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

Contracting Excellence Magazine - Mar 2009

 
 

Managing Through A Time Of Crisis

 
Many of us are wrestling with the impacts of today's economic conditions. Of course people are worried; and in some parts of the world, the potential suffering is extreme. But in the end, we will adjust because we have to adjust. So what are some of the positive steps we should be taking? IACCM CEO Tim Cummins sets out his thoughts and ideas for the commercial, procurement and contract management community.
 
 

So I guess I won't be retiring any time soon! In fact, I had better accept the idea that work is a life-long experience. Even those bankers who took golden handshakes as they departed the ships which they had holed may find themselves relieved of their life-time pensions sometime soon.

If I am going to have to work for more years than I expected, I am going to make sure that I enjoy it. And to do that, I need to expand my interests, I need to develop new and updated capabilities, I need to widen my network. In short, I need to feel that I am doing something worthwhile, with people I care about and feel affinity for.

Because the truth is, financial and material rewards may be in short supply for quite some time.

This new reality will have massive impacts on the world of work and on social values and judgments. Of course, it could generate far greater social disruption, a breakdown of trust, increasing conflict both within and between countries. But it could also bring us closer together, nearer to an appreciation of our mutual inter-dependence - the fact that there are values that go beyond pure economics and that realizing a better life and a better world depends on collaboration and unity of purpose.

I have no doubt that our community - those responsible for shaping and managing trading relationships - has a key role to play. In many organizations, we act as a form of conscience. We understand the difference between right and wrong, fair and unfair. We have a choice about whether we simply acquiesce to the policies and practices of others, or whether we fight for 'the right thing'.

Indeed, we have the opportunity to become proactive in defining the right thing. But to be effective, we must show increased unity among ourselves. We must begin to act as a community, sharing thoughts and ideas, committing ourselves to driving the framework for honest, open and trustworthy business relationships.

At times like this, it is easy to become defensive, or to look out for our own interests even at the expense of others. That is why there will be so much debate about protectionism in world trade. But protectionism takes many forms - and one that is very much in our hands is the area of terms and conditions and relationship governance.

There is a lot we can do: there are many initiatives already underway at IACCM - and with your ideas and active involvement, there could be many more. For example:

  • Our Ethics in Contracting Group is about to define some principles for the drafting and management of payment terms. It will also explore the impacts of public procurement policy on ethical business conduct.
  • We are working with an international consortium of law schools and academics to produce a set of global principles for contracting with consumers.
  • Our 'Managing In A Time Of Crisis' (see next article) initiative is preparing a series of programs and research activities that will generate improved dialogue within our professional community. Early programs explore areas such as renegotiation and managing credit risk.
  • The IACCM Managed Learning programs offer the chance for mentored groups to discover and discuss best practice and to share their ideas and challenges with a peer group of contracts professionals.
  • IACCM research projects equip us with the facts to influence management behavior and to ensure you are equipped to be at the forefront of company policy and direction in key areas of commercial practice.
  • IACCM Ask The Expert calls offer insights to the forces shaping our world and the way we should adjust to it. For example, by exploring the impacts of automation, or the expectations of the new generation as it enters the workplace; and by discussing shifts in terms and conditions or contract management techniques that reflect new economic realities - and continued market volatility.

It is at times of crisis and hardship that people achieve most by coming together. This is about more than developing a support network; it is also about creating an ideas network. IACCM members have a wealth of talent and experience. Now we must deploy that talent and experience to find our way through uncertain times. We have the choice of wandering alone and hoping we find a way out; or of working together to lead the way, not only for ourselves, but also for others who have been beleaguered by this economic mess.

Please send me your ideas, your appeals for help, your offers of leadership. But most importantly - participate! Log on to the IACCM site, activate your personal networking, join relevant Communities of Interest, post your thoughts on our message boards, engage in the many events and programs through which you can hear and be heard. Most of all, support our work of building trust and cooperation, so that trading relationships flourish and help us onto the road to recovery. 

 
 

 

 


 

 

Managing Through A Time Of Crisis Part II: IACCM Initiatives

 
IACCM members are at the forefront in these difficult times. Whether you are winning business, managing the risks of current relationships or renegotiating existing deals, we know that it is tough to obtain the latest ideas and information. This series of initiatives is designed to help.
 
 
As your professional association, we are determined to offer practical help and guidance. One initiative is our ‘Managing Through A Time Of Crisis’ event series.
 
  •       Research: Studies such as our recent Renegotiation Survey that shed light on key trends and issues to help you set policy and negotiate with authority, or our imminent study on trends in outsourcing and international sourcing that will alert you to competitive issues and opportunities.
  •       Panels: Conference calls featuring top practitioners that discuss how they are handling economic turbulence through contracting and commercial activities and resources.
  •       Briefings: Expert insights on critical issues such as credit risk – how might you best protect against the risk of customers not paying or suppliers running out of cash?
  •       Roundtables: Executive forums allowing open and interactive discussion between senior buy-side and sell-side practitioners and in-house counsel.
 
Ideas, challenges, best practices and solutions  will come together at the IACCM Spring Conference in Orlando, Florida (www.iaccm.com/americas).
 
HOW CAN YOU BENEFIT?
 
Apart from the Conference, these events are free (and exclusive) to IACCM paid members. You can start participating now.
 
-       Participate in the renegotiation study and receive the results by March 13th - www.etouches.com/renegotiation)
-       Participate in our inaugural panel call on Handling Renegotiation, March 16th, featuring Tim Cowen, GC at BT Global Services; Dan Mahlebashian, Chief Contracting Officer at GM; Tim McCarthy, Director of Pricing & Negotiations at Rockwell Automation; and Bill Huber, Director, CPO Services, TPI (http://www.etouches.com/crisis1)
-       Participate in our briefing and interactive discussion on ‘Managing Credit Risk’, date and time to be announced shortly
-       Participate in our Executive Roundtables (Director and above). For more information about a date and time near you, contact mheminway@iaccm.com
 
If you have topics to which you need urgent answers, please contact info@iaccm.com and we will attempt to add them to our agenda.
 
