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

Contracting Excellence Magazine - Nov 2008


Managing In Uncertain Times

The role and importance of contracting has perhaps never been more evident than in today's dramatic economic circumstances. Just months ago, all the talk was about how to manage and control rapidly spiraling commodity prices. Today, it is about managing the risks of economic and financial collapse.

At the heart of the dilemma facing business today is the speed of change in economic conditions - and the dramatic impact that these changes have on trading relationships. The certainties of the last few years, the belief that "commoditization' was here to stay, have rapidly yielded to the 'world of uncertainty' about which IACCM has been commenting for the last 3 years.

Organizations are mostly not well equipped to deal with this environment. Automation tools are either lacking, or designed for different assumptions. Organizational structures are not set up to support the levels of cooperation and information sharing that such uncertainties demand. And skills, training and performance measurements continue to reflect a former world.

IACCM has been stretched to the limit by the demands for help and support. We have responded with rapid increases in staffing and in ensuing creative ideas and solutions for member companies. Our research, advisory, benchmarking and process capabilities are all in heavy demand and we have undertaken a record number of speaking engagements in the last 3 months.

Ensure you are making use of the IACCM network and support capabilities. If you want to know more, simply contact us at info@iaccm.com





Using Measurements To Drive Organizational Value

Today every business function is challenged to be customer-centric and improve customer satisfaction.  Contract departments are not immune. Agilent Technologies’ Customer Contracts organization was called upon to transform in response to negative customer feedback. This is Dave Barton's story of how they succeeded.
The Kyoto Protocol and the United Nations Framework Convention on Climate Change (UNFCCC) teaches observers that agreement to “deep cuts in global emissions” is not enough to drive real change. The parties and stakeholders around the world learned that it is critical for countries to set numerical targets for the emission cuts in order to drive accountability to fight global warming. Similarly, many contracts organizations, especially customer-facing contracts organizations, are reluctant to apply ambitious quantitative metrics to measure the achievement of their goals to change how they approach contracting.  This article is about an example of bridging the “metrics” gap, and the benefits of doing so, for organizations in transition to higher added value to their stakeholders and customers.   
Beyond the words:
Today every business function is challenged to be customer-centric and improve customer satisfaction.  Contract departments are not immune. Agilent Technologies’ Customer Contracts organization was called upon to transform in response to negative customer feedback. I’m pleased to report that the organization answered that call.
Like the UNFCCC parties, we resisted setting concrete goals. Instead we first set a few guiding principles to communicate our commitment to change. We set these specific objectives:    
·        Simplicity in our agreements
·        Efficiency in the contracting process
·        Clarity in roles and responsibilities
But that was not enough. Without numerical goals, true achievement would be a subjective determination at best.  Like other processes, such as manufacturing, we needed to set process specifications to ensure our quality. We also needed to broaden our definition of quality to include simplification and speed. We called it our 50/50/500 Plan:
·        Reduce the length of our most common agreements by at least 50 percent.
·        Reduce negotiation cycle time by 50 percent. 
·        Provide more empowerment on contracts terms for deals of $500,000 or less.
The 50/50/500 Plan is a great success. Customer satisfaction is up, as is employee satisfaction.   We are applying the lessons learned to other organizations within Agilent.
More Information about the 50/50/500 Plan:
Simplicity in the Eyes of the Customer:
Like many complex organizations, we had hundreds of agreement templates and forms. Our process and policy around agreement creation or complexity had no bounds when it came to complexity. We lacked a customer-centric view of our documents. To change things, we set goals to cut the length of our most popular agreements at least 50 percent.  
