiation is about far more than the negotiation itself.

        Organisations need to be aware of and address any ‘factors that affect collaboration’ both internally and externally or success will be stifled and value destroyed.

        The way in which collaborators are identified and selected, and the process adopted by the organisation in the selection process is crucial for early success.

        What the negotiation includes, and how it is conducted with the other parties will then determine the time to success and whether the collaborators can work well together when the relationship moves into the delivery phase.

        During the selection and negotiation activity the parties need to construct an effective relationship architecture (ERA) to facilitate commitment delivery and mitigate the risk of failure or surprise.     


Just negotiating collaboratively is not enough to win together; however, without collaborative negotiation we will surely lose together. As such we also share the other aspects that contribute towards achieving success with collaborative negotiation. These include: addressing the factors that affect collaboration internally and externally; developing a method for effective partner selection before the negotiation even begins; and agreeing how best to design the relationship for effective delivery of commitments and relationship success once the negotiation concludes. 


Collaboration is easy to say, but not so easy in practice

The Oxford English Dictionary offers a simple definition of collaboration: ‘to work jointly’. I would build on that from a business perspective to describe collaboration as: ‘to work jointly towards an agreed goal or objective’. At a general level, human beings aim to be collaborative. But why is it that within and across organisations people find collaboration so difficult? Why is it that the effort expended in collaborative talks frequently shows little positive return in practice?
 

Everyone knows the forces pushing towards increased organisational collaboration continue to grow. They also know that customers want solutions not products; that the pace of change is increasing; that organisations must focus on what they do well and work with others that offer complementary assets and capabilities. In Wikinomics[1] the authors wax lyrical about the future of collaboration. It’s easy to talk about collaboration but knowing ‘how’ to do it well is a different story. In my book Alliance Brand: Fulfilling The Promise of Partnering [2] it shows organisations ‘how’ to win with partnering and alliances, where being able to collaborate is one of the seven key elements that make up an organisation’s capability to partner.

 

Factors affecting collaboration

We believe that all negotiators act with positive intent; it might not be their fault that a relationship falls apart at the time or later in life, or maybe they are just not aware that terms struck could actually cause conflict in operation. There are usually bigger factors at play, many of which will be explicit, but some of which may be implicitly driving behaviours and are therefore harder to recognise. My work with organisations both large and small suggests there is a common set of ‘factors affecting collaboration’. These contribute towards an organisation’s culture and must all be pointing in the right direction for it to be able to collaborate well internally, and must complement (not conflict with) the organisations that it wishes to work with externally (see Figure 1).

 

 

 BT Global Services (BTGS) is a great example of an organisation addressing the factors affecting collaboration as it seeks to double its revenues from partnering over the next three years. Steve Cash is General Manager for BTGS Systems Integrators & Channel Partners (SI&CP) and the person responsible for the BTGS Partner of Choice Program, the initiative that makes the partnering aspirations a reality. Steve and his team have adopted ALLIANTIST methods and are already seeing positive results; over the past 12 months BTGS has addressed about 30 factors that were affecting collaboration; both internal and external. These include:
  • clarifying its strategy, purpose and interest in the context of any future partnering activity and expecting the same of its partners (including sharing tools and methods with partners to help them make better decisions on collaborative intent with BTGS);
  • a change in leadership of BTGS where the new messages firmly emphasise collaboration (internally and externally) as a key means of achieving results;
  • making organisation structure changes to enable verticals (BTGS customer lines of business; for example, government) to collaborate alongside SI&CP teams to win more business together instead of competing for the same opportunities;
  • introducing PAM™ software to enable effective partner search, selection and negotiation for teams as well as a comprehensive governance process to ensure that the total portfolio of BTGS partners is considered for each opportunity;
  • introducing partnering training and development initiatives for all staff alongside the software tools that together equip users to collaborate more effectively — this includes C-level (CEO, COO, SVP and other senior decision makers) Partner Vision programs with selected partners and the articulation and expression of an ‘SI&CP Way’, where role modelling behaviours are rewarded and old ways of working are consigned to Room 101;[3]
  • significant changes to reward structures — whereas formerly vertical teams and SI&CP were incented to compete, now they are rewarded for collaboration — pay plans, targets and models to ensure a ‘channel neutral’ effect on meeting the customer need have been introduced; and
  • there is a range of consequences too — failure to share information early on may lead to loss of financial bonuses, and the organisation has started to make its intentions known for those who choose not to embrace the new methods and behaviours.
BTGS is now well on the way to achieving its goals because it has been prepared to invest in getting a capability to partner. It is already seeing very compelling returns from its investments. Without addressing these factors affecting collaboration, organisations have little chance of success. Next time you consider whether your organisation is capable of collaborating on an initiative, reflect on these factors. Of course, when you think about collaboration externally, that means working jointly with another party towards an agreed goal or objective. But how do we best go about finding the perfect collaborator for our project?
Effective search and selection
Picking collaborators for an important business initiative by just flicking through the yellow pages, networking over dinner or holding an e-auction alone is unlikely to offer the best answer. Organisations are becoming more sophisticated and recognise that you get what you deserve; if the selection process is transactional and one-sided, with little collaboration, it is likely the delivery will be too. So at this search and selection level, once the desired outcomes or value proposition needs are clear, negotiators need to consider two things:
  • What do you look for in the ideal partner/collaborator?
  • How best do you go about the selection exercise itself?
When thinking about selection criteria, it is easy to think about what you want from a collaborator or partner in terms of their assets, products and services — what we call the ‘technical’ criteria. What often gets missed is all the other facets of selection, many of which affect an organisation’s ability to collaborate in practice. ALLIANTIST offers a useful pneumonic to help remember effective selection characteristics. TOPSCORER is shown in table 1.
  

