Making Sense of Opportunity & Risk
IACCM's next conference (London, September 22nd - 24th) will focus on balancing risk and opportunity and describe 'the journey to contracting excellence'. It is timely to reproduce the results of the IACCM risk survey, conducted earlier this year, that suggests European firms are falling behind in the important race to establish robust risk management regimes.
LOSING TOUCH WITH THE MARKET
Are Current Approaches To Risk Management Placing Western Companies At Risk?
Risk is high on every executive agenda, as the uncertainties of new markets and global supply chains supplement traditional sources of risk. The maturity of risk management systems is today recognized as a defining characteristic for a company's competitiveness; and contracting and commercial practices represent key weapons in the risk management armory. But are they in fact enhancing competitiveness, or do they risk driving companies into the ground?
This article will briefly review the major categories of risk and will then summarize the findings of IACCM's latest risk maturity study, reporting on the extent to which risk regimes have adapted to the pressures of current market conditions.
BACKGROUND TO RISK MANAGEMENT
All companies seek to anticipate risks, so that they can be selective in their acceptance and effective in their management. To the extent that some risks cannot readily be anticipated, they endeavor to develop early warning systems and robust mechanisms for containment. But these methods largely focus on risks of things going wrong, ranging from natural disasters through market failures, to new regulations or shortages of supply.
There is of course another category of risk - and that is the failure to spot or exploit opportunities. This is the field of innovation and change, and covers new markets, new customers, new products or services, new routes to market or new business capabilities.
A truly mature risk management regime is of course one that addresses all three categories.
THE ROLE OF CONTRACTS AND CONTRACTING STRATEGIES
Many contracts, sourcing and legal groups have tended to focus their efforts on anticipating failure and, frequently, to develop business terms and negotiation strategies that allocate risk to their trading partners. There is growing evidence that this approach is not effective; it creates a confrontational relationship where the absence of trust undermines openness and accountability. As a result, 'surprises' are more likely and such relationships lack incentives for the types of information exchange and partnering that lead to new ideas. The consequence of this is that 'risk averse' organizations tend to be worse at handling incidents when they occur and also tend to be less innovative.
This observation is especially important today for several reasons. One is the simple fact that business is surrounded by unparalleled uncertainty. The openness of markets, the speed of change, the unpredictable emergence of new competitors or new ideas represent remarkable challenges for any manager. But this environment has been supplemented by complex regulatory and governance regimes, as well as significant shifts in public expectations of corporate responsibility. It is these that have generated for many companies a robust - and potentially inflexible - 'rules-based' compliance regime in their handling of risk.
THE RISK MATURITY SURVEY
The emergence of this regime is evident in the risk maturity survey results. These show the dramatic impacts of US regulation on the attitudes and capabilities of US-based companies - and a major reversal of our 2004 survey findings, when European firms recorded a healthy lead in their approach to risk management.
But the data also reveals areas for concern, in particular the extent to which risk management is dominated by a mentality of control and compliance.
In the short term, 'compliance' is a good thing. But if the rules and principles are not subject to constant review and change, they can rapidly become a source of risk in themselves. Inflexibility or 'risk blindness' will result in the loss of competitiveness.
So what does IACCM's latest risk maturity study tell us about corporate reactions to this exciting, but complex, business environment?
In all geographies, there has been a major improvement in the extent to which 'economic decisions consider potential and historical risks'. Today, over 50% of respondents declare this is 'always' or 'generally' true, compared with just 28% in 2004. Corporate Governance principles appear to have been at play in this area, but it is the only field in which there was universal agreement on improvement.
Overall, European input shows a situation where risk management has either remained static or declined. In some cases, this may simply be because of greater awareness - for example, today just 35% feel that "risk is fully quantified to support informed business decisions" - down 12% on the result 4 years ago. And there has been a drop of 18% (from 59 to 41) in those who state "risk identification is a systematic, integrated activity across the entire business". On a positive note, however, there is apparently growing coordination across business functions, with 77% feeling that this does now occur on a more regular basis (up 14%).