 

Sales Contracting – Latest Trends In Role & Organization

 
Sales Contracts and Commercial Management groups have been wrestling with dramatic changes in market conditions in the last couple of years. Much more is written about Procurement and its role or contribution to the business, so those on the other side of the table can often be forgotten. Yet that silence does not mean there have been no changes, or that the role has in some way diminished.
 
 

KEY TRENDS AT A GLANCE

More than half of all sales contracts / commercial groups have seen an increase in resources over the last 12 months
28% of groups have either been consolidated or had a change in functional reporting line in the last 2 years
17% of pre-award and post-award groups have been merged in the last 12 months, or are currently considering merger
There has been a slight trend to consolidation with Legal, which is now the most common reporting line (32%)
The Sales Contracting community has experienced an average 20% increase in workload over the last 4 years

Sales Contracts and Commercial Management groups have been wrestling with dramatic changes in market conditions in the last couple of years. Much more is written about Procurement and its role or contribution to the business, so those on the other side of the table can often be forgotten. Yet that silence does not mean there have been no changes, or that the role has in some way diminished.

Indeed, the opposite is true. As illustrated by IACCM’s research on “The Most Admired Companies in Contract Management”, those in sales contracts took 4 of the top 5 positions and 14 out of the top 25. In fact, when it comes to competence in contract negotiation and contract management, it is Procurement which is struggling to catch up.

That competence in Sales Contracting / Commercial Management has been in strong demand, as first of all they were called upon to respond to, or counter-act, the challenges of global markets and the ‘commoditization’ of products and services; then to deal with the contractual impacts of a dramatic upsurge in major commodity prices and shortages in key resources; and now to handle the wave of calls for contract renegotiation. Once again, the greater noise made by the Procurement press on issues of supply chain risk, credit concerns and demand volatility can easily lead everyone to forget that those same issues also impact the sales negotiator as they wrestle with customer stability, reliability and honesty. 

And behind the scenes, the lawyers have been making the ground even harder as they push on both buy-side and sell-side for more onerous risk terms (liabilities, indemnities, IP rights, confidentiality) – and due to their own workload, often become less accessible to deal with exception management.

So given these circumstances, it may surprise many to learn that more than 80% of Sales Contracts / Commercial personnel either like or love their job and a similar percentage would recommend it as a career path for others (even though only 64% are confident that their current employer views the role as a career opportunity).  

Indeed, given the demands of the job and the clear value that it can bring to the business, the biggest disappointment at present is the continued lack of investment in the training, tools and functional development that is required to build a true professional ethic and capability. This absence of investment – and the community’s failure to make the case for greater resources – remains a significant threat to its future. 

 
Today’s Challenges
 
To counter-balance the more vocal Procurement and Legal positions mentioned in the introduction, let’s describe how it feels to be in a Sales Contracts role right now. This brief summary was provided by Tim McCarthy, our current Vice-Chair for North America, and is a good representation of the pressures many are experiencing.
  • Key, global customers that represent large portions of our annual revenue are asking for renegotiated agreements affecting pricing, payment terms, etc.  These are not simply requests, but demands for greater value with no apparent interest in providing 'trade ups' for a win-win solution to their problem.  They simply want what they want, with no interest in giving anything in return.  End of discussion .
  • Key customers that represented solid growth to our business in coming years are struggling to make payroll, suffering unhealthy balance sheets, and little or no credit from their formerly trusted banking relationships.  Covenants are being rewritten daily and the new terms are astoundingly adverse.  The trip wires for setting off these re-writes can be set so amazingly low that no one is aware that they are violating their covenants; the 'trust me' relationship has been replaced with 'don't take it personally, these are just the new business rules' -- there is no longer any room for flexibility or trust.  "The Government is making me do it!"
  • Commodity prices are way down after the spikes we all experienced this past summer.  What does the future hold?  With government printing presses getting tuned and oiled for what surely will be the 'mother of all monetary expansions', will not hyper-inflation and stagnation be right around the corner.  How do we price our products in this environment?  How do we position ourselves for a future that we can only see through a dark glass, dimly?
  • How do we partner or form alliances that are trustworthy when we are unsure who will be standing next to us, or against us, come tomorrow?  Should the relationship come first, or the contract language, in a day when risk assessment and mitigation are vital arrows that few of us have in our quivers?
 
Growing Demand And Skills
 
“in this age of ethical collapse, contract managers perform a critical role which takes real courage and personality”

Sometimes it is easy for those in Sales Contracting to feel as if they are in the middle of a sandwich – and indeed, that is a key part of the role. High performing contracts professionals are able to withstand a range of conflicting pressures and interest groups. They are the people who do the right thing, rather than the expedient thing. And in this age of ethical collapse, that is a critical role which takes real courage and personality.

It is therefore not surprising that the success of Sales Contracts groups in our recent contract management survey is mirrored in the growth of professionalism and status for individual practitioners and by a trend to greater consolidation of resources. Overall, demand for expertise in this field continues to grow and the recent economic downturn has not – in general – hit this group especially hard. Recruitment remains relatively strong and has been accompanied by a trend towards increased consolidation of resources, into shared services groups.  However, on the counter side, talented and experienced professionals remain in short supply, since so few companies have invested in adequate training or making this a formal career path. 