In one example, a services division had consolidated six different support exhibits. Six different services, all described in one document, 17 pages long. Sounds simple, right? Easier for us to quote customers and customer service representatives didn’t need to worry about which set of terms and conditions to use when preparing quotes and processing customer orders, right?   
Wrong. Less complexity for Agilent meant more complexity for customers. We discovered that rarely did a customer require more than one of the services described in the contract. We were sending the customer a 17-page document that, at most, three pages might apply to their particular needs.  Further, the document covered support for different markets and industries, and none of our customers operated in more than one market.   
So as part of our 50 percent simplification goal, we broke the document apart, and re-drafted it into 6 separate documents, none longer than three pages. It saved the customer from sorting through our complexity. Now they can get back to solving their complex business problems instead of ours.
Taking a “Leap of Faith”
Focusing on speed in a contracts organization was, naturally, subject to resistance from the organization. After all, it takes at least two parties to form an agreement, and we were not advocating just conceding anything submitted by the other party. How could we commit to cutting cycle time in half, if we didn’t control the other party? Why not measure some subset, for example approval time or signature time, or something within our control? 
We discussed it with our stakeholders, and ultimately took a “leap of faith”, and began measuring the entire “end to end” negotiation cycle time. We concluded that both parties experienced the negotiation from start to finish, and we wanted to challenge both parties to work together more collaboratively to accelerate the process, all else being equal.
Using Six Sigma processes, we analyzed every step of the process, and found that much of our Contracts Managers’ time was wasted on non-value add activities, such as seeking internal approvals on common, yet so called “non-standard” issues. We also found that we often had multiple “decision makers” on same issue. We began to rally around the mantra that it “should not take a village” to negotiate most contracts.
For example, imagine a customer requires a late delivery clause, and it triggers approval from multiple managers. And often these “joint-decision makers” do not understand or agree. Multiply that scenario hundreds of times per year… An important benefit of concrete metrics and process tracking is it provides supporting data for policy change recommendations. Our “leap of faith” became the first step in building a case for change supported by indisputable data.
Empowerment as a Competitive Differentiator
The third, and equally powerful element of the 50/50/500 Plan was empowerment.  We realigned with our internal partners and clients on our roles and responsibilities. In particular, we set out to build greater capability in our internal clients, especially in sales and contracts administration. This is particularly important for overworked shared service organizations with precious few resources.
We collaborated with our partners to set a “risk threshold” on critical terms that still required escalation, and on the $500,000 threshold. We trained our partners on pre-approved positions so that they could be empowered.  We also empowered our contracts managers by providing pre-approval on higher “tier” risk issues on which they previously would have had to escalate.
As a result, not only were our customers experiencing shorter cycle times, now they were dealing directly with empowered Agilent representatives.  This it turns out, is a source of customer satisfaction in and of itself.
With obsessive focus on simplification, speed and empowerment, and by setting numerical goals and thresholds, Agilent Contracts’ achieved outstanding customer satisfaction and met its targets. More capability was built into our internal client organizations. And responsibility was delegated and accountability was made clear.
Today our organization has more capacity to focus on higher value added business relationships and issues. Finally, the plan has restored a sense of purpose in alignment with corporate goals, and this has reinvigorated a great sense of pride. 
Dave Barton is Director of Contracts at Agilent Technologies. He is also a member of the IACCM Board of Directors. He can be contacted at dave_barton@agilent.com