Other areas of concern regarding the European picture are the decline (down 11%) in decisions being made with "good understanding of the correlation among risks" (perhaps an indicator of the growing complexity and range of risks encountered) and the failure to escape from "narrow and silo-based" risk identification, with 46% feeling this is generally or always the approach within their organization.
These areas of weakness remain in the North American results. In fact, the issue of narrow and silo-based risk identification is even more pronounced, with 54% saying it is normal. Otherwise, the position in North America generally shows substantial improvement, with almost 60% stating that 'risk identification is a systematic, integrated activity across the entire business" (up 17%) and similar strong showing in areas such as "we have a full portfolio-based view of risk" (26% improvement) and in the understanding of correlation between risks (up 13%).
BUT IS ASIA ANY DIFFERENT?
The survey sample for the Asia-Pacific region is not large enough to draw firm conclusions, but the results do suggest substantial variations from North America and Europe. In general, they imply a less rigorous and well-defined risk management process, with limited use of economic or financial analysis. But of course, in today's fast moving markets, and without the same pressure of regulatory requirements, it may be that this absence of formal process (or bureaucracy) is extremely helpful. It is enabling Asian companies to be the new risk-takers, the test-bed for new products, new ideas and new trading practices. The danger of this approach, in today's networked world, is the potential damage to reputation and image not only for individual companies, but potentially to entire countries if 'failures' (of reliability, quality, safety etc.) are seen as regular or endemic.
The focus on risk management - doubtless driven by regulatory conditions - has certainly had a major impact on the belief that there are robust risk systems in place (North America), or in some cases the awareness that there may be significant holes (Europe). However, the data confirms that further improvements can be made - in particular in the extent of cross-functional coordination and portfolio-based analysis. It is also clear that economic analysis tools and methods remain weak and less than half are able to state that 'risk is weighted against opportunity', confirming the observation that risk management remains too focused on avoiding failure, rather than delivering success. Indeed, in further confirmation of this point, 55% of respondents feel that their risk analysis takes greater account of 'adherence to the corporate compliance process' than it does to the needs of the market.
In a question that was new this year, we asked respondents whether they felt that their contract commitments and relationship management policies offered a 'strong and immediate linkage to corporate strategy'. Just 35% were able to state that this was either always or generally true - so in almost two thirds of organizations, there is disconnect between the corporate strategy and the terms and practices of contracting and relationship management. That disconnect is itself quite clearly a source of risk - not only to the corporation, but also to the practitioners who allow such a gap to exist.
Expanding HR Contributions to Outsourcing Agreements
In this era of increasing globalization, contracting for outsourced services is no longer a pure procurement or legal effort. The combined processes of due diligence, contract negotiation and governance require contract provisions which define people, process and technology to ensure desired business outcomes are achieved.
By Paul McDonough
In this era of increasing globalization, contracting for outsourced services is no longer a pure procurement or legal effort. The combined processes of due diligence, contract negotiation and governance require contract provisions which define people, process and technology to ensure desired business outcomes are achieved. A great deal of progress has been made by competent cross-functional teams to get outsourcing contracts right and relevant. And yet, quite often, difficulty and distrust occur during the term of the contract in ways that put transparency, rapport and cultural fit beyond reach. Repeatedly, teams discover that their carefully crafted service level agreements measure what is easy to measure rather than what actually matters. As a result, customers and service providers find quite often that the efficiency and effectiveness of the extended workforce fall short of expectations.
Approaches to preventing such problems have been recommended. Most involve a prescription that more time be devoted to the contracting process through more careful documentation of processes and technology requirements. This usually leads to negotiation of detailed service level credits and penalties. However, to get the added value of intangibles such as cultural fit, transparency and trust, the contracting teams should also take three steps to review outsourcing agreements in a human resource management context.
