Contracting Excellence Magazine - Aug 2008
The key to organizational success
by TIM CUMMINS, CEO, IACCM
In the words of strategy guru Gary Hamel: ‘Sometime over the next decade, your company will be challenged to change in a way for which it has no precedent.‘ That change, he warns, will involve ‘painful restructurings’, in order to transform decision-making practices and organizational designs.
The cause of this disruptive change is networked technology and the consequent plethora of choice in how services are acquired and delivered. The result is organizational uncertainty. It is not just a matter of how to structure organizations, but there are fundamental questions over the scope of role, division of responsibilities, organizational skills and competencies, and the mix between ‘people-based’ and automated activity. And the analysis does not stop there — further choices remain in terms of both location of resources and the potential for outsourcing.
So we are confronted by a dynamic mix of factors, a confluence of choices that no manager has previously faced because many have arisen as a direct result of the networked age in which we live. It is of course important to remember that this situation is not unique to our community; it is pervasive across every organization and professional group. So the inevitable result is a battle for power. Organizational positioning is always fraught with politics, influence and perceptions of relative value. And the results of this are immediately evident as we look at the varying fortunes of our community in today’s corporate landscape.
Winners and losers
The changes around us should offer unique opportunities for our community. Organizations are becoming increasingly dependent on their ability to form the right portfolio of contracted relationships. These relationships also cross into new frontiers, both in the form they take and the geographies they embrace. As a result, the ability to select, negotiate and manage trading relationships has become a core competence.
Yet this reality is not automatically translating to an enhanced role for those in Procurement, Contract Management or Legal groups. In fact, for some it is proving threatening as they are displaced by others who appear more capable or are simply better placed within the organization.
Each day we hear new stories from our members illustrating this point. For those that are gaining power and authority there is a matching story of others who are under threat. In this issue of Contracting Excellence we will explore some of those contrasts.
Tactics versus strategy
The most important lesson that we observe is that the groups which suffer are those that remain purely tactical in their operations. While the ability to drive out cost or to close deals may offer short term relief, the change highlighted by Professor Hamel demands much more. Success – and long-term status — depend upon the ability to drive sustained process improvement, making those tactics more relevant and more effective. The groups that are gaining positive focus from executives are those that can deliver change, those that offer facts, not simply opinions.
In order to develop this role, leaders in our community must begin to take a full process-based view. They need to understand the elements of forming and managing trading relationships and start to monitor organizational effectiveness beyond the boundaries of their immediate team. This does not mean they ‘own’ each element of that process, but they must use tools and resources to monitor the pressures for change, the factors that improve contract outcomes and make their company or organization more attractive to do business with. They must be visible in assisting other functional owners to understand the pressures for change in policies, practices or resource allocations.
Many of our members remain limited in their insights to the process and therefore can themselves be victims of change. They see themselves as contributing specific tasks — and if the outcome of their efforts is not positive, it is generally perceived as someone else’s fault. For example, a minority of organizations today have responsibility for, or even insights into, both the pre-award selection, validation and negotiation of relationships and the post-award contract or performance management. This is useful in avoiding blame, but useless when it comes to demonstrating strategic importance.
This lack of information means that our community is often defensive and reactive in the face of demands for greater value. They struggle to define their contribution in terms that are meaningful to senior managers. The arguments — and their survival as a group — often depend on the belief that nasty things would happen if they were not there. Short term, this may be effective; but once the perceived threat reduces or can be handled by other means, they are rapidly dismembered.
At a time of such dramatic change, we must base our future on a more striking and more creative role. That is why IACCM has been developing tools and methods to assist our membership in making more effective assessments of their status and contribution. Leading groups are making use of the unique network and benchmarking capabilities that we offer to assess and raise their status. These range from the use of on-demand market or competitive research to a holistic capability assessment and benchmarking of skills or organizational maturity.
There is no question that we face a time of great change in organizational design and roles. That represents an opportunity or a threat. Simply working harder is not the way to fix this issue. Becoming an active participant in the networked community is offering many IACCM members the chance to exert greater control over their destiny and reduce the pain of restructuring.
This article is extracted from a paper entitled Collaboration & Innovation: Organizing To Shape Outcomes, Rather Than React To Them. Copies of this longer paper will be sent on request.
Globalisation (focusing on the broad business and functional impacts of the global networked economy and the way that this is driving the need for innovation and collaboration from sourcing, legal and contract management groups)
Organisation (focusing on the way that our role is changing and how this impacts what we do, how we do it and by whom it gets done)
Risk (the need for ‘business integrity’ and the management of ‘reputation risk’ demand new techniques for its management, including the role of measurements and automation in maintaining control and compliance, while enabling ‘controlled empowerment’)
Contract Terms & Negotiation (exploring what these changes mean to our core areas of activity - the role of contracts, the terms we use, the structure of contracts and the approaches to their negotiation and the management of relationships by both buy-side and sell-side)
What is core to your contracting function?
Today’s contracting world is getting more complex due to many factors, including globalization, outsourcing and out-tasking, requests for more integrated and collaborative relationships, and the ever-increasing speed of business in today’s networked world.
Customers with business problems are requiring individualized solutions, not just off-the-shelf products and services. Contracts are expected to do more than document revenue and provide risk management. A contract needs to be an enablement tool as well as a risk-containment tool. At Cisco, we have spent a lot of time trying to figure out how the contracts function is scaled to meet these needs in a productive and efficient manner. We believe the Sales Legal department is structured to succeed in this complex landscape, but it didn’t happen overnight. We want to share with you the steps that Cisco’s Sales Legal team took to enable us to provide contract services in this complex world.
To operate in this environment, Cisco relies on core values to define our strategy. We have the following four core values:
All of the activities in the Cisco legal and contracts functions read back onto these four core values, which have not changed in some 10 years. It is worth stressing that our goal of transparency and integrity underpins everything we do. We look to ensure in our contractual decision making that the right people at Cisco make the right decision with the right facts in front of them at the right time. The role of the Sales Legal group is to ensure we provide crisp advice to the relevant stakeholders and reflect their decision making in the contract. This is how we set our strategy. Now, let’s turn to how we organized the department to support this strategy.
Core versus context
Cisco’s legal staff has adopted a core-versus-context framework along the lines set out in Geoffrey Moore’s book Living on the Fault Line: Managing for Shareholder Value in Any Economy (HarperBusiness, 2002). Moore explains that when reallocating resources and human capital, a business can gain a competitive advantage by focusing on what is ‘core’ in the enterprise and by outsourcing ‘context’ activities. To help define how we have used the core-versus-context framework within the Cisco legal department, it is worth spending some time explaining the key tenets of our approach.
Core work is about creating market-differentiating value. It is what makes a company unique to its customers. Some companies have created their core around dimensions such as brand, product differentiation or service.
Context work is just as important, but in a different way. Context comprises the vast majority of the business operations that support the core. All companies must have context, but the key is to do context work effectively to improve productivity. Even though at the broader business level, the contracts function is arguably all context, the Sales Legal team does follow the model to focus resources on the most differentiating, customer-focused elements.
Specifically, this framework has been embraced in our contracts process with the fundamental goals being to:
Chart 1 on page 9 shows how the Cisco legal department has applied the core-versus-context framework to its activities. All Sales Legal activities can be grouped into one of four quadrants:
Context — mission critical
These are key activities over which we want to maintain control, but since they do not represent a competitive advantage, we are willing to out-task them to our trusted partners.