Markets or Regulators? Both Need Better Information

The role of regulation in financial markets is the subject of debate on both ideological and practical grounds. Wherever the line is drawn, proper market functioning and sound regulation rely on good quality information which is accurate, comprehensive and current. The most fundamental lesson of the credit crisis is that vital information is missing.
The role of regulation in financial markets is the subject of debate on both ideological and practical grounds. Wherever the line is drawn, proper market functioning and sound regulation rely on good quality information which is accurate, comprehensive and current. The most fundamental lesson of the credit crisis is that vital information is missing. 
This is not a question of a failure on the part of companies to make proper disclosure as required by law. Instead, managers are not in a position to understand the risks and commitments their organizations are undertaking. 
Many commentators have noted the vastly increased opacity of the financial system due in part to securitization and derivatives. Securitization can be a valuable tool for mobilizing industrial-scale capital to finance small assets such as mortgages. By spreading risk, even if a particular asset goes bad it will not be so hard for each investor to bear. Investors do not have to analyze each of the small loans or other assets but rely on rating agencies, guarantors and banks, who engage in a form of fee-based credit underwriting. Derivatives enable the trading of various forms of financial risk. The derivatives called credit default swaps let parties trade in the risk of company default without investing in the company’s debt, and they too represent a form of fee-based credit underwriting.
But having too many degrees of separation between an engineered financial instrument and a real earning asset may not always be such a good thing. When investors think they don’t have to understand what they are buying, assets that should not be financed can find funding. When a problem develops, investors unable to parse the embedded risks may shun entire classes of complex financial instruments, or of companies that own them. Risk-spreading has evolved from a loss-minimizing technique to become taint or contagion. One bad apple, if you do not know where it is and cannot throw it out, spoils the whole barrel, or even the whole warehouse.
The rating agencies, guarantors and banks became complexity-reducing, risk-bearing nodes in the financial network. But today’s triple-A rated guarantor can be tomorrow’s weakest link, and the epicenter of a liquidity crisis. Do credit default swaps diffuse risk or instead concentrate it, or even generate it? We have at least a partial answer in AIG.        
The potential cascading effects of asset writedowns, funding commitments, conditions to funding, ratings downgrades, collateralization requirements and cross-defaults as they generate a liquidity crisis inside a company and across companies do not spring out of nowhere. They are in the contracts the companies signed, bought or sold when money was flowing. Statistical risk models based on probabilities provide little comfort when low-probability events occur. Consolidated financial statements can hide liquidity time-bombs, particularly where there are restrictions on moving money around within the corporate group.
Investors have suspected that the values of their investments were being affected by trading fueled by leverage, that is, borrowing by hedge funds and other investors. But it was difficult to estimate what the effect of excess liquidity might be or when it would reverse. Under “mark-to-market” accounting the value of a market-traded investment “is what it is”. Leveraging on the upside and now de-leveraging on the downside push the values, and enable more leverage or force more de-leveraging – until you hit the wall on either end. On the upside there is little incentive to try to “correct” out the effects of leverage.
This set of dynamics has stopped the flow of money even though business in general does not seem to be doing so badly. Not only the regulators and the ordinary investing public but the players themselves do not seem to have had a grasp of how things could go so wrong. 
Management information systems are generally geared to producing financial reports, and are backward-looking in orientation, grounded in realized transactions and actuarial valuations. They may mark to the current market, but do not anticipate the unfolding of interrelated events. Likewise, simplified means-to-an-end statistical risk models (of the type described by Saul Hansell in The New York Times (September 18, 2008)) are not up to the job. We can instead imagine systems that would report real-time and in-depth on various risk scenarios entailed in firm assets and commitments before they are realized. Designing those systems and understanding what they mean would require business judgment and experience, and a willingness to contemplate unlikely events and correlations of unlikely events in detail. This is as much a qualitative as quantitative task. We can then debate how transparent a firm’s information should be to the market and to regulators. But few would argue that it is appropriate for so much of the financial system to be operating in the dark.   
Carolyn Paris, a former banking and finance partner at a major NYC law firm, is author of Drafting for Corporate Finance (Practising Law Institute 2007) and a PhD candidate in information systems at the London School of Economics.


Does Sharepoint Offer A Viable Solution For Contracts Automation?

Research shows that automation remains challenging for many contracts, legal and procurement groups. Microsoft Sharepoint is increasingly being considered as an option and in this article, an advocate for its use presents their case. (Please note that the views presented in this article do not reflect any formal IACCM position with regard to contracts automation.)
For those who haven’t heard, Microsoft SharePoint 2007 has quickly become the most popular Enterprise Content Management (ECM) Platform in the world. With over 100 million seats sold, Microsoft has indicated that it is has reached the 1 billion dollar mark faster than any of their other products. So….what is it, why is it so popular, or more pointedly…”why the buzz”?
Before answering this question, we think it is important to set the stage by asking another question. Specifically, how does one define a contract management solution (CMS)? At a high level, a CMS includes support for contract creation, contract document storage and retrieval, collaboration support, workflows and tracking, compliance reporting, and quite possibly integration with back office systems. 
Unfortunately, a heterogeneous constituency for the CMS typically exists; one with varied decision makers, business process managers, staff, and counterparties associated with the organization.   All of these constituents typically have different perspectives on priorities, requirements and timing. The General Counsel may see the top priority as collaboration. Business units’ needs may vary by volume, complexity, and degrees of standardization. These diverse and ever-changing demands require a certain level of flexibility and this is where SharePoint has become a great fit as a CMS.
SharePoint 2007 @ 50,000 Feet