The first step is to acknowledge certain givens of the current workplace environment. Human resource departments wear many hats, manage a wide array of transactions and are stretched thin. They are under scrutiny to prove their relevance. They are potential targets for outsourcing. Their involvement in contracting for outsourced services is generally limited to the planning and timing of changes impacting internal employees. They are not as deeply involved as they could be in reviewing the competence of service provider human resource practices nor in developing the requirements for retained organizations. As a result, valuable contributions from human resource professionals are missed by external counsel and management consultants in the drafting and negotiation of outsourcing agreements.
The second step is for human resource professionals to assess their subject matter expertise in building workforce effectiveness. Such expertise can be extremely relevant to the success of an outsourcing agreement. Compelling evidence for the need for more human resources expertise in outsourcing agreements can be found in the eSourcing Capability Model for Client Organizations (eSCM-CL) developed by Carnegie Mellon University’s IT Services Qualification Center. Of the eSCM-CL’s ninety-five (95) best practice standards for managing sourcing relationships, over fifty percent identify requirements that involve human resource management knowledge and expertise. This means that human resources skills and experience can add significant value at the contracting table through more comprehensive integration of human resource and sourcing processes. The key point is that while most contracts successfully address the process and technology requirements in detail, greater attention to the provisions covering the “people” requirements will help to ensure healthy relationships.
The third step is for human resource professionals to take the initiative to use a sourcing model such as eSCM-CL to bring thought leadership to the contracting process. While extra effort will be required at first to build the case for an expanded role, program managers and service providers will welcome contributions that help them to consciously determine which human resources management policies, practices and procedures need to be reflected in contract provisions and which should be addressed as part of governance and relationship management. Instilling trust, transparency and cultural fit are critical success factors for every major outsourcing initiative. Engaging the right human resources subject matter expertise to motivate and drive continuous improvement in the overall workforce effectiveness of outsourcing programs makes sense.
Paul McDonough is a Global Sourcing Leader with more than two decades of experience in developing and implementing procurement, outsourcing, offshoring and shared services programs. As a pioneer and innovator, leading proprietary, captive and third party initiatives spanning multiple geographies, he has worked with a number of Fortune 500 firms including American Express and SunTrust Bank. He is recognized for bringing integrity and trust into complex IT, BPO, KPO, Contact Center and Facilities Management relationships through thoughtful and disciplined governance practices covering the entire sourcing life cycle. He draws on extensive strategic sourcing experience to structure master services agreements, statements of work and service level agreements to eliminate ambiguity and reduce risk. In addition to his work in the Financial Services arena, Paul achieved program and project management expertise in high tech manufacturing, construction management and defense industries earlier in his career. He has made numerous presentations on globalization and strategic sourcing and is presently seeking new opportunities to bring transformational value to both customers and service providers.
The Role of A Contract Manager
One of the most common questions we face - and something that generates frequent web searches - is to define the role of a contract manager. This article, reproduced from Tim Cummins' blog (http://tcummins.wordpress.com), provides the answer. It sets out the typical range of activities that may be performed within a contracts organization and highlights the level of variation, driven by factors such as reporting line, industry and geography.
I note that many people still seem puzzled by the role of a contract manager. It is a frequently asked question and recently generated significant debate on the IACCM website (Contract Management Forum).
Among Contract Managers themselves, there is widespread belief that the title (and its variants, such as Commercial Manager) masks massive variations in job role, status and responsibilities. Hence it is often felt that external hiring (especially across industries or geographies) will be difficult, if not impossible.
How great are those differences? In fact, our research suggests that the core responsibilities of Contract Managers (and by deduction, Contract Management Departments) are very similar. Drawing from the postings on the IACCM Forum, these might be summarized as follows:
o Contracts (various: including formal, short form, and annual contracts)—Drafting, Evaluation, Negotiation and Execution:
· Non Disclosure Agreements, Sales / Purchasing Agreements, Sub-contracts, Consulting Agreements, Licensing Agreements, Master Agreements, review of customer proposed terms and conditions
· Distribution Agreements (resellers, agents, joint marketing etc.)