So having put effort in to defining the right selection criteria, will much of it get lost by having an adversarial or transactional process for selection? Buying commodities and low value / low risk products or services are ideal for e-auctions, competitive closed RFP tender processes and other transactional buying processes, but they don’t encourage collaboration. Think carefully about how you go about you selection process, especially if you need to work closely with the winning organisation afterwards. Of course, the exercise needs to be well structured with clear outcomes; be fair and transparent, and easily measurable for effective selection comparison, not least for the prospective partners to understand where they need to focus their efforts on demonstrating why they should be picked over another. It is important to also recognise that each individual will hold valuable experience to help the team make a better overall decision. There needs to be a way to harness this collaborative intelligence so that final decisions take into account everyone’s knowledge and thoughts, not just one dominant team member. With that in mind, BTGS has recently adopted PAM™ search and selection software tools that enable individuals and teams to work collaboratively to find the best partner/s for their initiatives. It is part of the PAM™ toolbox that is helping BTGS improve win probability, grow sales order values and margins, while reducing its cost of doing business.

Having considered what the organisation aims to achieve from its collaboration, then having identified the selection criteria and put in place a collaborative selection process, it will be better placed to consider the negotiation activity itself.
Negotiating collaboratively

Whilst we need to be very careful about ‘what’ we are negotiating, we should also put thought into the ‘why’ and ‘how’. An exercise we conducted at the recent IACCM EMEA conference looked to understand what people included in their negotiation activity. Although many people were familiar with thinking through their ‘must have’, ‘nice to have’ and other attributes, few did it from the other party’s perspective, and there was little consideration of ‘how’ the negotiations should be conducted. When asked about the use of negotiation support tools across organisations none of the circa 80 people in the audience could point to their availability or use. We offered up ‘POSER’, another ALLIANTIST pneumonic and a tool also available within the PAM™ software toolbox being used by BT.  

  • Prepare: being the foundation for success in any negotiation, this activity is about building our negotiation brief in readiness for future discussions.
  • Open: (in mind and approach) the mindset and style to approach a negotiation will determine how the discussions progress.
  • Share: intelligently sharing enables generation of mutually beneficial outcomes.
  • Exchange: we exchange assets and promises with the partner to meet each other’s goals and deliver the objectives.
  • Record: documenting the commitments is an essential part of helping facilitate collaboration success.
We know that the negotiation is a means to an end and just recording commitments is not enough for success; unfortunately many negotiations fail to consider how the parties might collaborate and deliver together in practice. To that end, you need to build an Effective Relationship Architecture (ERA)
Delivering on commitments needs an ERA
Putting in place a 300 page contract or leaving the agreement to a handshake with a few notes in POSER is unlikely to sustain success. My term, ‘effective relationship architecture’ or ERA, sums up what is needed for any important collaboration to deliver positive results. An ERA is established to facilitate alliance success and mitigate against the risk of failure or surprise. But one size does not fit all. ERA components and ingredients are determined by:
  • the alliance collaboration or relationship objectives;
  • each partner’s ability to execute on their promises; and
  • the relationship maturity of the parties concerned.
Figure 3 highlights the ERA matrix and its core components:
 
 
BTGS and HP put in place an ERA after I helped them realize that just because the two CEOs knew each other, it didn’t mean all the other global touch points were going to collaborate quite as well! [4] After adopting my initial ERA recommendations, it has helped their alliance to deliver over £1.5 billion of revenue in the last three years, and that continues to grow. BTGS is now expanding this concept into other SI&CP relationships as an operating methodology.
The business case for collaboration is clear
The return on investment from collaboration can be very compelling, but there is an investment required and many organisations fail to make that investment, and so do not achieve any return at all. The extra investment in collaboration should be far outweighed by the increased returns.
One other note of caution — collaboration is not always the right answer. Organisations should only invest in collaboration if the results exceed what might be achieved from a transaction; so if you can get acceptable and sustainable results from a transactional approach, go for it. This does not mean one needs to adopt adversarial behaviours for executing a transaction — being nice and reasonable is not a sin! It does mean that you shouldn’t over-invest in collaborative infrastructure, such as alliance management resources, specialist systems and so on just to buy or sell (for example) basic off-the-shelf commodities.
Conclusion
This article has expressed what it takes achieve success with collaborative negotiation — and a bit more. Just negotiating collaboratively is not enough to win together; however without collaborative negotiation we will surely lose together.
You might think all of this is common sense; you are right, it is just not common execution. Reflect back on your organisation’s successes and failures in this field and see if you can pinpoint what it was that made a difference between winning and losing. One or more of the points presented above will almost certainly have been a factor.

You don’t need organisations like ALLIANTIST or software tools like PAM™ to help you succeed. This is common sense after all. But if you do what you have always done you’ll get what you always got. And with up to 70 percent of collaborative partnering-type initiatives failing to deliver on their promises, there is clearly room for improvement. Where can you improve?

 

Mark Darby,
Principal, ALLIANTIST,
Email: mark.darby@ALLIANTIST.com.
www.ALLIANTIST.com.

Endnotes

 


[1]. Tapscott, Don and Wiliams, Anthony D Wikinomics How Mass Collaboration Changes Everything, Atlantic Books, 2006.
[2]. Darby, Mark Alliance Brand: Fulfilling the Promise of Partnering John Wiley & Sons 2006.
[3]. Room 101 was originally referenced in the George Orwell novel Nineteen Eighty-Four, and was where your worst nightmares were banished; it has since become a popular BBC television show.
[4]. While I was leading Deloitte’s UK Extended Enterprise Practice in 2004.
 
 

 

Social networking — leverage the power of the masses for your next innovation

 
Sites like Facebook and Wikipedia have elevated collaboration to a new level. How can businesses leverage this incredible phenomenon of social networking to bolster innovation? Read what leaders like P&G, Amazon and others have done to increase innovation using social networking concepts and other technology. ASHIF MAWJI, Upside Software
 
