Contracting Excellence Magazine - May 2009
Managing Through A Time Of Crisis: An Opportunity For Leadership
Contracting is becoming more important. It represents a key element in effective business controls and corporate governance. This importance was recognized quite specifically in a recent Memorandum issued in the name of President Obama, which highlighted: “It is essential to have the capacity to carry out robust and thorough management and oversight of contracts in order to achieve program goals, avoid significant overcharges, and curb wasteful spending.”
This need for improved contract management combines with a worldwide focus on greater financial and risk control. In the wake of the global financial meltdown, G20 leaders gave a clear indication of their thinking when they included the following statement in their final communique:
“Staff engaged in financial and risk control must be independent, have appropriate authority, and be compensated in a manner that is independent of the business areas they oversee and commensurate with their key role in the firm. Effective independence and appropriate authority of such staff are necessary to preserve the integrity of financial and risk management ....”
Other initiatives and public expectations reinforce the message that organizations everywhere must clean up their act. Business policies and practices will be scrutinized for their ethical standards; companies will be judged for their demonstrated fairness and social responsibility.
It is therefore clear that staff in contracts, commercial, procurement and legal groups have both an opportunity and a duty to protect their organizations from harm - to serve the interests of a wide group of stakeholders both inside and outside the company through principled and ethical trading relationships and networks.
But simply building a rigid set of rules around the company's operations will not result in effective risk management. In today's fast-moving business environment, rules and policies must be kept under constant review. Failure to comply may represent risk; but compliance with the wrong things presents an equal and possibly greater risk.
So the task of the contracting process must be to act as a barometer that measures the external climate and ensures that internal business controls are adjusted and monitored accordingly. And that represents a major shift in the goals and the role of most groups responsible for contract management today.
In his keynote address, IACCM's CEO Tim Cummins outlined the road ahead and highlighted the steps that groups should be taking to start on the journey. This will be amongst the featured webcasts that are being offered this month (see below).
This, then, was the core theme that underlay IACCM Americas 2009. The articles in this edition of Contracting Excellence reflect the views of a variety of delegates. Those who could not attend will have the opportunity to hear selected presentations in live or recorded webcasts (contact firstname.lastname@example.org for details). They can also access the full set of presentations in the Member Library at www.iaccm.com.
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There are almost 4,000 professionals from over 30 countries currently undertaking IACCM training and certification programs. New cohorts are starting soon; or you can undertake training as part of a corporate team. Find out more by contacting Jim Bergman (email@example.com) or Paul Mallory (firstname.lastname@example.org).
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IACCM Conference: Balancing Risk … and Finding Rewards
I am attending the IACCM Americas conference in Orlando today and tomorrow. So far, each speaker and roundtable discussion has focused in one way or another on a common theme - risk. What are the risks in today’s economic climate? How do you uncover them (think preventive medicine rather than an autopsy)? And what process changes and tools will help?
The interesting thing that we’ve heard from procurement execs and legal professionals today is a warning against going too far to reduce risk. At first, this concept sounded somewhat counter-intuitive to a room full of people doing everything in their power to alleviate risks to their business. But the point is, every action a company takes to reduce risk has consequences. In fact, sometimes those consequences actually increase risk in another area.
For example, in the opening keynote address, Bob Endres talked about balancing the risks between the buyer and supplier in a relationship. Although their risks are often very different, recognizing your counterparty’s risk and collaborating to minimize the risks that are most important to each of you can be a win-win. Bob cited a case where a buyer and supplier each compromised to achieve their primary risk reduction objectives (price containment for the buyer and flexibility in raw materials used in production for the supplier). The agreement left each party with MORE potential exposure to risk in some areas. But by choosing their battles, rather than beating each other up in negotiations over risks that didn’t really pose major threats, each was able to reach their most pressing goals.
Another example of pushing too far on risk avoidance came from Jason Anderman’s presentation on legal spend. As a lawyer and former inhouse counsel working on procurement contracts, Jason saw first hand that many overly protective contracts actually cost the company a great deal of time and money for negotiations, while focusing on exactly the wrong kind of risks - indemnity protection rather than price controls. In other words, the opportunity costs for fighting against phantom risks was actually a risk to the company’s bottom line.