There are growing divisions between ‘contract administrators’ and ‘contract managers’; indeed, understanding the difference between these job titles has been a repeated question on the IACCM message board and in member forums. Both groups have seen growth, with the ‘administrators’ more focused on compliance and the ‘managers’ performing a more creative role, driving both compliance and innovation. Over time, we believe that the ‘manager’ role will prove far more sustainable; and certainly many who have been tagged ‘administrators’ are seeking to improve their skills and credentials. We have noted growing numbers of web searches for information on ‘the role of a contract manager’- and the article on Commitment Matters that outlines typical responsibilities is frequently accessed.
 
“More than 2,000 sales contracts / commercial professionals are currently enrolled in IACCM Managed Learning & Certification programs”

This concern for professional status is reflected in strong growth in the numbers undertaking IACCM Managed Learning and Certification programs, with currently more than 2,000 sales contracts / commercial professionals enrolled (versus some 1,500 from Procurement). The role is also increasingly international, with a notable upsurge in contract managers within mainland Europe (France, Germany, Netherlands) and some increases in Asia (China, Malaysia).

 
Measurements Remain A Challenge
 
Unlike Procurement, those on the sell-side of contracting tend not to have such focused performance measurements. They are not responsible for savings or for strategic supply relationships. Their contribution is often more noted when it is absent, since ‘success’ tends to be measured by an absence of problems. This continues to make it difficult for such groups to justify their headcount – they depend on executive belief. However, the more advanced groups have been working on a more holistic set of metrics to show value-add and the growth of automation will assist these efforts.
 
Today, risk management remains the number one goal of most sales contracts organizations. However, there is growing emphasis on other aspects of their contribution and an understanding that risk is multi-faceted. IACCM’s recent survey revealed an interesting shift in priorities that reflect these much wider perceptions of the risks they are seeking to manage.
 
1.
Excellence in execution
2.
Customer experience / service quality
3.
Cost control
4.
Compliance to process
5.
Negotiation planning and Managing through economic turbulence

2009 ‘Big Issues’ For Sales Contracts / Commercial Groups

(IACCM member survey January 2009)

 
Top performing groups are determined to influence negotiations. They endeavor to switch the often narrow – single issue – approaches of Procurement and Sales into broader discussions of value and cost of ownership. Sales Contracts professionals seek to build solutions, rather than sell commodities.
 
Where To Report; How To Add Value? 

The reporting line of Sales Contracts groups continues to vary and of course also influences the breadth and focus of their role. In general, those reporting to Legal have a slightly narrower role than those reporting elsewhere in the business. However, the last few years have witnessed a growing appreciation by General Counsels that contracts staff can bring different values from those of the in-house lawyer. They typically offer wider and more varied business experience, a balanced understanding of not only the external risks but also the internal business capabilities. Good contract managers also appreciate the economic impact of terms and offerings, acting as a bridge between Legal and Finance. 

Sadly this lack of clarity over a natural organizational ‘fit’ can leave some groups feeling homeless and unloved – and this is patently not good for morale. Recent studies show that there is strong uncertainty over the potential career path, even though a large majority continue to like their job. Indeed, overall morale remains higher in this community than it does in Procurement groups, with a higher overall percentage viewing it as a field they would recommend to others.
 
 
A Crisis Of Leadership
 

Leadership remains a problem. Today’s leaders have mostly emerged from the ranks of successful practitioners. While they personally have great talents, their commitment to viewing sales contracting as a ‘profession’ remains variable and many continue to focus on deal-making, rather than working on the strategic positioning of their team and its wider contribution to marketing and brand image. This transactional focus and dependence on training through ‘on the job experience’ add to the overall uncertainty and lack of predictable quality in performance. For many practitioners, it results in a sense of insecurity and a feeling that they are not adequately valued and appreciated. Sadly, the leaders recognize the problem only when it is too late – when management has already decided to make cuts or to create a new organizational model. Overcoming this weakness of leadership remains perhaps the most significant challenge for the sales contracting community and appears essential to lift it from its current susceptibility to political whims.

Inadequate automation is inhibiting the progress of Sales Contracting performance and value

 Automation is slow to progress, yet is making steady inroads. A growing number accept the principle that software tools can significantly raise productivity and could – in theory – result in superior management reporting and functional visibility. However, there is limited confidence in most groups that the right automation is yet available. For those who deal with relatively complex, negotiated agreements, there is a belief that software can only handle standard deals. The evidence suggests that they have reason for skepticism, but that their issues are driven also by some innate fear of technology and the changes it implies. Sales Contracting remains a relatively individualistic, traditional role – once again reflecting the nature, experience and personal characteristics of many of its current leaders, few of whom could be accused of being ‘champions of technology’.
 
  
The Future
 
The typical report card for Sales Contracts / Commercial groups would probably read ‘Shows promise, but must try harder’. There is no doubt that the function attracts many talented individuals. But unfortunately many remain exactly that – individuals. Except in administrative groups, teaming and team learning are often weak and leaders continue to focus on transactional support at a time when strategy and portfolio analysis are becoming critically important to business health.
 
Few contracts groups are well-positioned for managing their own destiny. They tend to depend far too much on the support of a high level, benevolent sponsor. This leads to a sense of insecurity and confusion within the business over exactly what the contract department does. To advance from this position, leaders must engage in more research, a greater readiness to drive re-engineered processes, a focus on promoting executive reviews of commercial policies and practices. Status comes with visible and vocal added value for the business. Simply doing a great job that protects the business from invisible threats, or generates economic benefits that cannot be measured or attributed, Is not enough.

IACCM assists groups to achieve top performance through a range of services which include capability maturity assessments and improvement programs, process reengineering workshops, skills assessments, training, professional certification and commissioned market / competitive research. Contact info@iaccm.com for more information. 
 