Context — non-mission critical
These are tasks over which we don’t need to have control and that we want to make as efficient as possible. Here is where we outsource.
Core — mission critical
We perform these tasks in-house with the majority of our resources and develop key initiatives. These activities support functions that drive Cisco’s competitive advantage.
Core — non-mission critical
These tasks contribute to a competitive advantage, so we want to maintain some control, but they are ripe for improvement through a self-service model.
Our mantra is to always focus our resources on what is core for Cisco’s business. About 85 percent of the legal department’s resources are focused on the core activities. In our view, the core legal activities support the design and sale of Cisco products and services. In contrast, the purchase and leasing of real estate is a context activity. We have more than 100 people supporting sales, two people supporting 65,000 people on human resource matters, and no one is exclusively dedicated to workplace facilities and real estate.
Chart 1 also brings with it another reflection on how we are looking to build out our department. We have developed a range of IT tools to globally support those activities that can be repeatedly carried out in the same manner. As we will describe shortly, a key part of our global contracting strategy is the effective use of tools to ensure global productivity with minimal administrative overload.
Cisco’s contracting philosophy focuses on placing key resources where our clients and customers need them. The Sales Legal team is spread across 26 cities around the globe directly supporting sales contracts. The value of a local resource is to engage directly with the local clients and customers by participating in the complex deals in the region. Local customer and client demands will, in our view, continue to require local solutions that embrace the language, law and culture of a region or country.
We support these local resources with virtual back-office teams, global tools and a disciplined process, all of which we try to make seamless to our clients and customers.
Process, policy and tools
Where we have repeatable processes — contract renewals, non-disclosure agreements, internet commerce agreements and manufacturer’s authorization forms — we embrace tools that truly enable self-service. We firmly believe that we cannot take work away from the legal function and place it on our clients. We attempt to provide our clients with effective self-service tools that empower them to do what they need to do anywhere in the world, at any time. We are successful if our clients no longer have to determine whom they need to talk to in our department and then explain what they want and follow up to ensure execution.
Likewise, we have come to the conclusion that intricate, regional policies do not work in the fast-moving global environment in which we live. Our experience has been that a detailed policy is out of date by the time it’s been reviewed by all relevant stakeholders and publicly made available. We are tending toward more umbrella policies that are sustainable in today’s world.
Finally, we have tended over the years, with our use of IT, to build enabling tools and platforms. By this, I mean the tools should not be application-specific or for one restricted purpose, but instead generic enough to be adapted to multiple needs and uses. Another goal is that all tools should be available globally. Tools and processes can provide the glue ¯ a consistent interface ¯ that joins people with different legal and business backgrounds around the world.
Here are some specific examples of tools we have deployed at the center of our sales contracting process:
Our sales contracts department aims to create a structure in which a locally placed resource focuses on the core tasks, supported by virtual teams, enabling tools and simplified processes. In this vision the local resource becomes an empowered member of a global team where access to information, the ability to act immediately to meet client and customer needs, and the available channels to engage with the rest of Cisco are not hampered by geographic constraints. Technology is the key to this world.
When we develop our tools, processes and policies, it is with the local legal resources in mind. Our goal is to continue to make the local resources more productive and more focused on the core of what matters for Cisco, and to bring to their aid a virtual team and tool set that can take away the routine, enabling them to act more quickly, deal with more complexity, and continue to increase our productivity. We see this as a competitive advantage.
Paul G. Segalini,
Resourcing — the alternatives and why you should care
IACCM regularly researches the issues exercising the minds of our global community. This research has identified managing workload as the top functional issue and work/life balance as the top personal issue. The combination of the two is not surprising as they are effectively two sides of the same coin.
Since the IACCM published its research on the state of commercial management earlier in 2008, the economic impact of the credit crunch is becoming clearer. All the signs are that the drive to ‘do more with less’ is intensifying, putting the workload and work/life balance issues into sharper relief. Working harder, maybe a bit smarter, seems to be the immediate reaction, but it will have a negative impact not only on the individuals involved but also on the results of the organisations within which they work.
This article examines alternative resourcing approaches that have the ability to provide a route to both meeting the operational and cost challenges that we all face and mapping the path to functional excellence and leadership. Commercial leaders need to consider whether they will take up this challenge, or find that it is something that is done to them due to pressures external to their organisation.
There may be a temptation for commercial professionals to view this as solely a consideration for those at a functional or departmental level. It does, however, have as much significance for the future role of individual practitioners by providing opportunities for different types of role and highlighting the real, often latent, challenge to traditional areas of expertise.
So, what are the trends, options, experiences and factors that need consideration in deciding which option, or options, are appropriate for your circumstances or provide you with the opportunity to develop your professional expertise? There is, of course, no unique formula that guarantees success in all situations. It is evident, however, that keeping the status quo is only a short-term option and moving towards a model that blends traditional and alternative resourcing is essential.
I have interviewed a number of leading exponents in the field of alternative resourcing (a full name check and acknowledgements are detailed at the end of this article). These interviews, combined with my operational and consulting experiences introducing alternative resourcing, provide a snapshot of the current leading edge thinking.
What options are there?
The concept of using temporary resources is the oldest form of alternative resourcing. This has created an image in many places that ‘bringing in a temp’ should be limited to specific instances, such as maternity leave cover.
Organisations, however, have the option to use temporary resourcing as part of their overall resourcing plan. This requires them to look at supplementing their resourcing, not only for the traditional reasons but also to anticipate their need for specific skills or additional people to address times of peak operational activity.
This requires the commercial function to have a more detailed understanding of the overall business plans of their company, be able to translate that into a dynamic view of resourcing needs and demonstrate the value of so doing.
In turn, the temporary resourcing service provider needs to be able to provide the right type of resource and with a cost/benefit profile that allows commercial organisations to use this form of alternative resourcing. In my experience, many of the service providers that have offerings of this nature do so as almost as a sideline to their core business of permanent recruitment and, therefore, fail to address the differences, sometimes subtle, in providing resources on a short-term basis.
To avoid the likely disappointing results, using a specialist service provider can provide the ability to appreciate the specific operational needs, identify suitable supplementary resources and be supportive to all parties through what can sometimes be a very short term assignment — Bob Kelly of Advanced Contracting Strategies mentioned, for instance, a high impact three-hour project.
Non-permanent resourcing works most effectively when it is used with precision to supplement core commercial capability, either with the development of the permanent resource as a key by-product of the engagement or to manage a short-term peak of activity.
Third-party expert advisor
The increasing complexity of commercial relationships combined with high levels of contracting failure, most publicly seen in, but not limited to, outsourcing and IT contracts, demands an alternative approach. Whereas there is a strong tendency to look internally and attempt to refine or fix a previous approach, a more astute approach would be to explore whether there are expertise gaps that a third-party advisor could address, fulfilling a specific requirement in a more effective manner and transferring skills and capability into the organisation.
The challenge here is not only finding the right third-party advisor, but also aligning their interests with the needs of the particular project or deal. The method by which a third party is engaged, and how they are rewarded, has a direct effect on their behaviour and the business results. This, combined with more mature offerings from the service providers, such as the governance offerings led by Claude Marais at TPI , provides the organisation with the ability to better accelerate business effectiveness and utilise internal resource.
Aggregators provide a buy-side service that offers significant benefits by leveraging an increased level of spend in specific indirect spend categories. This can provide appreciable cost benefits. Possibly more importantly, it enables the purchasing organisation to focus on the areas that are critical to the success of their company.