· Commercial and Public (Federal, State and Local Municipalities) Contracting
o Serve as the point of contact for customers on contractual matters. Act as contractual “middleman” between company employees and customers, ensuring timely review and approval / reconciliation of variations.
o On all standard and nonstandard contracts, provide redlined recommendations and often negotiate directly with our customer’s attorneys or purchasing staff until consensus has been reached
o Maintain contractual records and documentation such as receipt and control of all contract correspondence, customer contact information sheets, contractual changes, status reports and other documents for all projects.
o As needed, provide guidance on contract matters to project managers, including training to new project managers and other employees in contracting procedures.
o Develop and implement procedures for contract management and administration in compliance with company policy. As appropriate, contribute to or influence company policies.
o Monitor compliance by company employees with established procedures.
o Work with Risk Management Department to coordinate contractual insurance requirements.
o Work with Finance to ensure adherence to broader finance and risk requirements such as revenue recognition, pricing and discounting policies,, export controls etc. May include ‘financial engineering’ and understanding / evaluating economic impact of terms and term options.
o Support Product Management / Marketing to ensure company products and services are offered with appropriate, competitive terms and conditions
o Monitor competitive terms. Monitor customer satisfaction with our terms and conditions and contracting practices. Recommend changes.
o Ensure that signed contracts are communicated to all relevant parties to provide contract visibility and awareness, interpretation to support implementation.
o Handle on-going issue and change management
o Monitor transaction compliance (milestones, deliverables, invoicing etc.)
o Oversee Service Level Agreement Compliance
o Ensure contract close-out, extension or renewal.
While these responsibilities are written from the perspective of a contract manager supporting sales (which is where there is a longer history for the role), they are easily converted to a description for Procurement, where the tasks are very similar.
It is true that the emphasis within this list will vary. For example, some groups have little or no responsibility up to the point of contract signature; and others little or no role after signature (though there is a marked trend towards consolidation of pre- and post- responsibilities within the same group). Reporting line also makes a difference, with groups reporting to Legal tending to have a narrower set of tasks (potentially little responsibility for non-legal aspects of the contract or related policies and procedures, especially in terms of any financial accountability). Geography has certainly been a major factor in the past, with few Contract Managers visible in non-Common Law countries. However, this is also changing as business globalizes and contract forms and procedures grow more consistent.
One of the biggest differences between organizations lies in the extent of authority and accountability that Contract Managers have for making contract changes. Another big difference is the extent to which the Contracts organization has solely deal-based responsibility, versus a more strategic role in overall company policy and commercial / contractual strategy. For example, does the function simply implement and protect other people’s rules, or does it advocate change and participate in key policy discussions?
Today’s ‘best practice’ contracts groups are those with a holistic responsibility for the contracting process (pre- and post- award). They are increasingly involved in establishing contracting policies that support market and business strategy - and this is something that cannot readily be done if resources are fragmented. As a Professor of Economics at one of the major UK business schools recently commented: ‘The value of contracts is in the outcomes they produce’. He also observed that today’s contracts are becoming more complex and the risks of failure more severe.
Too often, companies have had no one providing the oversight for achieving those outcomes or managing that complexity and risk – and that is why the role of Contract Manager is emerging as a critical competency in today’s organizations. It is also why Contract Managers themselves need to start focusing less on what makes them different, and more on recognizing that there is a common and consistent core of activities that underlie their role and professionalism.
Contracts Management Software: Custom or Off-the-Shelf?
In selecting a software solution for its business process challenges, an enterprise is faced with a multitude of choices. Custom applications are designed to conform to the specific business requirements communicated by the client. On the other hand, COTS offerings are superior to custom development in several respects. What is the right answer for your organization?
Pat Frye, Imagitek
Denise Deverelle Crown, Imagitek
By Pat Frye, JD, Application Consultant, Imagitek and Denise Deverelle Crown, Director, Marketing Communications, Imagitek
Individual bits of data exist in a vacuum. Value is only derived when data can be effectively turned into information and properly managed. Over time, the challenge of extracting usable information from data has amplified. According to IDC, “Humans created 161 exabytes of data in 2006, approximately 3 million times the information in all the books ever written.” In the corporate world, it is imperative for CIOs to implement policies that effectively manage information, while aligning IT and business goals, and reducing costs.