As referenced above, SharePoint is typically categorized as a multi-purpose ECM system. As a multi-purpose system, it allows for delivery of a high percentage of functionality based on configuration work without custom development and for many different purposes, including Contract Management. For those unfamiliar with SharePoint’s capabilities, here is a brief summary:
50,000 Foot Summary
Document Management
Centralized repository which can support any file type (MS Office, PDF, images), version control, check-in / check-out, document level security, custom metadata, version history, audit trails, searching and more.
Automation support for key business processes with task assignment, notification, approval, escalation, and completion monitoring capabilities. Provides support for ad-hoc workflow and structured workflow.
Business Intelligence & Reporting
Create custom reports, also known in SharePoint as views, for document metadata and other types of data which can be contained inside or outside of SharePoint. 
Allow users to easily and quickly find any information stored in SharePoint, including documents, blogs, wiki content, other web-sites, databases and file systems. When searching, the results that are returned must not violate any security definitions.
Exactly what “Collaboration capabilities” means varies considerably based on individual perspective. However, as a general guideline, Collaboration typically represents the ability to easily share content, have nested discussion threads, provide blogging and wiki services and to provide document sharing capabilities. This component set often represents the capabilities typically associated with “Web 2.0” or “Enterprise 2.0” strategies and also overlaps in certain respects with “Social Networking” technologies.
Portals create an aggregated view of information and processes within and outside an enterprise. These views are often personalized in some capacity and are typically comprised of a combination of content presentation, transaction support, and custom data aggregation.
Data Integration
SharePoint offers strong capabilities that allow it to integrate directly into back-office line of business systems. This can be done with SharePoint’s Business Data Catalogs (BDC), Web Services or an API.
Web Content Management
Tool which allows users to maintain and manage web-sites (public and internal). Provides in-place content editing, support for different page layouts, content approval workflows, and support for advanced graphical design. Representative public web-sites include www.tvguide.com, www.cwcapital.com, and www.paulmitchell.com .
Electronic Forms
On line submission, capture, and storage of information typically associated with a physical form. Once the E-form is completed, it can then be used in workflow processes and serve as a document of record.
Records Management
Automatically process physical (paper) and electronic records through the creation, use, storage, and disposition life cycle. Records Management has become an important feature for organizations that must implement and demonstrate compliance oriented processes. Most Records Management systems are designed to support specific regulations such as in the US, the DOD 5015.2 standard for the management of records.
Single-Sign On
This component allows users to login into SharePoint which then maintains all of the sign-on credentials for other systems that are in use in your organization.
Language Support
SharePoint has been designed to support a vast number of languages for organizations that have an internationally distributed and diverse audience.
Many Other Features
The features listed above are the primary components. There are however many other features within SharePoint that are being leveraged by companies today. These include custom lists, photo libraries, document conversion services, and many other features.
Why The Buzz?

As referenced in the beginning of the article, SharePoint 2007 has gained incredible momentum across the entire globe. Earlier versions were typically written off as a departmental solution but with SharePoint 2007, the landscape changed dramatically. In typical Microsoft-like fashion, it has taken a few tries to get it right and with SharePoint 2007, they’ve done pretty well. By no stretch of the imagination is SharePoint 2007 perfect and we would be the first to say that you should expect some missing functionality. However, SharePoint 2007 represents a giant step forward and for this reason, it is being readily adopted for its vast functionality. Much of SharePoint’s draw can be attributed to the ease and speed of configuration, particularly in that non-technical people can easily configure the product.
Another very important factor that has led to SharePoint reaching a “tipping point” is its price. Any company which owns Windows Server 2003 or beyond has access to an included license of SharePoint 2007. This “free” version is referred to as Windows SharePoint Server or WSS for short and it has been incredibly effective as organizations install and configure it without additional costs. It does have a number of limitations; however, for very basic contract management purposes, it can serve as a strong platform. When WSS is too limiting, something we believe is often the case for moderate to complex contract management requirements, there is the option to purchase Microsoft Office SharePoint Server 2007 (MOSS). MOSS comes in a “Standard” or “Enterprise” version and chances are that most of the companies that you work for already own MOSS.   Companies can acquire MOSS for relatively modest server and user licensing price points. 

Another point worthy of mention is that most IT shops have readily embraced SharePoint. It is built upon Microsoft’s popular .NET platform and technologists are typically comforted in working with Microsoft based technologies.   In fact, IT shops are struggling to keep up with the demand for SharePoint requests as it solves so many user problems. Additionally, it is much easier for them to support a SharePoint based solution than to introduce an additional line-of-business application. For with another system comes the burden of separate skills and more support costs, more infrastructure and more process. For most people and organizations, simpler is better.

Mike Dwyer is with Corridor Consulting and can be reached at mike.dwyer@corridorconsulting.com 


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