Whereas there are regulatory or legal issues associated with the participation in or use of such services these primarily affect public sector organisations, there is significant benefit for most other medium to large companies in using aggregators. The biggest barrier for these companies is the challenge to a purchasing organisation to ‘let go’ and trust a third party to work in their best interests on what Ian Cook of Supply Clusters calls the ‘unimportant many’. Leading edge aggregators like Supply Clusters and Corporate United provide a route to optimising expenditure while focusing resources on the ‘important few’.
Alternative resourcing approaches can include creative methods to achieve operational and cost flexibility while keeping the approach in-house. This provides the organisation with the ability to test and refine the methodology based on experience or changing circumstances without needing to unpick or modify contracts with third-party providers.
Craig Guarente’s innovative deployment of a centre of excellence and shared service centre approach for Oracle’s global contract services organisation started with the expectation that a facility in Romania would provide global 24x7 support. This developed into an approach utilising centres in Romania, Costa Rica, Malaysia, the Philippines and Australia that better manage time zones and business cultural issues, while still delivering on the efficiency objectives contained within the original vision. It is clear that Oracle’s measured approach has strengthened its resourcing strategy implementation and the overall performance of their contract services organisation.
The outsourcing industry in legal and contract management services is relatively young compared with other sectors like IT, finance and HR. There are, however, substantial service offerings that may have at their roots in labour cost arbitrage, but which have developed into more strategic offerings reflecting the overall evolution of the outsourcing marketplace.
Legal services providers like Pontus Global, Pangea3 and UnitedLex, who also provide contract management offerings, apply technology and processes to enable commercial organisations to deliver in ways they otherwise could not, and certainly not within the cost envelope achievable through traditional outsourcing.
There are also interesting developments building on process outsourcing to providing end-to-end solutions. Steve Sopko of UnitedLex has done some notable work in this space utilising IACCM’s Contracting Capability Maturity Model. By looking at the entire contracting life-cycle, understanding how the various functions involved connect, overlap or duplicate, provides the best way to achieve substantial opportunities to improve performance and, in Steve’s experience, has made the funding easier for the necessary automation and services.
The ultimate in alternative resourcing is establishing systems and processes that dramatically change the nature and level of a commercial organisation’s involvement in certain types of transaction. Moving away from an insistence that every transaction should have some form of manual review and involvement regardless of the strategic value or purpose of the transaction can re-orientate the commercial function both to use its resources more effectively and to positively change its perspective and image within a company.
A guide to using these options
These possible solutions are, of course, not mutually exclusive. The ideal solution for any given organisation is likely to involve a combination of approaches. Following are a number of fundamental questions to guide you through the application of these options to best effect:
Why are you doing this?
To date, cost is the number 1 reason for commercial functions to establish alternative resourcing. This is, on one hand, understandable. Cost pressures focus the mind and non-traditional solutions that can maintain or even improve service levels that need to be assessed. On the other hand, reacting to a cost trigger and only considering the cost dimension risks disempowering whoever is driving the future of the commercial function by leading to an immediate solution of doing the same thing, but less expensively, rather than re-assessing an re-inventing to produce an optimal operational solution with a clear path forward.
The most successful approaches happily embrace cost benefits and frequently use cost drivers as the ‘burning platform’ for change. At their core, however, they have a clear strategic vision of the commercial function and its service delivery model. This vision employs alternative resourcing as an essential ingredient rather than the answer to a challenging financial situation.
Are you ready to do this?
There are three dimensions of readiness that need to be achieved. Failure on any of these dimensions will either greatly limit the benefits of alternative resourcing or nullify them completely. Consulting People Ltd., experts in culture change and team dynamics, describe these dimensions as Technical/Professional, Managerial/Rational and Systemic/Cultural.
At the Technical/Professional dimension, considerations include the status of processes and tools. My observation is that commercial professionals still occupy a space where their personal toolkit, mostly contained on their notebook’s hard drive, is still highly valued. Thorough processes underpinned by automation are still the exception. (Think about the negotiation process that you use. Is it one that is used by cross-functional teams consistently from deal to deal or your personal approach that you have developed and has served you well in your career?) They are, however, on the critical path to leveraging the benefit of alternative resourcing.
At the Managerial/Rational dimension, considerations include the management approach to the functional role, the commercial professionals within the organisation, and the day-to-day operations. Strategic alignment and a clear vision of how the commercial function is a positive differentiator in the marketplace are indicators of success.
At the Systemic/Cultural dimension, considerations include individual and organisational flexibility and a willingness to embrace new delivery methods, to develop and learn from new approaches.
Organisations face challenges in all three dimensions. This does not automatically mean that alternative resourcing should not be attempted. Entering the process fully aware of the difficulties involved provides the best opportunity for success. A usual reaction is to try and resolve all issues by focusing simplistically on one dimension to the exclusion of the other two — ‘If we get the processes right, everything else will follow’. Addressing all three dimensions, which is far more challenging, enables positive change in the medium- to long-term.
How do you do this?
The starting point is the realisation that the commercial and resourcing models that have served us well historically are coming to the end of their life and we need to establish an alternative model to serve us beyond the short-term. Successful implementations, like Oracle’s in-house captive global resourcing model, started with a vision of a better way to deliver commercial service aligned with, and in support of, the company’s overall strategic objectives.
Having established a vision, it is then necessary to blueprint the organisation. The IACCM’s generic blueprint is shown in Table 1:
Understanding each aspect of this blueprint will lead to a resourcing approach that defines the:
• type of individuals who are required;
• locations of these individuals;
• processes that are needed;
• tools that are needed;
• third-party relationships that need to be established;
• organisational and operational interfaces; and
• processes for maintaining corporate alignment and support.
• automation-enabling performance metrics on dimensions like time and variations from standard provisions;
• non-commercial functions being empowered to execute agreements within specified parameters;
• resources being located in a different geography and time zone; and
• certain functions no longer being performed in-house.
These may not necessarily appear to be radical or novel, but the reaction to them within an organisation can be intense and strongly negative, both from the commercial function and from those functions that are supported by commercial.
Many of the alternative resourcing service providers note an irony: many commercial functions that resist considering different resource models are, at the same time, experts in the buying or selling of outsourcing services, such as HR, IT and telecommunication operational services. Such expertise, of course, requires a keen understanding of organisational needs and options to ensure an effective purchase or sale. It is, however, exceptional for the same perspective to be self-applied by the commercial function.
The options available mean that alternative resourcing can provide some exciting and beneficial solutions as part of a journey to excellence. Commercial organisations that understand the value they can deliver by focusing on key commercial contributions, rather than an ability to hand-craft a detailed multi-page compliance statement, will put in place a resourcing model that focuses the in-house commercial expertise on these key commercial contributions and supplement them with technology and third-party providers to cover all other areas.
Commercial functions that do not take the steps themselves will find others will do it for them. This can take many forms, ranging from a CFO or COO deciding that whole-scale outsourcing is appropriate, other functions absorbing commercial responsibilities, to the commercial function being reduced to a compliance, box ticking role providing little added value.
What does this mean to a commercial professional?
The development of alternative resourcing provides commercial professionals with two major considerations.
First, an understanding of where their value lies: staying within a comfort zone of contract drafting and detailed compliance work is unlikely to provide a career path beyond the medium term.
Second, the possibility of working as part of an alternative resourcing solution: for instance the prevalence of interim managers who work on a contract for a defined period, say three to six months to address a particular business issue. This, combined with the possibility of part-time working, is providing a new generation of professionals with the ability to create a new work/life balance dynamic.