The relationship between IT and business drivers is also driven by economies of scale. Enterprises not only grow over the years, but also acquire and merge with other ventures. Each business, location, or perhaps even project has its own entrenched processes – obtaining its own vendors, managing its own contracts, paying its own invoices, and the like. As these discrete business units are established or assimilated, business challenges multiply and require new supporting technology.
Increasingly complex legal and regulatory environments also impact this dynamic. For example, business drivers and IT intersect in the area of SOX compliance. In 2002, following the scandals involving corporations such as Enron, Worldcom, and Tyco International, the Sarbanes-Oxley Act passed into law mandates for the most comprehensive corporate governance reform in decades. New duties addressing the corporate “internal control structure” impact IT and business jointly. Other, similar concerns involve managing corporate litigation – including e-discovery – and maintaining audit trails for invoice payment and other business processes.
In selecting a software solution for its business process challenges, an enterprise is faced with a multitude of choices. For example, the venture must decide what fraction of its business processes the solution will occupy – and as a corollary, how much of its existing technology will be displaced. Put another way, the enterprise must decide whether to pursue a narrow “point” solution or a more encompassing “end-to-end” solution.
Another decision is whether to implement a solution requiring development of custom code, or one that has already been designed and implemented in other businesses. The latter product – a commercial off-the-shelf solution, or “COTS” – has become a more prevalent inclination as off-the-shelf vendors’ offerings have become more robust.
By definition, custom applications are designed to conform to the specific business requirements communicated by the client. On the other hand, COTS offerings are superior to custom development in several respects.
Limitations of Custom Applications
First, while custom applications can be made to fit a process from the conceptual stage, implementing that development is costly, time-consuming, and risks setbacks inherent in inventing what amounts to a brand-new product.
Second, business users seldom know at the onset of a new project what business process is the most effective and helps meet compliance rules most easily – thus, new deployments entail breaking new ground not only in developing the software code, but also in accommodating the business processes unique to the code-writers’ client.
Third, even when implementation of a custom product is completed, the finished product is static: incorporation of new processes and interfacing with other, newer enterprise systems will entail further development custom code. Business rules change over time, thus, systems need to adapt to a changing marketplace, changing regulatory issues and changing management demands.
The Advent of Configurable COTS
Software technology has evolved to the point where the line between custom and off-the-shelf solutions has moved: applications that can be tailored to business requirements by business users have assumed a prominent place in the market. Such applications offer quick implementation, opportunities for iterative process changes, and lower total cost of ownership. These new “configurable” COTS solutions can be engineered to manage business process and compliance issues, reducing risk and the time necessary to address changes in the business environment.
Value Propositions of Effective COTS Contracts management tools
An effective COTS solution’s functionality closely mirrors current best practice standards. It is updated to keep pace with the evolution of those standards with each release. More specifically, the “configurable” aspect of an effective COTS solution should empower a business administrator, affording the enterprise extensive control over its functionality. Common areas of business administrator control are as follows:
Ø Template language from which all contracts are created;
Ø Organizational workflow structures for each contract type;
Ø The enterprise’s reporting criteria, forms, and functions;
Ø Life-cycle management functions are available to each user or user group;
Ø Enforcement and modification of document retention policies and document access.
Effective drafting functions ensure uniformity in content, and thus consistency in contract bargaining, benefits, obligations, and risk exposures. Based upon templates, drafters can complete a contract that accommodates differing contract types and transactions.
Document control functions are also essential. Effective measures ensure that each action on every contract is date and time stamped, and that the identity of the person taking the action is recorded. As each action on a document is taken, an audit trail should be created. The capacity to establish and maintain relationships with associated documents is also critical.
Reporting, searching, and life-cycle management tailored for specific uses should also be included. The software should report around user-specific contract variables in a form generated according to that client’s organizational preference. After a contract is executed, the solution should track obligations, conditions, critical dates, and the course of performance. Further, the solution should enable adherence to document retention policies and archiving practices.