 


 
 

 

 

  


 

 

Differentiating Value Through Contracts: A Fresh Approach To Risk Management

 
If ever there was a time to re-think our approach to risk, surely that time must be now. In the first of two articles (the second will focus on buy-side risk  techniques), Bob Endres introduces 'Value Based Contracting', for those involved in sales or distribution contracts. (Bob is CEO of Synaptic Decisions, this year's sponsor of the IACCM Risk Management Community of Interest and a keynote presenter at the IACCM Spring Conference in Orlando.)
 
 
Value Based Contracting represents a radical departure from traditional approaches to deal development, evaluation and execution. It enables sellers of goods and services to shift the negotiations agenda with their customers away from a concentration on price and instead to trading value and risks.
 
Companies that have adopted this approach are achieving margin improvements of 10% or more, while accounting for risks, even at a time of generally falling prices and aggressive buyer negotiation.
 
This shift to value-based proposals is achieved by: 
 
  • taking a holistic approach to potential opportunities that results in understanding of both the buyer and seller’s perspective;
  • versioning and aligning contract offerings according to value;
  • presenting terms through a commercial menu that creates a broad trading space;
  • price differentiating offers according to value, cost of deal obligations, risks, and options;
  • deliberate trading of provisions to discover the optimal deal.
 
Introduction
 
Many business leaders believe that trading relationships should become more collaborative – and top negotiators agree. In a recent survey by the International Association for Contract & Commercial Management, over 80% of negotiators expressed the view that relationship outcomes would be more successful if the traditional focus for negotiations could be changed.[i] This view was similar for both buy-side and sell-side dealmakers …. So why hasn’t the agenda shifted? Why isn’t negotiation focused on value creation and distribution?
 
The primary reason, according to the negotiation professionals, is simply lack of trust in the other side. A readiness to talk value depends on trust; and trust tends to depend on a long-term relationship. No wonder newcomers and innovators find it hard to break into established markets or unseat incumbent providers!
 
So the challenge for sales is how to shift the nature of their conversation with customers and prospects. And the answer, instead of avoiding contract terms, is to equip Sales with the tools for pro-active value discussions.
 
 
Value-Based Contracting: What Is Different?
 
Deals are a compilation of obligations, risks, and options. The fundamental product or service of a company is only one aspect of a deal. Too often companies only focus on the differentiating aspects of their products and services in the marketplace and fail to recognize the differentiating advantage and value that can be created by the other aspects of the deal, i.e. other key terms and conditions.
 
As a result, many companies begin the sales process by presenting a single offer to their customers (or responding narrowly to a customer’s standard terms), which can quickly lead to ‘price-only’ negotiation and then a tough battle over the allocation of liability and indemnity risks.   Presenting or responding to a single offer:
·         Misses opportunities to discover buyer preferences and willingness to pay
·         Does not create a linkage between provision changes and pricing
·         Limits the negotiating trade space
 
If the focus is on a single offer, a customer will naturally concentrate on the price of what is being offered. Indeed, without visible alternatives, they will frequently assume that price is the only real source of value and differentiation. If any of the contract terms are not to the customer’s liking, they will simply ask that these be changed to what they think they prefer. Thus little true discovery of buyer perceived value across alternative offers occurs, and it takes a very skillful negotiator to maintain deal integrity and link changes in the deal’s terms to costs and pricing. In short, it fails to adequately price differentiate based on differences in terms and conditions.  Furthermore, with the focus on a single offer, there is limited exchange of information and innovative ‘win-win’ outcomes are not uncovered or explored.
 
What is required is a proactive and systematic way of soliciting and discovering customer preferences and willingness to pay within a framework that logically ties price differences to variations in risk allocations, options and obligations
 
An approach addressing these shortcomings is based on a ‘commercial menu’.  A menu of alternative offers with price points is presented to the customer.  Each offer of the menu is described by a bundle of terms and conditions.  The menu of offers creates a trading space that guides negotiation and a more deliberate exchange of value and risks.  A change in a bundle’s terms and conditions (tradable) to match a buyer’s preference is offset with another tradeable matching the supplier’s preference or a change in price and can result in a better deal for the supplier.
 
Contract Terms Are Like Product Features
 
Importantly, this is not a ‘cafeteria-buffet style’ style approach to deal formation where the individual prices of each element of an offering are given and a customer simply chooses all the elements they desire to come up with the total price.  Instead the ‘commercial menu’ is a set of carefully constructed bundles of provisions, and each bundle is priced to take advantage of the collective and synergistic value of the provisions.  Best practices in offering design and bundling are applied and the best decisions for bundled versus component pricing are made. This allows the seller to most effectively price the bundle while managing costs. Negotiations guided by a ‘commercial menu’ facilitate a controlled exchange of information that leads to better trades and discovery of ‘win-win’ opportunities which ultimately yield optimal deals for both parties.
 
In a recent example of this, a client included in one of its offerings the option to substitute a different raw material feedstock from that which it traditionally used for a particular customer. This ‘wild idea’ came out of discussion with the client’s supply chain group and risk management group. The supply chain group recognized the feasibility of the substitution, while the risk management group identified the potential of an advantaged future market price for the substitute feedstock. This had never been offered before as the client had always presented a single offering to the customer and it was not known how the customer would react to this option. However, by being able to value this option and including it in ‘commercial menu’ of multiple offerings, the client discovered that the customer was able and willing to accept the alternative feedstock. The customer obtained better pricing because by providing this option and the client was better able to manage their supply chain costs and risks to obtain better margins. Thus, the ultimate trade-off was beneficial to both parties.  In short, a menu allows a company to distinguish it’s offerings in terms of value and price differentiate them according to their different values, different allocations of risk, different levels of obligations, and different options.
 