 

by ASHIF MAWJI, Upside Software

Main points
As A G Lafley, CEO of Procter & Gamble points out, collaboration is a key ingredient in a company’s arsenal to help it innovate better and faster, and proactively respond to the increased demand we face in a global and connected economy. Some key points on implementing an effective program include:
              Not all ideas should be put out on the internet for collaboration — do your due diligence and ensure only the appropriate ones are leveraged.
             Implement the right contracting framework for this model where there’s significant external collaboration.
              Involve legal early on to ensure you have the right mix of IP protection and open collaboration, which will help you to achieve effective innovation.
             Embrace technology to help you facilitate collaborative innovation while ensuring efficiency, governance and compliance with company policies and local laws.
What is social networking?
The power behind the new communication paradigm exemplified by internet sites such as Facebook, Wikipedia and YouTube is that it promotes the flow of ideas — including advice, feedback and criticism — all of it free of charge
I think that A G Lafley puts it best when he says, ‘No company today, no matter how large or how global, can innovate fast enough or big enough by itself. Collaboration — externally with consumers and customers, suppliers and business partners, and internally across business and organization boundaries — is critical.’ And Eric Schmidt, CEO of Google encapsulates the power of networking on the internet with his words: ‘Thanks to the internet, masses of people outside the boundaries of traditional hierarchies can innovate to produce content, goods and services.’
The open source phenomenon is a great illustration of social networking yielding tangible results. This is where operating systems like Linux, and customer relationship management systems like SugarCRM, are being built, enhanced and maintained by thousands, if not millions, of individuals around the world. These companies have created a business model where the software is free but where services, such as support and enhanced versions of an offering, are provided at a nominal cost to consumers.
Collaboration examples
While there are numerous examples of corporations reaping the benefits of a collaborative innovation process — including Dow Chemicals, Eli Lilly & Co., Lego and DuPont — following are some that I believe have embraced this paradigm shift and are ready for the next wave — leveraging social networking to foster innovation.
Proctor & Gamble
Proctor & Gamble (P&G) spends around US$1.7 billion a year on R&D and has a network of over 80,000 independent professionals who provide solutions to its ideas and challenges. P&G pays upwards of $5000 for solutions derived in this manner. Since adopting this new paradigm, P&G has seen its new products increase year on year from 20 percent in 2004 to 35 percent in 2007. As a result, its sales per R&D person have increased by around 40 percent in the same period.
Amazon and eBay
If you have transacted on eBay or purchased a book from Amazon, you may have contributed to this new communication paradigm simply by leaving feedback for the seller you purchased from or a review on a book you purchased. Neither eBay nor Amazon paid for your feedback, so you are what Don Tapscott, co-author of Wikinomics, refers to as a ‘prosumer’ (a consumer who is productive by adding value to a purchase he or she made).
Goldcorp Inc
In Wikinomics, there’s an excellent example of a company — Goldcorp Inc — that was on the verge of bankruptcy until its CEO, Rob McEwen, put the company’s most prized asset — its geological data — on the internet. He incented the internet audience to help locate the gold deposits at the company’s gold mine in Red Lake, Ontario by offering a total of $575,000 in prize money to those who came up with the best methods and estimates. (visit www.bullnobull.com/archive/wikinomics.html for the story). For the shareholder, $100 invested in 1993 was worth about $3000 in 2007. Stories like this are common for those who embrace this new communication phenomenon.
Do your due diligence first
Transparency versus IP protection
When an idea becomes available on the internet, it allows people to network and collaborate — it also allows them to benefit from it. Therefore, before exposing your ideas to this social network, you first need to ensure that you conduct the appropriate due diligence to determine the risks and appropriateness of using this method. The upside, however, far outweighs most confidentiality issues. Think of the potential of millions of intelligent minds collaborating and helping you to fine-tune and deliver on your idea!
From a contractual perspective, ensure that all the goods and services you supply to build your end-product are protected, so that you retain ownership, patents and intellectual property (IP) protection, including copyright and trademarks. Also consider limiting the initial participation in the development of an idea to those that have signed a non-disclosure agreement. You may not get the full involvement of people or the best ideas using this model, but it’s a good balance between protecting your IP and gaining a superior end product.
Governance and compliance
It is important to be able to enforce your contract in the jurisdictions in which you do business. Where there’s diverse supplier participation, you will find that implementing contract management processes without automation will be difficult, and ensuring compliance using manual methods will be time-consuming, not to mention extremely labor intensive.
Automation (such as contract management software) can play an important role. By implementing business rules that manage the terms and conditions, and instilling triggers that notify you when certain terms are violated or performance levels do not comply with established service level agreements, managing a global and diverse supply chain can be made simpler and more efficient.
You will also need to understand the laws and reporting requirements, and ensure the proper documentation is filed. When the-end product is derived from goods or services offered by suppliers from different countries, be aware of import/export control laws and appropriate classification of the end-product or service. It’s best to get the advice of legal and finance professionals experienced in these matters.
Technology as an enabler
For international business transactions that involve numerous parties, technology is a must. Software to handle the financial aspects; for example, enterprise resource planning, and contract and commitment lifecycle management to manage the contractual commitments and elements related to service levels, are a minimum requirement. The various stakeholders collaborating in this digital supply chain need to be constantly appraised of commitments, changes and adjustments in scheduling and financial obligations, as well as order processing. As such, real-time collaboration is necessary to ensure a seamless delivery process.

In an ideal world, the process would follow the Software+Services model in Figure 1. 

The prospect of numerous suppliers providing various elements and components of the finished goods or services requires parties to collaborate and transact on the same platform, or ensure there’s tight integration between all the systems. In this model, real-time integration is mandatory.

Are we ready for this?
Today, where technology has enabled the most complex processes and boundaries for resources have all but disappeared — embracing global collaboration is not just an innovative way of doing business, it is a necessity for survival.
So, do your due diligence to gain an understanding of the ideas that will be important for you and let the intellectual power of the world’s citizens help to bring your next idea to commercialization in the most cost-effective way. However, don’t forget the basic principles of effective contract and commitment management — that is, instill a fair and ethical win-win agreement that fosters partnership and effective collaboration— which are critical in a globally connected world.
Ashif Mawji,
President and CEO, Upside Software Inc, 
Provider of contract lifecycle management software,
Email: ask@upsidesoft.com.
Upside Software is the ‘2007 Supply & Demand Chain Executive Top 100 Company & 2006 Deloitte Fast 50 Company’. Ashif was named the Entrepreneur of the Year by the Business Development Bank of Canada in 2007 and also the 2002 Ernst & Young Entrepreneur of the Year® recipient (Prairies Region — Young Entrepreneur), ranked as Canada’s Top 40 under 40TM (2004); he is  a member of the Financial Executives International and was recently awarded the Queen’s Golden Jubilee Medal.
 