Where is this going?
The unanimous view among the service providers is that the die has been cast. Alternative resourcing is not a temporary phenomenon after which we’ll go back to more traditional organisational structures. Their sense is that there will be refinements and improvements to the various service offerings, new technological underpinnings and better methods of implementation that ensure that services are seamless and improved. This may not be a surprising viewpoint given that it is in their interests that their vision of the future happens.
This perspective is not, however, simply self-serving. Operational leaders are realising that the intersection of technology and global resourcing provides the capability to support a more effective commercial function. The experience from other functions — like HR and IT — that have been involved in alternative delivery models for many years, teaches us that this is a long-term approach that will need to be refined and re-invented over time rather than being discarded because it may currently have some shortcomings or uncertainties, and that waiting for everything to be clear carries greater dangers than taking action now.
I close by expressing my appreciation of the wide range of experts who kindly agreed to be interviewed and contribute their expert perspective and experience. During one of my interviews, the discussion triggered a memory of the opening passage of a book that I had recently read:
‘Here is Edward Bear coming downstairs now, bump, bump, bump, on the back of his head, behind Christopher Robin. It is, as far as he knows, the only way of coming downstairs, but sometimes he feels that there really is another way, if only he could stop bumping for a moment and think of it.’
This quote from A A Milne’s Winnie The Pooh, beloved by my daughter (and me, I freely admit), captures the feeling of many professionals as they go about their day-to-day activities.
The good news is that whereas specific experiences and some service offerings demonstrate a high level of maturity, overall we are at the early stages of commercial and legal functions embracing and utilising alternative resourcing. The opportunity here is huge.
Contracting excellence with technology
AMR Research finds the average business has contracts for 85 per cent of their total customers and 55 per cent of their total suppliers. Most of these business contracts are stored in filing cabinets, compact disks, and personal hard drives located in sales, legal or procurement departments. The results of this highly fragmented business process are duplicate contracts at various prices, too much or too little inventory and wrong completion dates. The organizational risk posed by a decentralized, multi-functional and disparate CM process often goes ignored by companies. This article articulates an organization’s CM value, CM business process requirements, technologies that assist in closing the gap, and the calculation of the technology return on investment.
Income statement and balance sheet value
CM is the business process associated with a documented agreement of two or more parties. CM typically resides in the three functions of sales, legal and procurement. The management of contracts includes a contract repository, contract authoring and approval work flows, contract language and standardized terms, and the identification and tracking of the risk and liability of each contract. Risk-aware, performance-driven organizations understand the immediate value that comes from using CM technologies to improve product and service availability, reduce costs, and lower risks through a more holistic view of CM that spans the balance sheet and income statement.
Our research indicates that organizations are sharpening their focus on the availability and costs of materials that support revenue and working capital in three major areas (see Figure 1):
Companies report that linking these three areas to the income statement and balance sheet not only delivers value, but aligns customer relationships to the internal organization and extends into supplier relationships. The linked value is displayed in terms of pure numbers: the revenue, costs, inventory, and risk factors that come from aligning the contractual elements. The success in alignment is based on the current and future economic value derived. When done properly using CM and other business-process-related technologies the entire CM process mitigates potential risk areas by exposing the elements that are not in alignment or that create gaps.
A $7 billion discrete manufacturer found it had multiple contracts for the same customer based on different sales regions across one country. The customer did not know it had three different contracts and was charged three different prices for the same product and service. The discrete manufacturer consolidated the three contracts to one thereby reducing inventories and reducing their potential liabilities by 78 per cent. The VP of Sales noted, ‘Without an automated workflow provided by our CM vendor we were at risk of $1.4 million of excess inventory. ’
Business functions gain
The business functions that contribute to and gain the most from CM technologies are sales, supply management, and legal services.
Sales gains value by providing customer contracts with tangible, flexible requirements for revenue recognition. When some terms of the contract are not met, the customer can hold off payment or even walk away from the agreement. For these reasons, it’s in the sales organization’s best interests to not only use CM technologies, but also drive the requirements through service-level agreements (SLAs) to the rest of the organization and its suppliers. A tightly-knit contract cycle from revenue to supply enhances the ability to make the right decisions.
Example: A $2 billion discrete manufacturer introduced a CM product into its sales organization to improve the contract cycle time and standardize customer contracts. The organization mapped out its business process to the new CM technology resulting in immediate work flow improvements. Once effective training was implemented for users, the organization improved margins by 3 per cent and reduced the time to client signature by nine weeks. This resulted in an immediate enhancement to revenue and margin.
A recent AMR Research study shows that CM will be one of the largest areas of technology spending for supply management in 2008. This makes sense as companies, now more than ever, need a way to track their customer requirements via flow-down clauses, ensure compliance, and mitigate risk in their supply base. Supply management needs not only a repository, but authoring, workflow and compliance monitoring to ensure success.
CM technology is an engine that provides supply management efforts with the following:
Example: A $5 billion high-tech company’s supply management organization used its CM technology to stop an insistent supplier’s proposed cost increase. The commodity manager segmented the contract by forecast, current and future contracted costs, inventory liabilities and capacity requirements. When the totals were calculated, the supplier was put on notice it had not fulfilled half of the contract obligations, including carrying inventory as well as the reduction of costs based on completed innovative process changes. The commodity manager not only stopped a proposed cost increase, but also reduced them because of the unmet contractual requirements.
Legal services is the contract engine within many organizations, touching all contracts from sales to supply. It is also the sanity check and final approver, protecting the assets of the firm if litigation is ever required. Verifying that risk mitigation is identified within contract clauses, it also serves as the checkpoint for finance. All aspects of authoring, repository, compliance and workflow in contract lifecycle management are required by legal.
Example: With its CM application, a US health insurance company found it could tie its contracts with customers directly into its network of employees and doctors in full compliance with all requirements across its ecosystem. This connection allowed the health insurance provider to offer the services required by its customers and employees as well as capture and analyze the costs and assist in liability planning across the ecosystem of payers, providers and patients.
Technologies that close the gaps
Technology vendors that provide CM products are AEC Soft, Ariba, Bravo Solution, CMA Contiki, Ecteon, Emptoris, Finetooth, Iasta, I-many, Lawson, Nextance (Versata), Oracle, SAP, Selectica, SpringCM, Symfact, and Upside Software. Although they all offer CM products, each company provides technology that is slightly different in approach. Still, their products provide visibility into trading-partner requirements and the risk and exposure for each enterprise.
Each provider has expertise that can be validated by current customer use. Companies considering CM products should speak to the reference customers and ask the reference about the value derived from the product including partnership risk reduction, improved visibility and ROI.
Consider a $24 billion discrete manufacturer’s experience:
‘Prior to using a CM product, we were in yearly litigation disputes, held our contracts in hundreds of filing cabinets around the world, and had no concrete idea of our contract value—whether or not we were over-exposed or going to run into a problem. We had no clue about the extension of our business to our partners.’
The company was experiencing strategic risk by not optimizing CM across its internal stakeholders. But after it implemented a CM application globally over 18 months, the manufacturer achieved 220 per cent ROI across the company, while improving contract cycle time by 68 per cent and reducing litigation cases by 80 per cent.
ROI of CM technology
CM technology provides an integrated, collaborative platform for ensuring reliable supply and reduction of risk for the customer, enterprise and supplier. The value is obvious in two measures: risk mitigation and ROI.
For CM, handling risk is straightforward: use the technology to reduce or remove factors that increase its effects. Without CM technology, risk factors can multiply.