Another problem with presenting a single offer to all customers is that it assumes all segments of the market and all customers are the same – with homogeneous preferences and capacities to bear risks.  By versioning offerings through ‘commercial menus’, a company can gain a higher price from premium offer seekers and effectively compete to win low price seekers in more competitive segments.
 
This value-based approach is of course directly similar to value segmentation of the functions and features of a product or service. It is therefore most effectively done as part of the product development and lifecycle management process. The commitments offered must, after all, be capable of delivery. Constructing commitments ‘on the fly’ (i.e. during the proposal or negotiation phase of a specific customer deal) is highly inefficient and dramatically increases supplier risk. In certain industries, such as construction or outsourcing, a certain amount of deal-based customization is inevitable, yet even here the supplier must base this offer on a known and tested set of performance capabilities.
 
VBC In Practice: A Case Study
 
A transportation provider now offers 3 offerings to buyers- aligned with 3 distinctive value propositions:  Low price, Flexibility and Immediacy.  The basic service is transportation; but the offering versions for flexibility and immediacy were defined (and differentiated) by special quantity options and service levels respectively.  In another example, one maintenance service provider had always competed on the basis of a cost + fixed fee.  The key negotiables were the fixed fee % and escalation factor.  Contracts only promised conformance to specifications and efforts commensurate with industry standards.   The supplier created a performance based fee-at risk offer whereby they took on more risk; but earned a share-of-buyer savings.   The two offers were made to buyers using a commercial menu.  It allowed a cleaner and crisper separation of the two offers- whereby the fixed fee offer was stripped of risks and the fee at risk offer had supplier risks- but they were priced.  And the buyer would only pay a premium if savings were realized.  This differentiated the supplier in the market.
 
These are cases where suppliers saw their ‘offer’ as being broader than the product or service they provided.  They saw the full offer – as described by terms and conditions- much broader- and a way to differentiate themselves from competitors.
 
Identifying, costing, and pricing obligations, risks, and options
 
Every deal is a compilation of obligations, options, and allocated risks; and, in order for a company to maintain deal quality, it must 1st understand these components and be able to cost and price them. If this is not properly accomplished, deals will either be priced too high and not provide the ability to most effectively compete for business or worse they will be priced too low and provide lower than expected or even negative margins. Therefore, as a first step to effectively competing, especially in today’s increasingly demanding market, companies must identify and then fully cost and price the obligations, allocated risks, and options in deals.
 
Most suppliers are proficient at identifying and costing known and fixed obligations where the attendant costs to meet these obligations are certain and deterministic. But, few companies are proficient at costing risks or uncertainties. Risks, or simply uncertainties, fall into three categories: supply chain risks, external risks, and transaction risks.
 
Supply chain risks are uncertainties along a company’s supply chain that drive costs. For example, uncertainty in buyer demand effects a supplier’s asset utilization and is and should be important to a supplier employing significant capital assets to deliver a product or service. Steady or predictable demand can allow that supplier to more efficiently size and allocate its resources- thus lowering the overall cost to serve buyers.   Many suppliers either make assumptions or bet on the size and pattern of demand realized under their contracts and do not account for demand uncertainty and its affect on their costs.  In so doing, Suppliers also miss key opportunities to positively affect these costs by shaping buyer demand using contractual provisions.   Other potentially important uncertainties along the supply chain include design, production, supply, quality, liabilities associated with infringement, and general liability.
 
External risks are uncertainties outside of the direct control of either the buyer or seller; and important to the proper costing of deals.  A simple example of an external risk is raw material input pricing.   While raw material prices can fluctuate widely, many suppliers routinely fix the prices of their end products or services over specified time periods without considering the appropriate ‘price’ of that risk, or who is able to fund the risk at the lowest cost.    In doing so, risks are either priced too low and result in a sour deal or too high and result in a lost deal.   Suppliers (and buyers) also miss opportunities to allocate these risks in different and creative ways to lower the total cost of the risks.   Potentially important external risks are tied to economic, technology and legal/ political uncertainties.
 
Transaction risks relate to the interaction of the two parties and tied to uncertainties in the areas of payment, fulfillment of contract obligations, effectiveness of governance mechanisms and the buyer- supplier transition at the end of the deal.   These risks too- should be considered by suppliers in the proper costing and pricing of deals.   A simple example of transaction risk is payment.  Most suppliers correctly price payment terms; some even correctly price credit risk.  Another example of a transaction risk is the case of a supplier who has invested in an asset whose value is low outside of a specific buyer relationship (transition risk).   The right pricing and right risk treatment is obviously different than in the case of an asset with alternative use.  In failing to properly consider and distinguish transaction risks in deals, suppliers either apply a blanket policy of assuming them altogether- at a cost- or apply a blanket price risk premium to all their deals.   This misses the opportunity to price differentiate the risks of a deal- and again either price too high and lose the deal or too low and lose money. 
 
Embedded options are the final component of a deal.  There are obvious options such as an early payment right (usually for a discount off invoice) which most suppliers know how to price.  There are others that while obvious- most suppliers don’t understand how to value- such as a contract term extension right, right to subcontract or buyer right to acquire or sublicense intellectual property.  There are also less obvious options that require a trained eye to uncover.   For example, a supplier of a commodity chemical offered a buyer a formula price that could diverge significantly from market pricing.  The contract also allowed the buyer a generous degree of quantity flexibility from quarter to quarter.   The buyer was taking their full contract allowance when market pricing was at or above contract pricing and taking less when market pricing was lower than contract pricing.  Unknowingly, the supplier had given the buyer a ‘best-of-price’ option with value of 6.6 MM per year!  Accurately valuing contract options requires financial engineering expertise and advanced analytical tools drawing on empirical data and expert judgment. While performing option analysis can be complex, the benefits are substantial.
 