 

Service design as a basis for successful contracting

 
Service development, service production, service delivery and contracting should all be connected in a positive and mutually reinforcing cycle. Service design is a way to ensure this. KATRI REKOLA, Rekola Design Oy
 
 

by KATRI REKOLA, Rekola Design Oy 

Main points
      The ’service design’ approach to contracting involves the ’productification’ of a service and the development of a ’service guideline’.
      Productification transforms service ideas into ’products’ that are easy to sell, buy, deliver and multiply.
      The most important element of service productification is the ’service definition’, which can not only form the basis for contracts, but also help align expectations and enhance performance.
      The service guideline provides instructions to employees on how to proceed in daily service encounters and guidance with problem situations with customers. A principle objective of the service guideline is to improve internal and external communication and collaboration among employees.
      The service design and the contract must have the same intent and complementary content.
      One of the biggest challenges of the service design approach is making it an integral part of company culture and motivating service experts (individuals specialised in performing expert services) — to productify their services.
      Without a well thought-out service design, there can be no good contracts!
Service design
There is a trend among manufacturing companies to enhance their product offerings by attaching increasingly complicated services to them — and this in turn requires closer relationships with customers. As many processes between suppliers and customers, including contracting processes, become increasingly intertwined, companies must pay careful consideration when creating contracts.
The contracting process can be complicated in many knowledge-intensive business services (KIBS) and service experts often find it difficult to translate their expertise into an offering that can be sold to a customer and defined in a contract.
The service design approach addresses the situations outlined above. It is a form of proactive contracting in that its goal is to define the service clearly, accurately, concisely and exhaustively — thus defining the core of the contract with a customer, namely, the scope. Successful service design requires collaboration between various groups of employees — those in the front-line, service staff and service experts, legal staff and management.
The core of a service is its content. Complementary services add value to the customer. The two sides of a service are the value it creates (the ‘what’) and how the value is created (the ‘how’).
As mentioned, the process of making services more ‘product-like’ and tangible can be called ‘service productification’. There is no universally established term for the process, but many academics in the service field use this term, since it describes the process fairly accurately. Thus, ‘productification’ addresses the 'what', and the ’service guideline’ (akin to an operating manual in manufacturing — and discussed below) addresses the 'how'. The objective of service design (composed of service productification and the service guideline) is to improve the total quality of the service and the service experience.
The service guideline
The important elements of the service guideline follow.
  • It is unique to a company, but common to all services that contain the same elements.
  • It creates a uniform way for a supplier to produce and market all of its services.
  • It covers all customer encounters and provides instructions on how to deal with service tasks.
  • It also provides a clearly stated procedure for dealing with complaints or other problems, and understanding the responsibilities of different parties.
  • It is a great tool to differentiate a company in the marketplace. If the service guideline is well established, customers will identify its elements, such as ’every promise will be kept’.
A company’s values and mission statements are frequently difficult to interpret, or too generic to provide guidance to employees who deal with customers. The aim of the service guideline is to provide straightforward instructions about how a company’s values should be implemented with customers. It is useful as an interpreter of the 'company code' to people from different cultures and ensures that a particular productified service remains the same no matter where it is delivered, and by whom.
Problem resolution is an essential element of the service guideline; therefore, it is important that the company’s underlying philosophy be reflected in the contractual provisions related to service performance reviews and procedures, including dispute resolution. The service guideline aids internal collaboration, especially in problem situations, since it gives instructions about whom to contact and which groups of employees are needed to resolve any given problem. This, in turn, facilitates collaboration among stakeholders in the value chain and helps to create better services.
Service productification
Productification takes care of one service or service family at a time.
The service productification process defines the service in terms of:
  • what it consists of;
  • who produces it;
  • the tangible elements it contains;
  • its benefits;
  • its price;
  • where and when you can buy it; and
  • what the responsibilities are of both the service provider and the customer.
When a service has the characteristics of a product, it is easier to draft a contract and reach an agreement with the customer. The contract should protect all parties and provide clarity and confidence in the way their relationship will be managed.
Service productification brings together:
  • the capabilities of the company (its ability to deliver the service),
  • the expectations of the customer (what the customer thinks the service is), and
  • the offering of the company (what it promises to deliver).
A discrepancy between these three elements will lead to problems — so the service needs to be accurately described and a contract based on the service definition agreed by both parties.

The goals of service productification can be summed up as follows (see also, figure 1):

 

  1. Eliminate discrepancies between the proposition, the expectations and the supplier’s capability to deliver.
  2.  State competencies, knowledge and services as a structured form to make it easier to sell, buy, deliver and multiply the service.
  3. Standardize service productification.
 Service productification allows the company to simplify the contracting process by eliminating the need for many different (or customer-specific) types of contracts, therefore, it is not suitable for one-off deals. Service experts who provide and perform KIBS often consider their particular customer relationship and service to be unique, and therefore not suited to productification. However, it is often possible to standardize parts of the service offerings that are used in other transactions.
Following are the six elements of service productification.
  1. Definition
  2. Name
  3. Price
  4. Configuration and packaging
  5. Quality
  6. Intellectual property rights
As the service definition forms the basis for the productification and further development of the service, it should be accurate, clear, concise and honest. Writing the definition will expose weaknesses in the service idea or provide opportunities to further expand and differentiate the service. Having the definition in written form will also ensure that there is common understanding among those who are responsible for its success.
A good service definition can be used as the basis for a contract. Since making definitions and drawing up contracts involve several groups of people in the company, good internal communication is essential. Alignment between the definition (promise) and the contract (commitment) limits the risk of disputes over the service content — either between the company and the customer or within the company.
Example of service productification
’Company A’ produces equipment needed to manufacture washing machines. It sells this equipment to several manufacturers globally, and also provides maintenance service. Traditionally, the equipment was sold to the customer and the customer bought the maintenance service either from a local subsidiary of Company A or another local maintenance provider.
Wishing to build stronger relationships with its customers, Company A decides to focus on services to develop its offering. It creates a new service package based on preventive maintenance — involving a maintenance contract with each customer, annual fees for standard inspections and maintenance — the goal being that the equipment runs smoothly without the customer having to worry about it.
Another option is for the customer to buy the capacity of the equipment — instead of the equipment itself— as defined in a service level or similar agreement, as a service package based merely on preventive maintenance would not be likely to secure an output/capacity-based arrangement:
Service productification starts with the basic idea; and the relevant features (content, name, price, availability and delivery) are defined in the service definition, on which The contracts are based. Collaboration between the developers, the employees who deal with customers and the legal staff ensures that the goals of productification are met. All involved parties are clear about what is being produced, sold and bought.
Since Company A has maintenance staff in several countries, it is necessary to standardize their services no matter where or by whom they are delivered.
There is some confusion as to how to effectively handle customer complaints and suggestions. This is where the service guideline comes in. The company sees 'reliability and quality' as its mission and the service guideline is developed along those lines. Clear, written instructions (for example requiring the maintenance personnel to wear a uniform with Company A’s name on it, always keep their promises to customers, and forward requests to their supervisors) are given to all employees. Complaints are handled according to a defined procedure.
The result is that Company A has streamlined its service processes and created a new productified service according to the principles of service design.
Katri Rekola
PhD (econ.), Msc (Production economics)
Managing director, Rekola Design Oy
Email: Katri.Rekola@Kolumbus.fi.
Further reading
Rekola, K (2006) Product-centric Service Development: The Development Process, Tools, and Methods. Vaasa: ACTA WASAENSIA 167.
Rekola, K and Rekola, H (2003) Palvelukeskeisten järjestelmätuoteiden kehittäminen valmistavan teollisuuden yrityksissä. Helsinki: Teknova.
Rekola, K (2007) Palvelutapa teollisuuden kilpailukeinona. Helsinki: Teknova.
 
