Contracting Excellence Magazine - Dec 2009
IACCM Board Election Results Announced
- Adrian Furner, Commercial Director, BAE Systems
- Nancy Nelson, Global Contracts Director, CSC
- Ken Riley, General Manager, Supply Chain Management, Chevron
- Margaret Smith, Executive Director, Contract Management, Accenture
Highlights of 2009: A Turbulent Year
· Actions are no longer hidden. Increasing transparency has resulted in new levels of scrutiny for corporate and public sector behavior. The quality and integrity of trading relationships is under a new spotlight, leading to unprecedented interference and expectations of far higher ethical standards. The scale of settlements or fines being levied on companies such as Pfizer, Intel and Credit-Suisse are wake-up calls to executives everywhere that their trading standards and practices must improve – and that they are also responsible for failures in their extended supply chain or distribution networks.
· The law cannot any longer cope with global commerce. The challenge is in part about volume, but also it is about the anachronistic reliance on tribal legal systems that themselves become a source of dispute. Arbitration and mediation are becoming far more prevalent and starting to influence the content and structure of contracts.
· ‘Cozy relationships’ simply don’t work. So many key relationships were based upon personal ties at senior levels. Today’s competitive environment has pushed many organizations into complex cross-border transactions where personal knowledge and relationships play little or no part and where cultural divides create a gulf of potential misunderstanding. Many relationships are today at the organizational level – yet systems and procedures to support communications and reporting have not caught up.
· Traditional contracts are still in transition from a world dominated by products to a world dominated by services. The old world of caveat emptor and input-based value analysis has largely disappeared in many industries, yet contract and negotiation behavior has not adjusted to reflect the need for outcome-based measurements and commitments.
But Sales Contracting Must Also Change ...
Businesses exist to sell and there should have been far greater pressure to think strategically about the portfolio of trading relationships, both buy-side and sell-side. Many lawyers and contract managers remain complacent to the double-standards of contracting, with their procurement terms and sales terms deeply incongruent. Such inconsistency in what is deemed ‘reasonable’ has often made contract negotiations a frustrating activity where efforts are diverted to battles over risk allocation on liabilities, indemnities, intellectual property rights and confidentiality, rather than the key issues of scope, goals, change procedures and performance management.
A Summary Of 2009
As the decade draws to a close, the highlight of the year with respect to contracting is perhaps the realization of how important it is as a business discipline .... and the urgency for it to improve. In my introduction, I mentioned the work of academics and top practitioners in this field. Their contribution is key, because in the end it is academia that brings respectability to new ideas and it is practitioners who demonstrate their practical application. Academics are the ones who conduct the authoritative research and teach the leaders of the future. Practitioners prove that innovation is worthwhile. Hence for me, the highlight of the year is the work of those top academics and leading-edge practitioners who are grasping the critical nature of contracting. They are building on the 10 years of work that IACCM has undertaken in its efforts to transform and gain recognition for this area of business practice and competency.
IACCM Americas – Orlando, Florida – March 23rd – 25th
IACCM Europe, Middle East & Africa – Edinburgh, UK – May 24th – 26th
"Contracting As A Core Competence"
Get ready to join us for our 2010 conference series, which kicks off at the Omni Orlando Resort in March, 2010. See the agenda or register at www.iaccm.com/americas .
Contracting has been identified as one of the three core competencies on which business organizations will depend if they are to flourish in 21st century markets.