An effective contracts management solution should have the capacity to restrict the access to and use of documents according to the enterprise’s own security rules and requirements. Different users – or different user groups – can be restricted from abilities to delete a document, edit it, view it, or even know that it exists.
Finally, the solution should automate routine tasks and reduce the amount of time it takes to create and manage contracts. Reminders and checklists should ensure process is adhered to and obligations are not forgotten.
In the current economic environment, intense competitive pressure requires attaining more using less – meeting business requirements while reducing cost and streamlining processes.
About Imagitek Ltd.
Imagitek, Ltd., an Altran company, is a provider of off-the-shelf business applications that work seamlessly with content management and ERP systems. Imagitek’s flagship Prodagio Software delivers best-in-class applications for accounts payable, case management, contracts management and self-service. Established in 1982, Altran is publicly trade on the Paris Stock Exchange and is recognized as a global leader in innovation consulting with annual revenues exceeding $2.5 billion. For more information, visit www.prodagio.com.
A Horse named “Contract”
This amusing story from one of our UK members (a training provider) will have a tone familiar to many IACCM members. It proposes a solution from a tailored training program (IACCM can also assist with a series of web-based programs that are similarly directed at improving the contracts and commercial awareness of groups such as Sales or Project Management. Contact email@example.com for details)
Your business owns a horse named Contract. She is a promising mare and you have entered her in this year’s Grand National.
You employ a jockey named Tom Sales who loves to race but isn’t such a big fan of training. He has a love-hate relationship with Contract – when they win Sales is full of praise for her, but when they lose its all Contract’s fault.
Unfortunately there have been a couple of events where Contract has fallen at the final hurdle and you have missed out on a big purse because Sales and Contract were not working in harmony. Good races are few and far between, so you would like to ensure that your team doesn’t waste these opportunities!
You also employ a groom named Loretta Lawyer. She is responsible for making sure that Contract has the correct saddle weight, the tack fits, the whip is effective and the blinkers are on. She has access to all the finest equipment but sometimes you worry that she puts things on Contract that aren’t really necessary, or worse, could slow her down.
You employ a Vet named Larry Lawyer (Loretta’s brother). Larry is responsible for making sure that Contract is fit for the race ahead so as to minimise any injuries. He also has the responsibility of shooting Contract if she can no longer race. Larry’s favoured weapon is a 9mm Litigation - after an encounter with Litigation most contracts are only good for dog food…. You suspect that previous horses who ended up at the wrong end of Litigation may have avoided this expensive and emotional fate had they been better prepared and better understood by their jockeys.
1. You want Sales and Contract to work harmoniously together with the common goal of winning the race. So you need Sales to understand what the different parts of Contract do, to understand her strengths and weaknesses and to work with her to foresee and overcome any hurdles and win the race.
2. You also want Sales to work better with the Lawyers as you are finding that his short attention span isn’t suited to their technical talk about feed mix and tack.
3. You suspect that Sales sees the Lawyers as necessary evils that occasionally stop him from riding as fast as he wants to. You also know that the Lawyers regard Sales as a bit of a cowboy who will do anything to win.
4. You acknowledge that Sales is a crucial part of the team as he has to stay on the horse from start to finish while the Lawyers step in and out as required.
5. You also conclude that if you can get Sales and Contract working better together you will reduce the risk of injury or equipment failure and so reduce the amount of fees you pay to the Lawyers – as they can be expensive!
You decide you need a trainer who can work with Sales to better understand Contract - someone Sales will relate to, a seasoned jockey who has won races on many different horses and experienced lots of challenging courses. Your ideal trainer would help Sales work more efficiently with the Lawyers by translating their technical jargon and explaining how both sides contribute to Contract’s success. As a result you hope that Sales will recognize when to ask the Lawyers for advice rather than risking injury (no one wants Litigation!).
You ask around the market among other successful owners and they tell you about a trainer named David Devant. Devant is a highly decorated jockey who likes to share his skills and experience with jockeys coming up through the ranks. He also has an excellent understanding of what it takes to get a horse like Contract over the finish line first (interestingly you discover “Devant” in French means “in front”).