 
 

Contracting Excellence themes
The remaining themes to be explored in the first volume of Contracting Excellence follow.
 
Please be in touch with the editor or a member of the editorial panel if you have ideas you wish to pursue for any of these themes; examples or case studies you feel we should explore; or a contribution you would like considered.
 
Measurement and KPIs (February 2008) This issue will deal with the challenge of goals, measurements and incentives and their impact on behavior and performance. We will explore internal process and performance measurements as well as external (contractual) measurements, such as growth targets, service levels and the consequences of failure, and how they affect innovation, revenue growth, savings, change management.
 
Contracting with government and public sector entities (April 2008) Specific issues in public sector, international comparisons/best practice. We will highlight ways in which public sector practices offer leadership and also highlight ways that public sector contracting may inhibit value for money and project success.
 
Risk management (June 2008) The focus will be on what many consider the real purpose of contracting —managing risk. This issue will focus on creative approaches and the role of technology in enabling ‘risk as an opportunity’. Topics include prevention versus cure; assessing probability; and portfolio versus transactional risk.
 
Organization management (August 2008) This issue brings everything together— industry variations in role and reporting; impacts on performance; how to organize for new ways of contracting; relationship mapping; competency versusfunction; preparing for the future; and individual skills and their development.
 
Each edition also carries advertising opportunities, so if these interest you (or you know of
others who may be interested) please let us know. <www.iaccm.com>.

 
 

Will you help me move your job overseas?

 
This article outlines the necessities of collaborating with displaced employees whenever operations are being moved offshore. CRAIG GUARENTE, Vice President, Oracle
 
 