Conclusion
 
In today’s highly competitive markets, suppliers must take steps not only to differentiate their products and services, but also to protect their sales margins. Value Based Contracting is a critical tool for those determined to flourish.
 
About Synaptic Decisions
 
Synaptic Decisions is a specialty consultancy focused on helping clients achieve step change improvements in business results through integration of strategy, risk management, negotiations, and contracting. Value Based Sales Contracting is a core offering of Synaptic Decisions.
 
Acknowledgement
 
Synaptic Decisions thanks Tim Cummins, Executive Director of IACCM, for his review, insightful commentary and contribution to the final draft of this article.
 
 


[i] IACCM worldwide survey of ‘Most Frequently Negotiated Terms’, December 2008. This annual study receives input from negotiators (Sales, Procurement and Legal) in more than 1,100 companies and has been tracking trends in negotiation since 2001.
 
 
  
IACCM offers a range of advisory and research services to help members solve organizational challenges, make critical business or technology decisions, benchmark their organization, gain market and competitive insights and much more.  For additional information about how IACCM can help with your specific research and advisory services needs, please contact kkawamoto@iaccm.com.
 
 


 

 

Benchmarking: "We aren't as uniques as we think we are..."

 
Membership in the IACCM opens a number of ways to turn benchmarking from a tedious exercise into a fast-path to organizational evolution. In this article, long-time member Steve Sopko highlights the importance of objective data for functional health and survival - and illustrates ways that IACCM can help.
 
 
As contracts professionals (buy and sell-side), we often think of benchmarking as something that happens to other people.  Beyond the most transactional of processes, there are so many historical barriers to benchmarking a contracts group that most organizations give up on the challenge.

This is dangerous, because over the last 5 years, a dramatic increase in standardization eroded some of what made contracts a tough function to measure.  The variability of our role (creating unique deals or solutions) has diminished, because of increased governance and the need to systematize all areas of business.  Because of these drivers, other parts of the enterprise are not willing to accept "contracts & sourcing are unique" as rationale for avoiding measurement and benchmarking.  Some of my clients recently found that, when challenged, they could do good measurement, because a lot of the variation they thought was present in their business has evaporated since 2003.

That's the first thing to consider when benchmarking your contracting process against others - put aside the thought that it cannot be done, or it can't be done beyond a low level.  Fact is, it can be done, and it is being done.  It is not easy, particularly as there is a lot of history to overcome, but it is working - and you can take advantage of it.

This article briefly covers 5 basic considerations for a successful benchmarking strategy.

(1)  Benchmark Against Yourself

There may be some validity to the notion that comparing your organization to others is more trouble than it is worth.  The problem is not your unique-ness, it is that you may not know what is truly worth measuring.  The best way to discover what is worth measuring is to start with your current performance & efficiency; then benchmark your improvement over those baseline numbers.  Most organizations do this to some degree, but the numbers are met with either total apathy, or endless wrangling over what and how measurements are taken.
 
This is where IACCM membership really starts to pay off, not only as a way to directly compare organizations, but providing insight as to how other organizations measure, and what they do with the results.

Leadership has a primary role here, insisting that measurement and benchmarks be used for management decisions.  Time spent getting everyone on board is useful, but management visibly using the numbers for real-world change is crucial.  Apathy will disappear, and arguments over the numbers will get much more intense. As a result, people will take them seriously, and a better set of measures will emerge.
 
 
 
(2)  Fit Into the Big Picture

A classic error is to benchmark on least-common-denominator measures to which everyone inside the contracts function can (finally) agree.  The error comes from failing to consider the critical needs of stakeholders, visibly.  Often, this renders the entire exercise meaningless.  Widely-accepted measurements are process and function-based, and may include the actions of many organizations.  We improve those processes by changing & measuring at lower (departmental) levels, then checking to see if there is a net impact on the top-level process that everyone agrees is desirable.

A good example of this is cycle time, probably the most common single measurement of contracts & sourcing.  Let's consider two definitions of cycle time:
  1. the total time needed between the recognition of a need and appropriate fulfillment, or,
  2. the amount of time the contracts & sourcing department takes to process paperwork and negotiate a deal.
Most contracts organizations choose definition #2, and it drives their measurement behavior:
  • Starting the cycle time clock when they receive a correct request for service
  • Pausing the clock when other parties must act
  • Stopping the clock on signed agreement
This narrow approach causes problems:
  • Waiting to start the clock on a 'correct' request ignores difficulty stakeholders may face in requesting your help, and misses an opportunity to improve access to your service
  • When you pause the clock for any reason, you are showing that cycle time is a measure only of your action, not a measure of the overall health of the contracting process - this limits its acceptability with other groups, and narrows your opportunity to affect the big picture
  • By stopping the clock when an agreement is signed, you tempt people to push contentious issues out of initial negotiations - a good counter-measure is to see if there is any relationship between accelerating cycle time and increases in post-signature modifications.

At Dell, it wasn't until we looked outside our traditional process that we found the source of conflict with Sales and Finance.  It wasn't (always) my people, it was the fact that we didn't start caring (measuring) until the deal was almost done - then complained that we weren't brought in soon enough to make a real difference!  The easy fix was to reduce the complexity of engaging us, and then tie our measurements to numbers meaningful to our stakeholders.  We could then demonstrate our impact with very little argument.

(3) Beware Over-measurement

If you've done 1 and 2, you have a good idea of which measurements are important, and how those measurements are viewed by the people who matter.  This is a great start, but be careful about the amount of time it takes to collect the data.  I recently encountered a client data-capture process that took longer than the task it was measuring.  The contract managers spent more time entering data than they spent creating agreements!

Over-measurement is an easy trap to fall into, because the consumers of data (managers, stakeholders, auditors) are almost never the people who have to do the grunt work of data collection (negotiators, lawyers, sourcing specialists, contract managers).