Risk value can be calculated by multiplying the probability of risk and its impact (see Figure 2). This model can also be useful for communicating the value of contract lifecycle management to stakeholders, with company contracts reviewed against it to expose gaps.
As part of the selling process, the technology vendor typically calculates ROI. This then becomes the point of reference for the technology adoption and enablement across the enterprise. It’s also the cornerstone for measurement of success. Enterprises should ensure key elements are included in the ROI analysis (see Table 1). If the elements are not known, they should be estimated.
Example: An $8 billion High Tech chief purchasing office (CPO) needed CM technology because, as he put it, ‘My business process was fragmented and not under management. I knew that technology would provide a consistent work flow and repository. It was just up to my team and me to choose the right technology and achieve an immediate ROI.’ The CPO and his team chose a buy-side only technology product that was: quick and easy to install; streamlined their process by removing 31 days in the contract review process; implemented standard contracts based on supplier, product and business requirements; and reduced product risk exposure by 48 per cent.
Can you risk NOT using CM Technology?
Clearly, the advantages brought by CM functionality are numerous and spread across the organization and ecosystem of customers and suppliers. An organization’s financials are critical to success, but so is mitigating the risk of higher costs, too much inventory and unknown long-term financial liabilities. Do you know where your company’s liabilities are headed, short- and long-term? Do you know what is happening with your customers and suppliers? Contracts are an excellent way to monitor the availability, cost and liabilities of your trading partnerships. Can your organization risk NOT using CM technology?
Mickey North Rizza,
Crossing the contractual chasm: using contract management automation to improve organizational relationships
Working together through contracts
What organization couldn’t benefit from working more collaboratively? Team-building exercises, off-site meetings, task forces are all aimed and building better relationships. Does contract management automation provide the ice-breaker to help bridge the chasm between internal groups?
This suggestion may be surprising to some. The word ‘automation’ often has a sterile, impersonal connotation. However, the case of contract management, there are numerous examples where automation enables a new level of visibility and collaboration between once disparate functional groups, such as legal, procurement, sales and IT. In short, contract management automation tools are proving that it’s possible to build and foster relationships with an eye on performing contracting objectives for many organizations.
Building the business case
Research from independent analysts and organizations — such as the IACCM — on the benefits of contract management automation have made the task of building a sound business case for contract management solutions fairly straightforward, taking into account contract types, contract volumes, and organizational scope.
The drivers for contract management automation are many and varied, and usually depend primarily on the most pressing ‘deck fire’ threatening to damage or, in the worst case, sink the ship. A recent joint survey conducted by IACCM and Ariba titled Contract Management Automation: Legal’s Perspective and Roleidentified ‘minimizing risk,’ followed closely by ‘managing sales contracts’ and ‘managing procurement contracts,’ as the three leading reasons behind starting a contract management initiative.
The business case for automating procurement contracting hinges on optimizing and improving compliance with existing contract terms to avoid missed savings opportunities. The Aberdeen Group pegs the cost of poor contract compliance at US$153 billion annually.
Automation of sales contracting processes improves customer relationships and expedites contracting negotiation and cycle times, resulting in revenue increases of between 1 and 2 per cent, according to Aberdeen research.
Meanwhile, programs led by contracting, legal, and finance groups can be shown to have a marked impact on minimizing risks, both regulatory and organizational. In addition to these, improved visibility, process standardization, and performance management capabilities deliver numerous additional benefits, including better contract renewals, realized discounts and rebates, and improvements in resource efficiency.
While these are fairly obvious based on the functional area leading the charge for automation, what many don’t consider is the substantial benefits from the heightened participation of groups such as engineering or customer support, which have traditionally been strangers to the contract area, into the collaborative process of contract management. Just as contracting professionals lament the lack of clear, repeatable processes and guidelines in a contract process, stakeholders throughout the company similarly suffer from the inability to control what gets into the final contract. Through working more collaboratively and strategically, automation often results in better relationships, not only between the functional procurement, sales and contracting groups, but in other areas of the organization which previously had little to no interaction.
The organizational benefits of contract automation
In order to understand how relationships can be improved in traditionally distant areas of the organization, we must first examine the benefits that contract automation delivers.
The first area of the contract lifecycle that automation addresses takes place before the contract comes into existence — the request for a contract. I’ve regularly seen the contract request function to be the most widely-deployed of all contracting functions made available to virtually everyone in the organization, as it can be for any type of agreement — ranging from a complex outsourcing agreement to a standard non-disclosure agreement. Not everyone in the organization, for example, will actively negotiate or sign-off on a customer contract, but anyone with the knowledge of a potential deal can log a contract request in order to align the documents, processes and resources required to draft, negotiate, and execute the contract.
Once submitted, the real need for collaboration is evident. Budget holders, legal, finance, requestors and others must be notified of the request and its details. Subsequently, when the request has been approved, the contract must be vetted and authored. The contract creation process can leverage pre-constructed clauses consisting of approved legal language. These clause libraries broaden and empower the functional areas of the company to create contracts that legal can approve on an exception basis — reviewing only those documents containing non-approved language. As a result, legal can focus on more strategic initiatives.
Negotiation of contractual terms with trading partners according to a pre-defined process can be permitted to include not only those internal stakeholders requiring involvement in the process (often well beyond the functional procurement or sales functional area), but can be extended to strategic suppliers and customers, where necessary, who can be given direct, limited access to the contract management solution, thus expediting contracting cycle times. Stakeholders are notified when and where workflow-driven tasks are required in the process while leaving a trackable, enforceable audit trail of activities.
Once executed, contracts and all associated attachments and documents are stored in an electronic repository that is fully searchable and reportable. Again, interested parties throughout the organization can be notified when commitments and milestones are coming due, as well as when contracts are expiring and are due for renewal. The result is total visibility and management of the contract lifecycle — and possibly a new friend along the way.
These tools allow the contracting process to reach throughout the organization as is necessary. With access to the system, stakeholders beyond the contracting group can have visibility into an expedited, consistent contracting cycle. In fact, an IACCM study found faster cycle times to the tune of six weeks for companies in the top quartile versus 26 weeks for those in the bottom quartile. To further illustrate the value that automation can deliver, 75 per cent of those in the top quartile leveraged contract management automation tools versus 0 per cent of those in the bottom.
Organizational benefits of contract management in action
How does contract management automation benefit organizational relationships in the real world? And how have some peer organizations measured their success? Following, on page 16, are several real-world practical implications based on my experience.
Improving organizational relationships is not a high-ranking objective of contract management automation tools, nor should it be. The entire company circling to engage in a round of ‘Cumbaya’ may be a stretch. However, there are real benefits in this area in addition to improved compliance, faster cycle times that should not be ignored when building your business plan. Think beyond existing organizational barriers that constrain your current contracting processes. Contract management automation can open new doors throughout the organization resulting, in benefits that may surprise you.
Senior Product Marketing Manager,
Ariba Contract Management, Ariba Inc,
Texas Children’s Hospital case study ANGELIA TUCKER Manager, Contracts Administration, Texas Children’s Hospital
Our contract management solution has been most effective and, as a result, Texas Children’s Leadership has recognized and celebrated the value contracts administration brings to the organization. With the development of standard and preferred contract language, visibility to contract workflow, easy access to historical documents, and clear electronic approval guidelines, the Legal department and Contracts Administration agreed to increase Contracts Administration’s negotiation and approval authority. We would not have received the buy-in of the Legal department and Texas Children’s Leadership without the visibility created by our contract management solution.