CRAIG GUARENTE, Vice President, Oracle

Main points
        To successfully move operations offshore, you will need the cooperation and active support of your staff to transfer procedures and know-how.
      Be clear on the reasons you are moving work offshore — be it to cut costs or to allow your local staff to concentrate on more complex tasks.
       Identify which current staff you will keep involved and informed, and develop expectations and incentives to ensure their participation to the end of the transition period.
The question in the title may seem a little off, but if you are moving your operations overseas, it’s a question you will need to ask. This article outlines the necessities of collaborating with displaced employees whenever operations are being moved offshore.
No one individual can manage a successful offshore transition and implementation without the help of others. Regardless of your influence in your company, you are going to need other people to actively participate and believe in your project. With that in mind, few topics raise more concern, emotion, and uncertainty than ‘offshoring.’ We see it in our geo political climate — the North American Free Trade Agreement(NAFTA), the Central America Free Trade Agreement (CAFTA), G8 Summit Meetings, and globalization in general have all been met with zealous protests. We can also see it in our everyday lives — you are bound to know someone whose life has been impacted by an offshoring operation — through losing a job or being moved to a new role because the old role now sits in a shared service center 5000 miles away. When it comes to offshoring, the stakes are high and can be very personal. If the transition is not completed properly, companies can go out of business and lives can be turned upside down. For an offshore transition to be successful, it is critical that all impacted parties are brought into the process.
Moving work offshore will require assistance from many different groups within your company — internal customers, facilities, human resources, tax, legal and IT, are a few of the groups that should be engaged in your project. However, probably the most important group to involve in this process is your local staff who currently perform the tasks that you will move offshore. You will need the support of the people who will be displaced by your decisions because, without their assistance, your transition will be rocky at best.
Collaborating with these employees can be quite difficult. Let’s face it, how would you react if your boss came to you and said, ‘It’s in the best interest of the company to move your current job overseas. I really need your support to make this transition successful.’ As you can imagine, not everyone would take kindly to this request.
Why engage local staff whose roles are moving offshore?
There are many reasons to take the time and effort and keep this team involved and, in some circumstances, even having them lead the offshore move.
First, your local employees are the experts in their work. No one knows the process (both documented and undocumented) like your local team. They can help you identify process pitfalls and blind spots so you can effectively manage the transition. Take a second and think of your own job. How many tasks do you perform each day that are not documented in a handbook? You’ve learned them over time and they are essential to your success. How would a person thousands of miles away take over your responsibilities if you were not there to help in the transition? More than anyone else, your current staff understand how to complete all the work that you want to move.
Understanding the goals of your offshore move
As you map out your plans to engage your staff, you should always remember the goal of your offshore transition. This will determine how you involve and motivate your staff. For example, if your company is in a growth phase, your local staff may already be over-worked. With the proliferation of additional regulations (such as Sarbanes-Oxley) many contracting organizations have been forced to take on more and more non-contracting functions. Perhaps your team has been burdened with work that is outside the scope of its core competencies. Moving work offshore can enable your local teams to focus on their primary tasks without the added weight of those non-essential tasks. Your offshore operation can be a key factor that also enables your local staff to work on more complex tasks while the more administrative work is moved away. If that is the case, make sure they know it. Don’t just communicate that goal — over-communicate it. Keep in mind that your staff will be skeptical of this move until they see the benefits.
Involve the local staff in the process of determining which tasks are to be moved offshore and which will remain local. The more they are empowered to define the processes the more effort they will put into its success. In addition, as stated above, no one is more uniquely qualified to analyze these functions than the people performing the tasks every day. No one wants to fail, especially when their success has a direct impact on their job satisfaction.
Engaging the local team in this decision-making process does not mean completely turning it over to them. There are some competing factors involved and you need to be aware of them. If you simply move all the administrative work to your offshore centers, you will eventually have turnover and motivation problems over there. You must strike a balance between the two interests.
Motivating people whose jobs will be lost
Not all offshore transitions will result in the retention of the local employees. There are times when the sole goal of moving jobs offshore is to cut costs — you want to reduce local headcount with less expensive headcount in another location. If this is your goal, then your collaboration efforts are going to be more difficult. Before you announce anything to your local staff, you must understand how you are going to retain and motivate your team to help you in this transition. Rest assured, there will be staff attrition once you announce your intentions. Some people will leave no matter how you proceed. In situations where local jobs will be lost, it is even more critical to retain a core group of local employees during a transition phase. Your goal is not to keep every employee — rather, it is to retain those employees needed to continue the local operations and assist in the transition and implementation of the remote operation. Unlike the situation where some local staff will be retained, once all of your local employees are gone, you will have lost all the expertise associated with them.
Keeping core transition staff
All offshore transitions take time. You cannot announce a move and implement it on the same day. Contracting, invoicing, shipping and technical support are all functions that cannot be disturbed. Therefore, you will need to keep a core group of local staff in place to continue your operations during the transition. Keep your current team involved and informed and they are much more likely to stay with the project through to its completion.
If your offshore transition does result in layoffs at home, make sure you are clear with your staff on what incentives are available to them should they stay through to the completion of the project. You may offer retention bonuses, project performance bonuses, job training or enhanced severance packages to those people who stay until the end and perform at a high level. Before you announce any of these options, make sure you work through all the details with your human resources and legal departments. Once you announce layoffs, people quite understandably will want to know what is going to happen to them. Give them all the options up front and in detail. The last thing they want to hear is, ‘We’ll get back to you’ or, ‘We’re working on the details’. All hands meetings, town hall meetings, and personal one-on-one sessions are all important tools to keep your staff informed and engaged.
Communicate expectations and incentives
In addition to informing your staff what is available to them, it is equally important that you are clear in what you expect from them. You are offering these incentives to your local staff in return for their active support and participation in the transition of work to your offshore location. This transition will require your local staff to do more than just their day jobs. They may be expected to create process documents, define new processes, and quite possibly even perform hands-on training with the new offshore employees. This hands-on training can be invaluable to a smooth transition, but there is a risk associated with it as well. Not everyone is able to put the personal issues aside and focus on the task of training their replacement.
Finally, understand when collaboration is not possible. A few people may not be capable of handling a transition out of a job, no matter what type of incentives are offered. These employees want your project to fail and may take actions to sabotage its success. Open lines of communication, as outlined above, will enable you to identify these issues early on in your move. It is important that you address them immediately to avoid souring the already tense atmosphere that is bound to be in place.
The saying, ‘It takes a village’, certainly applies to building successful offshore operations. While you have made the decision to move work offshore, you must continue to tap into the knowledge, talents, and skills of your local resources. An open and collaborative approach, where people clearly understand their options, will help you retain these individuals and successfully transition your operations to your new center.
Craig Guarente,
VP, Global Contract Services, Oracle USA, Inc.
Email: craig.guarente@oracle.com.
Craig is responsible for managing the contracting process and personnel servicing all lines of business. This includes license, consulting, hosting/outsourcing, subcontracting, and education sales contracting. In addition, Craig is responsible for establishing Oracle's global contracting processes. This includes working with executive management, sales, IT, and product development on global contracting automation and system solutions, ensuring compliance with Sarbanes-Oxley legislation, and assisting the divisional contracting leads in meeting their specific regional requirements. Craig also works closely with the mergers and acquisitions teams to ensure proper integration of staff and processes from acquired companies.
 
 
 

From the Frontline

 
Your Letters and Questions
 
 
Letters
To: Tim Cummins, From: Mark Hope, 30 October 2007
Collaborative contracting

Tim,

[I] agreed with most of your ideas in your recent article about Collaborative Contracting [CE Interim Bulletin, November 2007] but my comment is that the emphasis on governance is currently too high as if it is the saviour to all our contract problems. I strongly believe that we must get the pre-contract due diligence right (where applicable) and the definition and description of the services, charges etc in the contract right first if the undoubted benefits of governance are to be enjoyed.

Whilst this might be a bit of an over simplification, I am currently observing the promotion of the idea that it is impossible to get the specification right in a complex contract so don't worry too much about it and buy governance as your saviour instead. This really worries me. My view is that the bigger the deal, the more important the specifications and descriptions.
With complex deals there are more likely to be disputes about scope etc, as it is true that it is difficult to produce a perfect specification, but we really must try otherwise the disputes will occur earlier in the contract life and be big ones. No amount of governance will resolve the lack of a clear specification - only renegotiation can do that and this is something we are trying to avoid for everybody's sake. I think if we ride the governance instead of specification "wave", we as a community will live to regret it and damage our reputations.
On a more pedantic level, penalties are unenforceable under English law so can I plead that you don't use this expression. Apologies if I am teaching my grandmother to suck eggs but damages are what you get under English contract law (there are penalties under other areas of the law, e.g. speeding fines under criminal law, but no penalties under English contract law).