Avoid this by cost-justifying the measurements.  Consider the staff-hours spent on capture & review, cost of software & outside services, plus the opportunity cost.  What could your people have been doing with that time, and can the data collection process be streamlined? 

(4) Look at Function - Not Business

Steps 1 through 3 above take 3-6 months, depending on the degree to which you have valid measurements in place today.  Now it is time to find someone to benchmark against.  The classic conundrum here is that:
  • Most businesses aren't like yours
  • The ones who are like you either (a) compete with you, (b) buy from you, or (c) sell to you - in all of these cases, disclosing lots of data is dangerous,
  • Companies like yours who don't compete with you are often in very different geographies, or sell in different ways.
By yourself, it can be very difficult to find a business that is identical to yours without encountering this conundrum.  The IACCM is a big help here, making introductions and passing the data through their larger universe of surveyed organizations – thus disarming the competitive concerns. In any event, I find that by looking at processes instead of businesses, we find enough commonality to do meaningful benchmarking.  During my time as an outsourcer, I came to realize that everyone does certain functions, for example: form agreement processing, agreement terms checklists, and approval processes.  If your measurements indicate that one of these areas is important to you, look for companies that face similar challenges in that process area.
This is an opportunity to get creative.  Example - if you have a high-volume, low complexity process (form agreements), look for companies who buy or sell in a similar business model with similar volume and complexity.  You are considering the function of processing many form agreements with minimal variation, not the fact that they are a bank and you are a software company...

(5)  Encourage the Right Attitude

Key job skills of the contracts profession are spotting what is wrong and directing attention to it.  Benchmarking requires a willingness to ignore the 90% that is different (wrong) to look for the 10% that is common enough to be useful.  Conflict between our job skills and the requirements of benchmarking make it a particular challenge for contracts & sourcing professionals.

The answer is to select the right people for the effort, and motivate them to look at measurement and benchmarking in the right way.  The leader of the effort must be someone who is relentlessly positive, optimistic, credible, and driven by facts instead of doubts.  One successful company selected 10-year sourcing veterans (for credibility) but emphasized
 
 
 
 
people whose education or experience was from outside.  These folks had already learned that different groups and professions see the world in different ways.  The result was people who could quickly find commonalities, instead of spending endless hours "raising issues" about differences.

Finally, attitude also extends to leadership.  If you are perceived as a fact-driven leader who cares about the big-picture impact of your group - your people will echo that attitude, and you will achieve the results you want from benchmarking.

__________________________________________________________________________

Stephen Sopko has performed nearly every role there is in the contracts & sourcing profession.  He was a U.S. Federal contracting officer, led R&D negotiations in Europe and the former Soviet Union, managed technology sourcing for a Fortune 500 oil & gas company, led a multi-billion dollar sales support organization at Dell, and served as the practice manager for contracts & sourcing services at UnitedLex.  He is a pioneer in streamlining the contracts & sourcing function through automation and out-tasking.  Stephen can be found online at www.ContractInsider.com.
 
 

Draconian or not Draconian, that is the question?

 
Renegotiation is just one way that contracts are being adjusted. In some industries, companies are taking much more unilateral behavior, using relative levels of power to impose new terms. In late 2008 contract and commercial management consultancy Blake Newport hosted a roundtable discussion to look into the best approach for managing contracts and supplier relationships in the current economic climate.  This article by Alex Ellis summarizes the main discussion points.
 
 

The roundtable, held in London, UK, brought together leading figures from an assortment of both buyers and suppliers from companies such as Centrica, Siemens, QinetiQ, Pfizer and the International Association of Contract and Commercial Management (IACCM). Its purpose was to discuss best practice techniques to maintaining strong supplier/buyer relationships in the current economic downturn.

The current economic downturn has placed many companies in a difficult position with respect to their supply chains, with the management of cash flow and supplier sustainability becoming increasingly important. This has resulted in some companies taking a very radical and hard line with their suppliers, according to Greg Brownlee, Managing Director of commercial and contract management consultancy Blake Newport. Greg highlighted the construction industry as an example: “Back in the summer of 2008 a lot of house builders were writing to their suppliers and telling them that they were taking a five percent discount off their invoices, This was non-negotiable. Many companies were in fact advising their suppliers that if they didn’t like it, they could tear their contract up!”

“This is a very draconian measure to take”, says Brownlee. “The parties to a contract should honour the obligations and the requirements signed up to. Should circumstances change, both parties should agree what changes, if any, are required to a contract. Protection rather than damage to your supply chain in these uncertain times should be paramount”. The real issue he highlights is how this will affect those who work in the commercial department of organisations. “As commercial managers should we be tasked with unduly pressurising suppliers and looking up the line to see where we can cut the cloth with clients? Or should it be a more pro-active and elegant approach to actually manage tougher times rather than the ‘large stick’ approach that we have seen in other industries?”
 
The majority of attendees disagreed with an aggressive approach, believing it to be a short-term fix only.

"It always comes back to bite you," says Heather Rodgers, head of procurement and supplier relationship management at Centrica. “We put a lot of time and effort into our key suppliers and they almost always become an extension of our business, in both the good and the bad times, with the most important suppliers for us being the ones that work with us in these really tough times. What I really like is where we’re working with some of those suppliers, and looking at their processes more broadly. Although they might not be able to do anything in direct relation to us, we can actually help them to remove a huge number of costs from their dealings with other companies.”
 
It’s all about constant reviews and adjustments says Rodgers. “I actually find that a pro-active approach helps you get through the tough times. It’s not an opportunity to review the way we are doing something and remove costs in a different way other than just cutting them right back. At the end of the day we play a key role in driving down the costs and making sure that the quality is there.”
 