Devant understands the important role that the Lawyers play in the process, but he is able to convey this to Sales in a language that Sales understands, explaining the technical jargon and getting to the point quickly. Devant explains that it is crucial that everybody in the team understands and appreciates the role each has to play towards the common goal of getting Contract over the line first otherwise team arguments may actually slow Contract down.
With Devant in the team you start to see immediate results:
• Contract is far better prepared. Weighty equipment that served little purpose is removed and replaced with modern, sleeker gear which has been used successfully by Devant and his clients in the past
• Sales now understands what Contract is capable of and also is able to recognize potential falls at hurdles and take corrective action before they occur
• Sales and the Lawyers now have a better understanding of one another’s roles. Sales also makes more efficient and selective use of the Lawyers, saving you time and money
• Contract and Sales start to win more races faster and more often. They gain a reputation as attractive competitors and you find new and repeat race invitations come to your door before you have even enquired.
Through winning more and bigger races, your company becomes more successful enabling you to buy more horses with similar attributes to Contract and to hire more jockeys like Sales. You retain Devant’s services to ensure that the benefit of training is passed consistently to all new entrants and refreshers given to the older hands who may be entering less well known or more challenging races.
You are so impressed with Devant’s work that you wonder if he has some kind of magic wand (you Google his name and decide there may be something in that…), but you conclude that the real magic is simply harnessing external expertise and experience and delivering it to your team in a common sense and accessible manner.
Devant Limited is a Company registered in England and Wales Co. No. 4904708 , VAT Registration Number 807 0320 70 Registered Office: 298, Hyde End Road, Spencers Wood, Berkshire RG7 1DN Tel. 0118 3536000
Managing Global Supply Chains
A recent study by McKinsey confirms that senior executives are increasingly concerned about the risks facing their supply chains. They also feel that supply chain management is failing to deliver adequately against top strategic goals.
A recent study by McKinsey confirms that senior executives are increasingly concerned about the risks facing their supply chains. They also feel that supply chain management is failing to deliver adequately against top strategic goals.
The fact that risks are perceived to be increasing is scarcely a surprise. However, the extent of regional variations in the areas considered to be influencing supply chains is interesting. For example, in North America the top three concerns are rising energy prices (39%), financial volatility (38%) and increasing complexity of products and services (35%); in Europe, product and service complexity is cited by 60%, followed by rising energy prices (33%) and increasingly global labor markets / rising wage costs (25%). Developing markets select the same three issues as North America, though in different sequence.
Other factors influencing supply chains show wide disparities. For example, 25% in North America see the adoption of increasingly scientific, data-driven management techniques as significant, against just 4% in Europe (and 16% in developing markets). Similarly, 20% of North American and Developing Market participants are concerned about exposure to differing regulatory environments in overseas markets, versus 9% in Europe.
The strategic goals for supply chains reflect the findings of a recent IACCM survey. Reducing costs is the number one priority, followed by improving customer service and getting products to market faster. For suppliers, assisting with these goals would represent a source of competitive advantage, since executives are far from satisfied with current progress.
To improve performance, they are focused on increasing the efficiency of supply chain processes (71%), actively managing supply chain risks (56%) and increasing inputs from low cost countries (47%).
The survey also reveals a continuing trend towards centralizing the management of supply chains. In part, this is to address talent and knowledge issues - indeed, ensuring that different locations share knowledge emerges as the number one challenge in global talent management (again a finding in common with the wider IACCM membership). Other major challenges are managing communications and cultural differences and attracting and retaining entry level talent. The issues of communications and knowledge sharing are to some extent attributed to the (lack of) integration of IT systems and vendors on a global level (these pre-requisites were highlighted in a recent story about P&G’s success in developing global shared services).
Executives do not identify any one ’big issue’ in globalizing the supply chain. However, the importance of increased cross-functional collaboration is highlighted as a dependency in meeting strategic goals. This suggests that organizations adopting the IACCM ‘best practice’ service delivery model will gain a competitive edge on their more traditional rivals.