Dispatch One: Tracking the News and Happenings From IACCM Americas 2009
The annual IACCM (International Association of Contract and Commercial Management) Americas 2009 conference kicked off yesterday in sunny Orlando at the scenic Omni ChampionsGate resort. The outside temperature was a balmy 85 degrees, but the action and interest in the conference was even hotter. To my surprise (being Canadian in the US and especially Florida, hockey was mentioned in the opening keynote), IACCM Chairman Tim McCarthy opened up the conference with a reference to the current NHL playoffs and the strive for The Stanley Cup holy grail. He went through the challenges the players and the teams go through to have their names inscribed on this eternal cup and correlated that to what businesses and practitioners need to do in today's turbulent climate. The central theme of the conference "Managing Commitments in Turbulent Times" couldn't be timelier, with presenters centering around risk mitigation and management while focusing on the long term.
It's no surprise that the attendance level has dropped from last year's conference, but it is a lot higher than I expected. More importantly, the attendees are definitely of the right caliber and are very eager to learn from the speakers and the other attendees about what's working in the various organizations in terms of contract management and governance in this climate. The number of exhibitors seems higher than last year, which demonstrates the value and brand recognition IACCM has built and strengthened over the past few years. The usual suspects in the enterprise contract management software spectrum were present, including Ariba, Emptoris, I-Many, Selectica and Upside Software. In addition, consulting companies including EMC Consulting, Huron and TPI were also present along with providers in various related segments.
The morning started with Bob Endres of Synaptic Decisions challenging the audience on the notion "are our contracts keeping up with the times". Bob raised several good points to consider, including:
- Allowing for variations in risk within contracts and associating a price point for various risk levels (e.g. you probably don't want the same insurance requirements for your janitorial provider as you do for your largest part supplier). It's important to instill transparency in illustrating risk levels within the various elements of a contract and indicating the price variations for each risk threshold.
- Knowing that your strategic suppliers are at risk of going into bankruptcy, it's important to ensure you are working with them in a collaborative manner to ensure reasonable payment terms and risk mitigation so the supplier remains a going concern. Then once we come out of this recession, you will have strengthened your relationship and it will help you accelerate growth at a much more rapid pace
- Know that you are both a buyer and a seller in any transaction, even if you are the buyer of goods/services -- you are buying the goods/services but are selling your risk thresholds and governance controls
Well, I already had my ROI for the conference just from Tim McCarthy's opening remarks and Bob's keynote presentation and it was only 9:15am. I could tell that this was going to be a remarkable conference. Next was a powerful panel led by Pierre Mitchell of the Hackett Group accompanied by Mark McDaniel Chief Procurement Officer for Conoco Phillips, Doug Turner General Manager and Chief Procurement Officer of the British Columbia Institute of Technology, Carolyn Lindsey Director of Member Services with TRACE International and Stacy Goff President of ProjectExperts. The panelists articulated how their companies and organizations have brought their stakeholders together in balancing risk and ensuring a "Design-for-risk (reduction)" approach. Mark talked about how Conoco Phillips has brought together the contracting, procurement and risk management groups under one umbrella and the benefits realized. The diversity among the panel with Mark's group managing projects that can be over $20B each, to Doug's organization assisting much smaller deals, was very valuable for the equally diverse audience.
The day only got better with a morning break that allowed us to get rejuvenated with fresh Starbucks coffee and other beverages and head right into the various tracks on risk mitigation. I can honestly say that the speakers at the conference have a refreshing passion for this field and their presentations demonstrate their enthusiasm and knowledge. I was torn as to which tracks to attend and wish I could have split myself and attended them all -- now while I may have multiple personalities, they all needed to agree on just one track.
Lunch was great and the upside was it was outdoors, allowing us to enjoy the sun and warmth. This was also the downside -- nothing like perspiring in a suit while being next door to a pool and not being able to jump right in. It was back to the action packed afternoon agenda and I sat in on the panel discussion led by David Chameli Associate General Counsel for Sears Holding Management Corporation on Globalization 2.0. David quizzed the audience on "Is Globalization Alive and Well"? Well, controversy was in the air... With the Obama administration focused on using domestic resources, outsourcing and off-shoring has been an interesting discussion in some industries and as such, globalization is taking a back seat. Opponents pointed out that diversification is the strategy their companies were using to instill resilience and were thereby capturing new untapped international markets. Needless to say, it was another interesting discussion with valuable lessons and the one key thing I got out of it was to not re-trench, but rather get even more aggressive in capturing new markets while being smart about it (i.e. doing the right research before attempting to take on a market just for the sake of growth).