The ability to report contract metrics has been essential to the buy-in of Texas Children’s Leadership; the proof is in the numbers. Within 12 months of implementation, we received 1021 contract requests, representing transactions in excess of a quarter billion dollars.
Since implementation, we have established a contract review and approval process owner, created a single point of entry for contract initiation and review, created the ability to track contract status throughout the process, developed clear timelines for review, created the ability to retrieve copies of fully-executed contracts, defined dedicated contract specialist roles and drafted standard contract templates and preferred language. These new processes are by no means static. As an organization, we are constantly discussing new and more efficient workflow measures, and with the use of Ariba we can actually tie our production numbers back to illustrate future more efficient workflow processes.
In my years of experience working in Contracts Administration and Compliance, I have never had such a positive and productive working relationship with an in-house counsel department, and I attribute much of that to the automated contract process. The Legal department is able to focus on specific provisions in the contracts, while Contracts Administration is able to focus on daily contract management, including but not limited to RFIs, RFPs, contract negotiation, review, drafting and termination.
Most impressive is that our robust contract management solution has been recognized and heralded by the Joint Commission, which is national hospital accrediting agency. Our ability to quickly search and report on specific clinical agreements on demand during a recent unannounced survey received a great deal of positive feedback from leadership. A prior ‘mock’ Joint Commission survey report stated, ‘This is a best-in-class contracts process; we haven’t seen anything like this — anywhere’. And we’ve only been live for 17 months!
In July, the President of IACCM, Tim Cummins, took time out with his son Ritchie to tour the Inca ruins in Peru. It was hard to select one out of 300 amazing shots and, on request, Tim will share more photos of the ruins and crop terracing at the Sacred Valley and Machu Pichu, local village snaps, magnificent architectural buildings, and glittering church interiors. Email Suzanne Birch at IACCM Resourcing for a selection. All pictures are copyright Tim Cummins.
The evolution of procurement: How CPOs can drive real competitive advantage, à la Darwin
by PIERRE MITCHELL The Hackett Group
Over the last few years, procurement organizations have been facing a confluence of five major trends that have created what might be called ‘procurement’s perfect storm’.
Volatile commodity markets, tight financial markets and cautious consumers are indeed making their influence felt along supply chains. In addition, environmental issues, product safety incidents, critical part shortages, ethics violations and other supply risks obviously have a negative effect on companies’ reputations and business fortunes.
So, are CPOs sensing these changes and preparing for them? Unfortunately not, according to 2020 Vision: Delivering on the Evolving Value Proposition of Procurement — the Hackett Group’s latest research study drawing from its ongoing benchmarking of procurement organizations at Global 1000 companies.
There’s an old adage that says ‘nothing fails like success’, and most procurement organizations have been happy to simply deliver value by riding the deflationary price environment to meet cost savings targets. Our research shows that the return on investment (ROI) generated by a world-class procurement organization (defined as one that delivers top-quartile performance across a wide range of effectiveness and efficiency metrics) is a compelling 700 per cent, and even typical companies in the study deliver a median ROI of 280 per cent — an almost threefold return on every dollar spent. (This figure is calculated by dividing annual incremental cost savings by the annual cost of procurement processes.)
However, the most successful procurement organizations saw the ‘end of the runway’ of price-centric savings years ago and began re-tooling themselves to take a broader view of the risks and returns of managing global supply properly. The less successful ones are now in an unenviable position of explaining to management why their gross savings numbers (that is, only favorable price variances) are being reported while the firms’ total purchased costs are skyrocketing (for example, from commodities relying on fuel).
If procurement is going to transcend its one-trick-pony status of creating value by beating down purchased costs, it will need all the help it can get. This includes working with corporate contracting, legal, and/or risk management groups to similarly expand the role of contracts from blunt instruments of risk reduction to tangible methods of unlocking value.
Charting a new course
Virtually every procurement organization we have studied evolves its value proposition through five major stages (shown in Figure 1 on page 18) that starts, at the foundation, with addressing business continuity issues by assuring on-time delivery of quality goods and services, and moves through tactical sourcing and transactional purchasing and expediting.
Procurement organizations move up the value chain to focus on reducing first purchased costs, then total supply costs. The former is usually done through cross-functional strategic sourcing teams led by procurement and organized around supply markets. Unfortunately, rather than being true cross-functional supply teams that are extended out to suppliers to reduce overall lifecycle costs, they tend to get implemented as ’drive-by sourcing events’ which then throw the contracts back office and operations groups to figure out how to implement them (see Figure 2).
The real ‘tipping point’ occurs in stages 4 and 5 of the evolutionary model, and this is where world-class firms are primarily focused. While the first three stages of the model are supply-centric, the final two shift procurement’s focus more deeply on to customers — both internal and external. This helps procurement gain the voice of the customer and ‘assurance of relationship’ from the budget owners rather than just looking for assurance of supply. This helps procurement shape both consumption and supply drivers in order to help the broader organization gain more value from its spend.
This is much more than a cursory ‘stakeholder management’ process in a traditional sourcing methodology. Rather, it is about making sure that spend owners are getting what they need from both suppliers andprocurement as a professional services organization. It also tends to be the inflection point at which procurement no longer has to aggressively sell itself, but instead has the business knocking at its door for help in meeting its objectives. At the final stage — value management — the CPO’s agenda should be in lockstep with that of the CEO and CFO (innovation, growth, sustainability, predictability, and so on) and there should be no parallel measurement system for procurement that’s different from that of the enterprise.
This gets us back to the idea of unlocking value. To unlock value, you have to first define value. If the economic definition of value is utility divided by cost, then procurement’s goal of maximizing supplier spend value should be done by either reducing spend magnitude or increasing the utility of supplier spending to support business objectives. While the first four stages focus on reducing spend magnitude, increasing the utility of supplier spending is where the strategic linkages occur, such as:
For example, Procter & Gamble, with its ‘Connect and Develop’ program, increased the proportion of its procurement innovations coming from outside the company from 15 per cent in 2000 to 42 per cent in 2007. And, arguably, if General Motors had invested R&D dollars with its suppliers to advance battery technology in the 1990s, or even outright licensed/bought the fuel cell technology available at the time, its now-defunct EV-1 electric car program could have pushed GM to a leadership position in the current red-hot ‘green vehicle’ market.
These are just some of the platforms that can be used to elevate procurement’s role and fund required capabilities such as improved market intelligence, supply performance measurement, knowledge management, and of course, contract management (CM).
In a presentation titled ‘Reshaping Procurement’ that I gave at the IACCM Americas 2008 conference in April this year, I detailed specific ways in which CM helps support the procurement value evolution from one stage to the next. They’re too numerous to list in detail here, but focused primarily on contract visibility, commitments analysis for spend/supply planning, performance monitoring (internally and with suppliers), demand/customer/specification management, and support of the strategic elements cited above.
Yet, as much as procurement may struggle to improve its commercial toolbox, the more difficult and fundamental change is to apply value management not just to the overall business, but to procurement’s own ‘services business’. There is a certain natural psychosis at work here. On one hand, to a forward-thinking supply professional, every business process/function and its associated resources (labor, technology and so on) is a supply market that can have sourcing principles applied to it, and thereby it should need procurement’s help. On the other hand, the most progressive organizations view procurement as a process, and not a department to grow headcount and power. This also goes for CM and is often evidenced when a question such as ‘Where should CM report to?’ gets asked. World-class firms do not spend time debating how the hierarchy is drawn, but rather look to aggressively standardize (without destroying value), automate, and then either push the processes to the ‘end user‘ or to a specialized provider, whether to an external supplier or to itself (for example, via a center of excellence). In other words, to them, the biggest cost is the opportunity cost of wasting time on low value activities while money is on the table ready for the taking at higher levels of value delivery.