Regards, Mark

 

Q&A
Are RFPs a waste of time?
From Tim Cummins 12 November 2007.
A recent blog by Mark Turrell, CEO of Imaginatik, questions the value of the RFP procedures used by most large corporations. It is based on one company's experiences over a three month period during which they analyzed the outcome of the RFPs to which they responded, but reflects similar comments that we have received from IACCM members (and a few of which have been inserted into Mark's commentary).
Are the author's experiences valid? Do you follow more effective methods or RFX disciplines? Do you monitor the outcomes of the RFPs you issue? Have you found a better, or more disciplined, approach? Feedback and suggestions will be welcomed.
‘I have strong opinions on the likely success of the firms who follow the RFP approach.
52% (26 firms) projects did not proceed beyond planning phase
24% (12) pilots did not get far enough to be implemented (one took a year!)
12% (6) pilots did not convince management and the project was cancelled
12% (6) change of business priority or loss of project team left project abandoned
8% (4) programs successful implemented to some extent
RFPs are unbelievably time consuming when you have to do them properly. An average RFP takes 20 - 60 man hours to complete, depending on how much detail is required, how individual a response is needed, and whether our team needs to travel to the client to present. (For large compnaies, involving multiple functions and reviewers, this time estimate is often a major understatement).
‘For small firms (we employ 35 people - a lot more than others who might be considered competitive), this represents a lot of work. This would be worthwhile, but most RFPs go nowhere. Based on our experience, few have any buying commitment.
‘I personally believe it is unfair for large companies to put so many companies through the rigmarole of RFPs. Let's be honest - the IT department and procurement group will NOT own this once the system is bought. And the data does not lie - you will fail to achieve your end goals (unless you are in the lucky 10%).
‘Even if the buying intent is serious, vendors (and buyers) know that many RFPs are a check box game. Tick all the boxes, even if there are some suspicions that you cannot actually do what is requested, and you go to the next round (or alternatively, fail to get to the next round because the process is about due diligence - the 'winner' was already decided). So what do vendors do? They check the boxes (even though they know this means any eventual implementation will end up with problems around the tricky areas, and would prefer to confront these issues honestly and directly with the purchasing group).
‘So does the RFP process deliver what companies want?
‘What is really needed is for companies to take the time to work out what makes their needs UNIQUE. What is it about their firm, their process, their culture, their management expectations, that requires a unique response?
‘To illustrate, large, complex organizations need systems AND vendors that can handle large, complex organizations. So, if this is your biggest need, focus the RFP on that. Look for a vendor that will be around in five years, that does not rely on 2 people in a basement in Jersey City (or wherever), or alternatively has thousands of people, but looks to impose thier methodologies and culture on you. Look for someone who has explicitly and obviously done it before AND shows the versatility to repeat their success in different situations and organizational structures.
‘And call up the references! The amount of - I'm going to have to call them lazy - firms that run RFPs and do not take 30 mins to call the reference companies is frankly a disappointment. Tiny companies ALWAYS cheat on their references - they have to, as they are not big enough yet. That does not excuse your procurement team - and business buyers - from not making a couple of hours of calls. Call the references - NO EXCUSES.
‘So, on that happy note, what can we learn from this:
companies should try to avoid RFPs if they can
if you have to do an RFP, focus on what makes your needs distinct from the generic
if you have to do an RFP, call the references FIRST THING to make your review job quicker
There you go. Over to folks to go implement.’

 

 

Responses

Ingo Koehler-Bartels: Dimension Data Germany has a Bid & Proposal Managment Department in place where the more complex RFPs are answered. The biggest challenge is to qualify the RFP beforehand. I must say that:
a) To a very large extent RFPs seem to be a benchmark which has to be done in order to fulfill internal processes. The decision is often already made.
b) Many RFPs turn out to be a compilation of boiler plates. E.g. the Client is asking for Managed Services based on clauses intended for "Building/Construction Contracts" or for very unreasonnable insurance requirements. Often we get the answer "We know, the RFP does not fit - but our legal department didn´t provide anything else". Or the RFP is done be external consultants who are more active in other industries (than IT).
c) The small rest of the RFPs is asking for the right services based on the right stipulations and thus covers the interests of the issuer on the one hand and a fair "contest" for the bidder on the other.
My conculsion is that in many cases the result is anything but the right quality for the best price. RFP is a good tool in a competitive market but need a high level of attention by the customer to get the optimum out.
For the bidder it is the challenge to qualifiy very thorougly - where the realtionship to the customer is a most important aspect.
Jim Moran: Mark, I beg to differ. A properly crafted RFI, RFP or even Reverse Auction event is worth its weight in gold. I use them all the time. However, before I release one I ensure that the wants of the functional group that will benefit from the event are clearly outlined. A sound sourcing methodology is critical for success. RFP's also promote accountability and disincent back room deals for corporations. 404 compliance issues are also adressed through their use.
Jim Moran, Contracts Manager, IKON Office Solutions
Sheila Mader: I also believe that RFP's are not a waste of time. Sure we have had those that do not work out so well, but our process becomes better defined because of it. We currently have a process that includes cross functional team members, reference checks, product demonstration (pilot if possible); scored vendor presentations, lessons learned, etc. and for the majority of our projects it works.
Bob Kelly: It seems to us that Mr. Turrell's conclusion is a classic case of throwing the baby out with the bathwater. In our consulting practice we have observed poorly managed RFP processes with disappointing results although nothing on a scale represented by the statistics cited by Mr. Turrell. We have also observed well managed RFP operations with outstanding results and seen poorly managed RFP processes with bad results turn themselves around into best in class RFP operations making significantly positive contributions to sales, profits and business relationships.
To be frank we do see more problems with the RFP process on the sales side than we do on the procurement side. As Mr. Turrell's focus seems to be on the selling side, we should point out that in our experience any company that wins some or all of its business through competitive bidding and negotiated contracts MUST have a well disciplined - and yes, funded - Bid & Proposal operation. And it needs to be based on best practices in bid/no-bid decision making and accountability for results (including win rate). If a company is too small to do this well in house, there are several companies that specialize in providing this kind of best-in-class service.
An outstanding article on bid/no-bid decision making can be found in the April issue of Contract Management magazine. And there are excellent books and training courses on the subject. Bottom line: when your business model requires competitive bidding there are no excuses for not doing this and not doing it very, very well.
Bob Kelly, Advanced Contracting Strategies, LLC (www.beyondcontracting.net)
Tony Brita: In some cases, it may make perfect sense to perform a RFP (provided it is structured correctly), it really depends on the commodity and the nature of the relationship you want with the supplier. In other cases, and this happens frequently, the vendor of choice has already been determined by the business unit prior to the RFP and the RFP process is viewed merely as a compliance exercise. This I find to be a colossal waste of time and effort on both the buy and sell sides. Suppliers are savvy enough to smell this from a mile away and it creates ill will between buyers and sellers.
I have seen RFPs used because sourcing personnel simply don't have the industry/supplier knowledge or lack the requisite negotiating skills. There are clearly certain situations where it would be more cost effective and efficient to negotiate a new deal with an incumbent supplier than to move forward with a RFP process.
But many sourcing organizations don't feel confident enough to take that risk because they don't really believe that they could achieve the same results through negotiating. In some ways, sourcing organizations rely on the RFP to do their work for them.
 