Greg Brownlee explained the importance to good business of building better relationships. “The benefit of having long term relationships with a supplier is that there is a level of trust there, meaning that you can actually work together to save costs. More importantly the short sighted and draconian approach to cutting contracts with suppliers may actually cause them to go out of business. This in turn causes a lot of organisations major problems because the supplier will then need to be replaced. This is often not something that can be done overnight and in all likelihood will be more costly. The end result is ultimately a negative impact upon what you yourself are delivering.”
 
And for some, such as QinetiQ's commercial director Chris Mead - who is reliant on a high number of specialist suppliers - making draconian demands on suppliers is simply not an option. “My company has a different challenge with roughly a third of our revenue supported by a single source supply chain. With a lack of competition in the supply chain and the needs we face from our customers -  who are in essence government departments - we don’t have the option of sending them a tersely worded email saying cut five percent off your price! It’s therefore about sitting down with people and getting them to have a sensible conversation with you. The question is how to get to that point and how much have you spent in the process of doing it.”
 
Tim Cummins, Chief Executive of the IACCM, believes buyers should be looking for some kind of ‘balanced renegotiation’. He commented "I actually see it as unethical not to renegotiate contracts, in the sense that a contract's purpose is to give both sides a reasonable basis for planning, based upon the commitments and responsibilities they are able to assume at that time. Clearly the current circumstances should really drive companies towards this approach and to undertake an honest reassessment of their respective needs and capabilities.”
 
“Not paying suppliers in a credit crisis is not only going to potentially destroy some of your supply chain, but it will also certainly destroy any opportunity that you had to build trust,” he added. “In a world where everyone is talking about needing to build trust and behave ethically, then this sort of behaviour is clearly something that is not only counter to your business interest from the point of supplier relationships, but also to your public image.”
 
This view was mirrored by those around the table and proactively checking the financial health of suppliers throughout their relationships, not only at the start, was highlighted as critical.

"We tend to be quite good on the upfront financial due diligence, but it's not always a well-developed ongoing discipline at present and we need that right now," says Colin Davies, Senior Director of worldwide procurement at drug company Pfizer. “An ongoing system of checks would allow buyers to see earlier if suppliers were running into trouble, or needed assistance, and they would then be in a position to help them to act.”

But Tim Cummins believes the whole contracting process may need to be revised in light of the current situation. “It’s actually to the broader point that a number of companies have been emphasising for some time, which is that the global economy has brought with it a dramatic increase in the frequency of change. Obviously what we are going through at the moment is a key example. None the less, with the speed of technology change and the speed of new opportunities occurring, we could argue that we are all dealing with a far more volatile environment than we were twenty years ago. Yet many of our behaviours and many of the ways in which we go about contracting in particular remain very much unaltered”.
 
“I think this whole issue of how you structure contracts might need to now incorporate  much more flexibility and allow for the ‘management of change’ and this is something I think many are beginning to recognise – and this is also something they need to become far more sophisticated at. Contracts aren’t about getting a document signed and sticking it in a drawer, it’s actually about having a living framework so that the relationship is governed throughout its life-cycle. In order for that relationship to then evolve over time it needs to be positioned and structured in a fairly flexible way.”
 
But it’s only now in this current economic climate that relationships are being tested, as Greg Brownlee explains. “Positions of trust or relationships built on trust that have formed through the good times only really come into their own in the bad times, because that’s when they are tested to the maximum - do I trust this guy and does he trust me when it comes to survival!” 
 

Brownlee added. “There is a very real importance to maintaining your supply chain and particularly monitoring and mentoring your suppliers. I think we will all need to be proactive rather than reactive in the commercial and contract management of our suppliers in these times of uncertainty, in order to ensure that the organisations we work in don’t end up as front page headlines in the Financial Times. I think we all probably need to work harder to do things better and to make sure that the right systems, people and processes are in place to make sure that once the downturn ends we are all in a good position to take advantage of the good times.”

 

Blake Newport is an IACCM Corporate Member. For more information about Blake Newport and its services, visit http://www.blakenewport.co.uk/

 


 
 

In Case You Missed It .....

 
A round-up of some interesting news articles and research results. This month, trends in legal services buying, outsourcing versus insourcing, focus terms and conditions and the trend to 'free' goods and services.
 
 

Supply Excellence ran an interesting article on Legal services spend and the growing focus on alternative charging methods, which comes on top of the trend towards outsourcing of selected activities to low-cost providers. Hourly rates increasingly appear to be a thing of the past, but finding creative alternatives remains a problem. Category specialist Nick Cherrone discusses some of the options being explored by negotiators.
Is large-scale insourcing the next trend, as companies react to social and economic pressures and increased availability of domestic labor? This was the subject of discussion on CIO Talk Radio and, while there are certainly indications of some increase in repatriation of work, the panelists uttered some words of warning and helpful advice for those considering this route. Useful listening for those who may be involved in sourcing decisions or negotiations. 

 

Did you know that almost 30% of companies have extended their payment period in the last 3 months?  

Did you know that over 70% of companies are actively engaged on renegotiating many of their contracts?  
Were you aware that almost 40% of companies have been tightening their approaches to confidentiality and the application of Intellectual Property rights?

 

'Freeconomics' (not to be confused with Freakonomics) is a concept discussed in Knowledge@Wharton. and the subject of a forthcoming book by Chris Anderson, author of 'The Long Tail'. The idea of offering 'free' goods and services in order to generate downstream demand is not new; but today's networked age may increase its role as a viable economic option for a growing number of goods and services.. Free cars? Free software? This is an approach that may re-shape many industries and the competitive landscape in the next few years - especially in these tough economic times. Important reading for any contracts and negotiation expert.

 

 

 


 
 
 
 
 
 
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