Next came the tracks on, yes you guessed it, Globalization. Again, with the variety of top-notch speakers to choose from, I knew that whichever track I picked was going to be great -- and it was.
We wrapped up the evening with a wonderful meal hosted by the title sponsor and we were surrounded by a gorgeous Florida sunset shining on the beautiful ChampionsGate Golf Course. Being outdoors, I would never miss the opportunity to enjoy some fine cigars and beverages with good friends, colleagues and dear customers -- so I did just that (and shared too). At midnight, I decided it was time to head back to the room and write this blog as well as complete my day's worth of work in 1.5 hours. I have become more efficient thanks to today's learning and this is my first blog (and it shows). One more to come, if I am permitted to post ...
- Ashif Mawji
Dispatch Two: Tracking the News and Happenings From IACCM Americas 2009
The IACCM conference day 2 agenda had even more thought provoking content and I was surprised to see all the attendees bright and early, even after considering the evening gala dinner the night before which had the troops enjoying a lovely dinner and fine beverages. This tells me that the content presented was well worth the sleep deprivation.
The morning started with a powerful keynote from Roberto Magana, Vice President -- Purchases, Global Business Services, Proctor & Gamble Company discussing what P&G had done to help with innovation in supply chain. P&G has about 1,000 professionals in its global business purchasing services group and one of their key strategies has been to allow each unit to operate as an owner while leveraging the efficiencies available in a global structure, as Roberto put it "Go Global without losing the local touch". They have truly embraced collaboration at all levels and partnered with industry leaders like Cisco to implement tele-presence facilities in over 50 locations, allowing for agility while streamlining costs. They built strong partnerships with their suppliers and truly work in a win-win manner. I can speak personally to this as P&G is also an Upside Software client and it's been a great relationship. There's a lot others can learn from building a strong win-win partnership and structuring contracts to be very fair (their purchasing contract for license and services was one of the most amicable ones I have ever seen). But I digress… P&G is a very well respected business in the consumer / packaged goods industry and it was apparent from Roberto's presentation that they have very, very smart people leading the troops, which comes from the top with A.G. Lafley. Needless to say, I took a lot of notes and will try to leverage some of their strategies in helping my company and more importantly, our clients, where applicable.
With Roberto setting the stage for innovation, the next sessions and tracks were focused on this theme with intriguing presentations by Russ Edelman of Corridor Consulting, Tom Larkin of Credit Suisse, Nancy Jessen of Huron Consulting Group, a joint presentation by Mark Oman and David Barton of Agilent Technologies, Jonathan Hughes of Vantage Partners and Ioana Canescu of Tellabs. Again, picking sessions to go to was a tough endeavor so I basically threw a dart on the agenda page and off I went. I attended Nancy’s presentation which in essence stressed that technology is only part of the solution and before technology is brought in, take the time to understand and agree upon what the objectives, goals and desires/outcomes are. Then bring in technology that truly meets these criterion and implement the right methodology for deploying the technology. Which led into the next session led by Ioana that provided the details on how to successfully deploy contract management software.
Ioana spoke very honestly and talked about some of the mistakes and challenges experienced at Tellabs. She had the guts to recognize that the first solution they picked was not the right one and to stop that deployment. Now at that point, most would likely just abandon the initiative let alone make a recommendation to go out to the market to find yet another solution. She understood that it could have meant her job, but Ioana wanted what was right for Tellabs, irrespective of her personal fate. Wow -- I wish we had more Ioana's in the workforce -- when people put the greater good ahead of personal gain, we get excellence and leadership. So, she got management’s support, which also says a lot about Tellabs and the support they extend to their leaders. Well, the next selection they made worked out very well for them and they were able to roll out phase 1 and are on the way for phase 2. Ioana gave a very detailed blue print on the approach and techniques to deploy contract management successfully, which most consulting companies would charge an arm and a leg for. So, in terms of value for the attendees, there were definitely no complaints.
Next was Tim Cummin's, CEO for IACCM presentation and he keynoted on Managing Through a Time of Crisis... An opportunity for leadership. Now anyone who's spoken with Tim or attended one of his sessions will realize within 5 minutes that there's no one out there more passionate about contract and commitment management than Tim. In essence, Tim challenged the audience to be leaders and not take the obvious stance on increasing reviews and compliance but instead to think out of the box and focus on innovation and leadership. It was indeed an engaging discussion and the audience offered up ideas on what they have done in their organization and what's working and not working. Lunch was next but there was no hurry to feed the grumbling stomachs -- the presentation was just that engaging.