 
 

Regulatory Update

 
EuroSox - how will it affect companies trading with EU companies? An overview provided by Blake Newport
 
 

The collapse of Enron and Worldcom has had a major impact upon the way that the US and the EU view their corporate governance. With the transparency and accountability of existing financial control and management systems under question, Europe reacted with a revision to the European 8th Directive on Company Law (Directive 2006/43/EC). Compliance by European and non-European companies listed in any country of the EU is mandatory.

The consultation period for the Directive was completed in 2006, and individual national implementation measures are now imminent. With content concerning education, approval and registration of persons who can be approved by Member State authorities to perform audits, what will be the impact on companies trading with or within the EU?
The new requirements, which can be viewed at http://eur-lex.europa.eu/, oblige statutory auditors or audit firms to:
        be approved in any member state;
         adhere to continuous education requirements;
      show evidence of approval through registration in a public electronic register;
         be subject to robust professional ethics: as per the code of ethics adopted by the Ethics Committee of the International Federation of Accountants.
         be independent from the audited entity;
         adhere to the International Auditing and Assurance Standards Board’s international standards on auditing;
         be subject to a system of quality assurance;
         be subject to member states' systems of investigation and sanctions;
         be subject to effective public oversight;
         be subject to procedures for appointment, dismissal, and communication between the audit firms and audited entity;
        disclose a governance statement, a description of the internal quality control system, and a statement on the effectiveness of the audit firm's administrative function;
        cooperate with the mandated audit committee in the audit and financial reporting process;
        be aware that third-country auditors who issue audit reports in relation to securities traded in the EU need to be registered in the EU — the quality of audits within the EU should not be undermined by possible poor audit quality from third-country auditors who issue audit reports in relation to securities traded in the EU; and
        be aware of a new audit regulatory committee composed of member states and chaired by a representative of the European Commission (EC)
Who will be affected?
As with all EU Directives, implementation is a national issue, however, it is likely that implementation of 2006/43/will affect:
        all EU companies that have a statutory audit (over 50 employees; and/or a balance sheet of over £2.8 million; and/or a turnover of over £5.6 million);
        overseas companies with offices in the EU or who form part of a supply chain will also need to be aware of the possible changes; and
        companies classified as public interest entities (PIEs), which is essentially any company listed on the London Stock Exchange, banks, insurance companies and their audit firms — this in turn will have implications for any company dealing with them.
Requirements
There will be clear requirements for managers to improve their internal controls with respect to management, auditing and reporting. Implementation may also require a PIE company to establish an audit committee to ensure the effectiveness of internal controls, internal audits (where applicable) and risk management systems — something that will assist in making existing processes clearer and more transparent.
Most importantly, procurement, purchasing and supply managers should have in place effective organisational control systems, fully integrated via an appropriate model into the business’s internal rules and processes. For this to be truly effective, and for purchase managers to benefit from improved efficiency throughout the company’s processes, all supply chain managers and individuals within procurement organisations, and those operating in contract management, will need to understand the rules, control systems and obligatory processes. The forthcoming Directive should not be shied away from but, rather, embraced.

Blake Newport

www.BlakeNewport.co.uk

 

 
 
 

New Rules under the UKLA to ease restrictions on JVs

 
The joint venture (JV) structure allows two or more organisations to share capital, technology and human resources in order to create a new entity with which to enter into a related business or new geographic markets. JVs are a popular means for companies to form strategic alliances, and while they may be difficult to manage and susceptible to failure, they can deliver many business benefits. GREG BROWNLEE, Blake Newport
 
 

by GREG BROWNLEE, Blake Newport

The joint venture (JV) structure allows two or more organisations to share capital, technology and human resources in order to create a new entity with which to enter into a related business or new geographic markets. JVs are a popular means for companies to form strategic alliances, and while they may be difficult to manage and susceptible to failure, they can deliver many business benefits. Recent studies place the rate of failure at anything between 30–61 percent, with the majority of large JVs running into serious financial or managerial problems within the first two years.
The Listing Rules from the UK Listing Authority (UKLA), created in 2005, led to a number of difficulties for listed companies and their partners. However, this is set to change, with the FSA’s new rules (CP182) that will have benefits not just for listed companies, but for all firms undertaking a JV with a listed company.
Key changes
First, under the original 2005 Listing Rules, the right of a partner to buy out the other company at the end of a JV term required shareholder approval. This was not practical for small JVs, in particular, largely due to the issues it raised surrounding affordability and time delays.
Key changes will include a relaxation in notifying shareholders. The UKLA has also confirmed that it will be possible for the establishment, acquisition or disposal of a JV to be treated as a transaction in the ‘ordinary course of business’ and not be liable for restrictions that reflect the six listing principles as detailed by the Financial Services Authority.
Second, as most JVs are established on a 50/50 risk and ownership ratio, both parties must agree with any decisions. A problem occurs when two partners become deadlocked, as the JV partner listed has to treat both the JV and the other JV partner as its related parties, with the consequence that many of its transactions must then be approved by the company shareholders. As a result, dealings with the JV can become difficult and incur time and costs.
Under the new Listing Rules, deadlocked situations will no longer automatically lead to the JV partner and JV itself being treated as related parties, greatly reducing the burden to parties who wish to sell. Above all, these changes will specifically help businesses that have established JVs as vehicles for their organisation, enabling them to focus on the commercial benefits that they offer, rather than on the technical issues.
Greg Brownlee, 
Managing Director of Commercial and Contract Management Consultancy,
Blake Newport.
Email: GBrownlee@BlakeNewport.co.uk,
www.blakenewport.co.uk
 
 
 
 

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(2) Contracting Excellence.

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