This is analogous with the mass democratization of quality management processes within firms. It is already being seen in ‘hands-free’ transactional purchasing, and also now in the realm of CM where end-users can be guided by expert-systems self-service systems that enable flexible assembly of appropriate contract clauses into the appropriate ‘system-of-record’ for contracts. That system will then also feed the critical downstream ‘systems-of-process’ and ‘systems-of-decision’ that will help to transform contract data into contract intelligence.
This process of mass democratization is a bit of an unnatural act for procurement — or any similar function. In fact, this is why there’s a naturally occurring higher turnover at world-class procurement organizations versus their peers. It also requires, displeasing as it may sound to some CPOs, running procurement like a management consulting or equivalent business. As such, it requires relationship managers to use CRM best practices internally and to clinically assemble supply management services that serve the budget owners rather than procurement. This is increasingly being coordinated with other functions under a common ‘business services delivery model’ run by progressive shared services organizations that do as much transformation work as they do transactional work. It results in clearer coordination with all other support functions. This means that procurement, risk management, CM, supplier management, quality, training, and siloed centers of excellence are all working together under one operating model. This becomes critical in supply risk management, where it takes different forms for different aspects of the 5-stage value evolution model and must successfully integrate all types of risk from broad corporate risk, to strategic supply risk, to more tactical buyer-supplier relationship risk.
New capabilities need apply
Finally, this evolution requires not just a different operating model, but also a broader set of organizational capabilities and new skills/competencies for the new supply professional and contracting professional. The skills for the new CPO and the emerging role of procurement client relationship managers are all about managing relationships, change and brand. Increasingly, new CPOs are coming from sales and marketing backgrounds and the key skill is more about selling than buying. This will also prove useful as procurement works at Stages 4 and 5 and helps customer-facing managers and staff to quantify and optimize the trade-offs between demand-side choices in products, pricing, service levels and so on, and the resultant capabilities needed (and risks present) in the extended inbound supply chain.
One thing is for sure, commercial excellence has never been more important to business operations, and procurement needs to evolve its commitment management capabilities if it hopes to evolve its broader value proposition to the business.
Pierre Mitchell, Director,
The Hackett Group’s Procurement Executive Advisor Program,
Training and development for competitive advantage — best-in-class practices
Best-in-class organizations understand that a robust training and development program is critical to their competitiveness in today’s complex global business environment. But they know they must also focus on the skills and training needed for the future, as they are crucial for maintaining competitive advantage.
Listed below are just a few of the key areas to focus on, as a best-in-class organization, while preparing for the challenges of the future.
Retaining high performing employees
Many organizations spend an enormous amount of time and resources recruiting top employees, but then fail to invest time and resources in retaining them. When it comes to retaining talent, you need to look beyond compensation and explore other aspects of the work environment that compel high performing employees to stay with the company. By providing challenging opportunities for individual employees to achieve their highest aspirations and goals, you will draw the high achievers. These include training programs to prepare individuals for those opportunities, and establishing a clear and documented development plan. Establishing a consistent recognition process is another way to satisfy the esteem needs of employees.
Employees whose basic needs to excel and be appreciated are met by their employer will continue to perform at high levels and will want to contribute more to the organization. Recognition programs and processes should be creative and well managed, ensuring recognition and reward in a timely manner. Studies continue to show that the cost of replacing a high achieving employee is much greater than retaining one. Therefore, continue to invest in your employees long after the hiring ‘honeymoon’ is over.
Employee engagement, especially Generation X and Y
Aging workforce: knowledge transfer
The challenges and opportunities for learning organizations
ABOUT THE AUTHORS
Susan Nwanoro is a HR Advisor for a non-profit organization in California. Over the years she has successfully managed several employee training and development processes. Susan has recently developed and implemented a Professional Development Academy in California. She is also a graduate student at California State University Bakersfield where she is obtaining a Masters of Science in Administration. She will be graduating December 2008.
Katherine Kawamoto is responsible for developing IACCM’s research and advisory services and has been heavily involved in building IACCM’s relationships with academia. Prior to joining IACCM, Katherine was the Worldwide Director of Contract Management at NCR Corporation. Her experience spans more than 25 years and includes both buy and sell-side leadership roles.
From the front line...
The debate over the desirability of rules and regulations will never go away. Humanity has long struggled to determine the ‘right’ balance — and clearly different cultures have different perceptions of what that should be.
But this debate — and the effect of the answers — should be a very active topic for discussion by the contracts, sourcing and legal community. These groups are typically charged not only with creating many of the rules in their organization, but also with their enforcement.
Not surprisingly, many see ‘the rules’ as important and valuable. There is a natural inclination to want more of them — since that is surely the route to greater power and more resources and to ensure control over the ignorance or poor judgment of others. That is the quintessential ‘police force’ mentality — and as the challenges of modern policing reveal, it is not especially effective and becomes a slippery slope of ever-greater constraints on freedom.
There is a counter-view to that position, which is that rules should be minimal and that adherence to acceptable ‘codes of conduct’ should wherever possible, be voluntary. Proponents of this position argue that a rules-based culture inhibits innovation and creativity; it becomes innately risk-averse. By reducing freedoms, we force people to choose either to comply or to leave. And of course it is those who leave who are typically the value-generators, the entrepreneurs, the people with personal drive and ambition.
The challenges facing political decision-makers are therefore reflected in the corporate world. Indeed, many of the new rules that our community is being called upon to enforce are today being driven from outside the company.
Contracts experts, lawyers, procurement professionals are in a unique position to observe the effects of more rules and tighter controls. And because these groups are seen as having an innate interest in supporting them, a voice raised in opposition would have significant impact.
The time has come to start raising those questions. It is clear that governments in the free world are steadily undermining freedoms, not just to protect their citizens, but increasingly to protect vested interest groups that have seen an opportunity to drive new regulation. Those rules may be protecting our jobs — at least short term; but longer term, they are destroying competitiveness and will lead to major economic shifts of power.
IACCM has announced that it will increasingly monitor the areas where external regulation damages world trade and jobs (export/import controls is a current example). It has also called on its members to monitor the way internal rules are having similar effects on their company’s competitiveness. Together, we must start to campaign for (and describe) an environment that maintains an intelligent balance between regulation, trust and education — and structure our contracts and associated policies and practices accordingly.
From Tim Cummins’ Commitment Matters blog, 11 July 2008.
In April 2008, IACCM conducted a survey to identify the Sales Contracting titles most commonly used by member organizations. Members were asked to review the descriptions of four typical sales contracting ‘roles’ and identify from a list of the choices the titles their organization uses for similar roles. Figure 1 depicts the top two title choices for each of the roles defined in the survey.
Kurt Frohna: As a contracts professional, my view of the ultimate attorney: define clear roles of legal and contracts functions, establish policies which include decision authority levels, and to create ‘playbooks’ providing guidance and resolution for typical contract issues. Cut the apron strings and assist in implementing processes to make it all work. Help us to evaluate risk, mitigate risk, and to accept some risk. Keep an open door, encourage a contract professional to recommend solutions, and promptly approve/coach etc. Help us to add more value to the business and to build the level of trust between us. I’ve seen done it many ways and am fortunate to be in such a situation.