After lunch (again outside on a perfect southern Florida day), it was a different story. It was Friday, the last day of the conference, very nice outside, already received a strong ROI on their attendance, a stomach full of incredible food and wonderful iced tea... Well, you can understand why I saw a few slipping away to the whispers of the pool bar...(I managed to resist those calls)
For the die-hards, there were still a number of interesting presentations including one from William Deckelman, VP and General Counsel of CSC Corporation, where Bill talked extensively about bringing together the contracting, legal and sourcing groups in a much more collaborative and effective manner. He discussed how to foster teaming between these groups so there's no silos or competing agendas, understanding and defining the organization's core contracting capabilities to set the right expectations and fill any missing skill sets, and empowering these groups to instill innovation and positive change. Again, another timely and needed presentation for today's times and how corporations can take the opportunity to instill changes that ordinarily would not be accepted or could not be implemented in past years. Mr. Obama's theme of Change was definitely embraced at this conference and I for one am excited to be a part of this journey.
There was one more panel session followed by related tracks and with that came the end to yet another very successful IACCM Americas Conference. I heard some rumors about the location of next year's event and I do hope those rumors come true as the location is one that everyone will be simply amazed with. I will give you a few clues: Olympics, Picturesque, Ocean, Mountains, Hockey, Very Friendly People. I can't wait for it and will be working closely with Tim and team to help make it an even bigger success than this year, which will be hard to do, but I am up for the challenge.
- Ashif Mawji
IACCM Conference: Rethinking Incentives for Legal Services
Jason Anderman’s presentation at the IACCM Americas show Thursday echoed Nick Cherrone’s recent series on addressing legal spend. Like Nick, Jason thinks most companies are spending far too much on their legal services and that addressing the billable hour - by focusing on alternative billing models geared towards results - is the way to drive better ROI.
What’s the replacement billing model and how can that cut costs, improve results and provide some degree of predictability? Jason, a former inhouse counsel who focused on procurement contracts, had plenty of ideas.
Primarily, Jason urged the audience to rework the incentives for their outside legal counsel. Between Jason and a few of the lawyers in the audience who were willing to share their experiences, we heard horror stories about how some firms really hit their billable targets. Let’s just say, if you structure the compensation and KPIs for associates and partners around hitting billable hour targets … they’ll “hit” those billable targets. But does anything in that comp plan sound like it encourages high quality, efficient use of client time (billed at several hundred dollars per hour)? Of course not. Results for the client aren’t part of the incentive and therefore become secondary. Couple that with the fact that legal services spend has largely been written off by companies as a necessary cost of doing business, no matter what that cost adds up to, and you see why legal spend is such an opportunity for savings.
To capture some of that spend and have better legal representation, Jason recommends negotiating “incentives that motivate people to do better”. Meaning, structure your relationship with outside counsel so that there are either caps on fees for specific, clearly defined projects OR include “efficiency bonuses” that reward the firm for coming in under budget.
Jason provides templates of these contracts, complete with incentive clauses, on his website - whichdraft.com. I encourage you to take a look … and then begin the dialog with your counsel. If you can cut costs, improve service and capitalize on market conditions in the legal field, it’s certainly worth a conversation.
IACCM Conference: Bridging the gap between great ideas and KPIs
The panel discussion on Risk Management at IACCM Americas yesterday focused on addressing the threats organizations face in the current economy. But perhaps the most interesting take-away wasn’t that sourcing, procurement and contracts professionals have an increasing role to play in risk management efforts. Instead it was a comment from Mark McDaniel, CPO of Conoco Phillips, who noted that it’s “important to get KPIs from the great, collaborative discussions into the contracts.”
That sounds obvious enough, right? Great, innovative ideas and strategies come from collaborative discussions all of the time. White boards, Word docs and cocktail napkins are covered in great ideas. But do those ideas make it into the legal contracts that will be interpreted by people outside of those initial creative discussions to conduct business?
Do the contract authors have a seat in the room while the risks, goals and strategies are evolving? Or, are sourcing and procurement pros in your organization scared of the folks in legal?
Ultimately, the legal contracts between buyers and suppliers will be where the rubber meets the road in terms of pricing, terms and risk management. So effectively translating concerns, ideas and innovations from conference room into contracted KPIs is something every risk averse organization must do.
Insights from the IACCM Americas Conference (Part 1)
The 2009 International Association for Contract and Commercial Management (IACCM) (http://www.iaccm.com/americas/) Americas conference opened yesterday in Orlando. The conference theme focuses on the tools, techniques and organizational models that result in the responsible management of risk and ensure high-performing business functions.
In the words of IACCM President Tim Cummins, “Today's market conditions have increased the pressure for responsible risk management. In such an environment, it is tempting to respond with increased review and greater emphasis on compliance. Yet this presumes that risks are themselves well understood and that market needs and opportunities will adjust to fit an accepted risk profile.”
During the opening panel, Conoco-Philips Chief Procurement Officer (CPO) Mark McDaniel focused on the fact that risks are analyzed by various constituents: finance and procurement, suppliers and service providers, partners, government entities and others. However, as Mark pointed out, “The trick is getting alignment of risk profiles and risk strategies between these constituents.”
An effective risk strategy cannot be built around risk transfer, as such an approach merely shifts the weak link within the chain, and does nothing to mitigate the overall supply and services chain risk. As a better approach, examples were provided of frameworks to integrate multiple risk scenarios into the negotiation process to encourage a joint mitigation approach as standard part of negotiation strategy
Pervasive challenges also remain in adoption of models that link risks on the enterprise level with those at the contract portfolio level and those within individual relationships and specific contracts.
In the case of Conoco-Philips, they have taken the approach of conducting regular meetings between the procurement organization and finance, internal economists, and legal to facilitate the formation of this common view. McDaniel also pointed out that he will ask supplier sales representatives whether they know the names of the CPOs within their companies and uses this approach to gauge whether his suppliers have implemented integrated risk strategies within their own organizations.
Those organizations that are effectively managing supply risk have implemented a formalized governance structure to institutionalize an integrated view of risk and enable efficient communication, analysis and decision making at the right organizational level. TPI’s presentation; “Global Procurement Design – An Agile Engine During Recession” provided an example of the type of framework that companies can implement to provide an integrated view of risk by leveraging both functional competencies and leadership processes. While technology is clearly helpful, implementing the appropriate communications and decisioning processes can be highly effective in the absence of any special technology. This also appears to be the consensus of many of the presenters at IACCM.
The General Counsel’s Role in Driving Enterprise Change for Contract Lifecycle Management
Even before the contract lifecycle begins, the OGC can establish a foundation of rules around the entire process, as once again it is in the best position to recognize the company’s risk tolerance and translate that into its contracts. As the hub of the contracting process, the OGC can facilitate the discussion between functional groups with competing goals to establish agreement on the corporate appetite for risk. Setting rules and policies up front increases efficiency so that processes don’t get bogged down with each deal variation. It also improves consistency across deals, further reducing the risk exposure of the company.
Unfortunately, executed contracts are often stored in various locations and formats—from file cabinets in the Legal Department or worse, a sales person’s garage, to a network drive that few know about.
If a question or dispute arises, those contracts and related documents need to be easily accessible by the lawyers for review. But without a central repository, critical time is lost searching for the appropriate documents. Also, when there is no global corporate view of the contractual obligations of the company, it becomes impossible to develop meaningful performance metrics. It is imperative that the OGC enforce a central repository for the storage of contracts and related documents, and define the standards for storage and access to the documents and data.
Companies can not survive without contracts. Furthermore, inconsistent and disjointed contract processes result in inefficient operations. The optimal state is a seamless integration throughout the entire contract lifecycle, from opportunity identification through termination. While the contracting process involves many stakeholders in the company, the OGC has a unique opportunity to drive change throughout the process and throughout the enterprise. Changes that are both necessary for the company and reflective of the changing role of the OGC as a proactive, strategic business partner.
IACCM's Americas 2009 Conference in April
Suzanne Watson, Nina Carstens, Tim Cummins, Ram Paravasthu, Sandra Lewy, Paul Mallory
Tim Cummins, Mark Heminway, Sandra Lewy, Katherine Kawamoto
Russ Edelman, Tim Cummins, Nina Carstens, Ram Paravasthu, Mark Heminway, Sandra Lewy