From Catherine Uffen, M.A., J.D. on 11 Jun 2008: I am interested in knowing whether any purchaser has had a supplier sue or threaten to sue for breach by the purchaser (including uneven application of the supplier conduct rules) of obligations on the purchaser contained in the supplier code of conduct.
There was a California class action case in which employees of Wal-Mart suppliers (offshore) sued Wal-Mart for failing to remove other suppliers who breached the code. It failed of course because employees of a supplier have no privity of contract with Wal-Mart, BUT had the suppliers commenced the action, it would likely have succeeded.
I am not focused on the class action — just on a supplier who has agreed to a code of conduct as a term of an RFx or a term of its supply agreement and who then sues its purchaser for breaching its obligations under the code. Sometimes codes of conduct have very high aspirational standards (like ‘highest ethical standards’, no ‘apparent conflict of interest’, no ‘concealment of relevant criteria’) that conflict with sound commercial practice. So there’s an opening here for a supplier to sue for purchaser’s breach of the code, if the code is part of the contract, or on collateral warranty if the code is a separate document.
Tim Cummins, IACCM: The issue of ‘codes’ is of great interest to me (and IACCM). For example, to what extent do these supplement or even supersede contracts? Will corporate codes be used to replace the need for contract terms in many areas, and in particular used to address the inconsistencies of law between different jurisdictions? And if so, will the result be that they become a source of litigation, or will ‘the jury’ be public opinion, when companies are called out for failing to match their promises?
We have to remember that codes are typically used as a marketing technique (setting out capabilities or responsibilities). Contracts (in good companies) may also do this. But more often they are used by each side to limit their capabilities or responsibilities. Codes are about trust; contracts (frequently) are not. So there is a fundamental conflict of philosophy; yet to prosper in the global economy, companies must establish trust in their brand — to attract the best customers and the best suppliers and distribution partners. So Codes seem likely to proliferate.
My enquiries suggest that in most companies, the group responsible for producing the codes has little or no relationship to the group producing the contracts. I understand why this may be the case, but it doesn’t seem very smart. The two areas must be reconciled, or there is a very real risk that they simply cancel each other out (and what does that do for generating either trust or good risk management?).
The question cites the example of Walmart. In the end, Walmart responded to public pressure (reputation risk) much more than legal pressure. And perhaps that is the way of the future.
If the use of codes increases, I guess it is only a matter of time before they more frequently get introduced in litigation. What we have yet to see is the extent to which courts are prepared to take them into account in reaching judgment. Presumably, key questions will be the extent to which reliance was placed upon them, whether companies explicitly or by implication include them in their contractual undertakings, the sophistication and history of the other party etc.
And the pattern here is also likely to vary depending on the jurisdiction and its relative readiness to incorporate supplementary materials into its judgments.
IACCM Member: We have a similar provision in our contracts with the remedy of buyer’s right to terminate. The key phrase we have in our language is ‘Buyer may terminate an order and the agreement. It is at the buyer’s discretion, and is dependent on the severity of the breach. Nothing is automatic, and whatever action is taken, or not taken, is confidential to the parties.
Charles Rumbaugh: Most firms I’m familiar with include their code as a term and condition. Also, there is usually an appropriate disclaimer as to actions or inactions relative to enforcement so as to eliminate legal liability in connection with same.
To me, the issue is primarily non-legal but ethical one. Why have a code unless it is fairly and uniformly administered? A quick call by/between the CEOs (Chief Ethics Officers) should resolve the matter. Further, if the ‘errors of the way’ are significant, there may be a SEC reporting or an accounting issue that may have to be disclosed ‘to the world’, if not promptly remedied.
Diane Homolak: The buyer typically reserves the right to negotiate terms even when the seller has no such right. As long as the terms of the on-line bid don’t restrict you from withdrawing your bid after the auction you could go ahead and hope they are willing to talk afterwards if you win the award. If you bid was sufficiently attractive and the points you want to raise are minor and you are within your rights to withdraw without penalty or risk of ruining the relationship if you don’t come to terms then you could bid and take your chances. Or you could try submitting your objections in writing outside of the bid process and say that your bid is contingent upon the coming to terms irrespective of the click and accept.
Kurt Frohna: Our company has determined that we will not fall into the trap of having our products treated as commodities. To this end we require our folks to find some way to get to the customer (or the procurement entity) to work out acceptable terms, or we will not bid. We have also implemented a policy that we will not participate in web auctions. We’ve had no negative results.
Talent revisited: the end of professions?
Pink’s suggestion is that changes in the economy are putting a premium on specific types of capability — and that this is challenging the dominance of the traditional professions. Lawyers, accountants, engineers — while still worthy roles — will wield far less influence in the new economy — because they are left-brain dominant. And the future, according to Pink, increasingly favors right-brain thinking.
For those not ‘in the know’ on right versus left-brain characteristics, they broadly boil down to people who are linear, analytical, sequential, quantitative, numeric (left-brain) and those who are more inclined to multi-task, see context, synthesize. In traditional businesses, the logical, linear skills used to be the most important — making ‘professionals’ the dominant management groups. But while these roles remain necessary, they are no longer sufficient. The networked world is placing a premium on those who also display inventiveness, big-picture thinking, the ability to see connections.
Right-brain thinkers are more able to see nuances, to see shadows, to sense degrees of tone or light, proportions, space — hence they tend to be better ‘relationship’ people. And as we all know, the ability to form and manage ‘relationships’ is becoming a dominant influence in our networked world.
Pink went on to describe three great influences shaping our world and destiny. These he defined as ‘abundance’ (the fact that in the west, and in the US particularly, people live in a state of material abundance, increasingly buying things that they didn’t even know they needed. As evidence of this ‘excess’, he highlighted the growth of the self-storage industry — which now earns an amazing $22.6bn annually in the US (to be honest, I am not sure many other countries even have ’self-storage’ at any measurable level).
His second force is Asia — and the pure volume of people that can be deployed to support global markets. Pink declared that ‘Outsourcing has been over-hyped in the short run’ (there is far less of it than people think) ‘and under-hyped in the long run’ (there will be lots more of it). The vast imbalance in numbers of people means that Asia will come to dominate in terms of available skills and purely ’smart’ people. So future outsourcing will move from routine tasks to higher value work.
Finally, he cited automation. This replaces logical, rules-based work — because the fact it is logical and rules-based makes it programmable.
So the ‘new’ professional will be good at what? According to Pink, they will excel in areas like knowledge management, they will exhibit empathy, they will be good story-tellers, they will be good at ’symphony’, by which he means joining dots in a mass of information.
There is certainly a large amount of evidence to back up Pink’s concepts. They reflect the work that IACCM has been undertaking in recent years both in its assessment of required skills and in the re-shaping of organizations to enable such skills to flourish (because traditional functional structures actively discourage such behaviors on any significant scale). Our research also demonstrates the problem when we look at the ‘alienation’ of today’s networked youth from the traditional corporate workplace and hierarchies.
Back in 2006, at the IACCM Americas conference, I posed the question about what jobs parents should recommend for their children. By way of illustration, I listed the careers open to children in the late middle ages — and contrasted them with those of the industrial age. As we now move into the information age, how many of today’s roles will survive? Based on history, very few. The questions we are asking simply are not radical enough; organizations are looking for evolution when they should be considering revolution.
Tim Cummins’ Commitment Matters.
Making Sense Of Opportunity and Risk:
The Journey To Contracting Excellence
September 22-24, 2008 • Royal Garden Hotel • London, UK