Dave Connor, VP Procurement & Supply Chain, BP
Craig Silliman, Senior Vice President & General Counsel, Verizon Business & Verizon Telecom
Sylvia Steinhauser, VP & Deputy General Counsel, Enterprise Business, Hewlett-Packard
Vince Taylor, Managing Director, Commercial & Contract Management, Accenture
Lamar Chesney, EVP & CPO, Suntrust Banks
M C McNeill, Vice-President, IBM Global Services
Craig Guarente, VP Contract Management, Oracle Corporation
Kenneth Riley, General Manager, Supply Chain Management, Chevron Global Upstream Oil & Gas
Daniel Mahlebashian, Chief Contracting Officer, General Motors
Jean Kinney, Associate Director, Purchases, Procter & Gamble
Nancy Nelson, Global Contracts Director, CSC
Tim McCarthy, Worldwide Director, Contracts & Pricing, Rockwell Automation
Stacie LeGrow, Corporate Counsel, Cisco
Regina Jones, Global Client Contracts Manager, Schlumberger
Tim Cummins, CEO, IACCM
Katherine Kawamoto, Vice President, Research & Advisory Services, IACCM
Suzanne Watson, Vice President, Consulting Services, IACCM
IACCM: Where Thought Leadership & Practicality Co-Incide
Trends For 2010
In conversations with top practitioners and executives, the number one issue for 2010 is the subject of ‘commercial agility’ or ‘flexibility’. The standardizations and enterprise software implementations of the 1990s introduced new levels of efficiency, but far too much rigidity. The elimination of people and their replacement with automation in many cases reduced the ability to adjust to changing market conditions, and was accompanied by a stereotyped view of risk management (in particular the belief that risk could be managed primarily by allocating it to others). The recent recession has emphasized the need for change.
“We are now often facing an ‘asymmetric’ threat at the front line and therefore our products and services need to be more adaptive and agile. This flows down into the business models and commercial / contractual constructs required throughout the supply chain. There are significant opportunities for those organizations that can adapt quickly and drive the market; commercial / contracts staff have a real opportunity to play a strong role in this”, wrote one executive from the aerospace and security industry. His comments were echoed by others, including Professor Rob Handfield, who said: “I think one of the key issues we saw in the recent market intelligence study (conducted with IACCM) was the importance of understanding market conditions and having the ability to scan, listen and understand changes in the market – and form appropriate responses and actions in the business. Structuring contracts around those listening mechanisms and creating flexibility is a key component of companies that are truly best in class ....”.
On the buy-side, Procurement executives emphasized the need for more efficient ways to adjust price and cost models: “We are building into contracts mechanisms to manage inflation and deflation that should maintain supplier margins. We expect those margins to be used to develop people and technology that will benefit our operations”, commented one Chief Procurement Officer from the oil and gas industry. Another, from the technology sector, confirmed this position: “A major issue facing our contract professionals is how to deal with market volatility and / or inflation in 2010 – 12. The question we must be asking ourselves is how we are protecting our organizations against the market risks associated with economic uncertainty. The creative use of forward contracting or contract price adjustment clauses will be needed to ensure that the parties are managing commercial and market risks appropriately. If the contract represents an allocation of risks between the parties, we must ensure our personnel have the ability to assess the risks and allocate them in complex contracts”.
To enable this agility, among the changes in contracts and terms and conditions that we expect to see during 2010 are:
This drive for agility and flexibility will lead many to rethink their sourcing (and outsourcing) strategies. It will cause a reassessment of many of the large ‘prime contractor’ agreements because, as buyers develop their contract and relationship management capabilities, they will perceive advantages in having direct relationships with sub-contractors, both from the perspective of cost and flexibility.
Contract duration will be another major area of review. Many long-term contracts have failed to deliver innovation and the argument that outsourcing would increase flexibility was felt by many – during this recession – to be a myth. This is driving increased demand for either shorter contracts, or contracts with specific break provisions based on milestone reviews. While such changes are possible, they will change the economics of many deals and will result either in scaled-back supplier investment or in higher front-end charges.
Within the industry itself, former IACCM Chairman Bill Huber (now an executive at TPI) suggests two major trends.
1. An increased level of sale of offshore captives to Indian-based outsourcers, reflecting both a desire to monetize value and an increasing recognition that the business case for captive vs. outsourcing may have been overstated.
“Innovation is not about wearing a white coat,” wrote John Kay in the Financial Times (December 16th). He is not the first to comment that today’s sources of competitive edge are increasingly based on business models and commercial terms, rather than technical innovation. As Warren Buffett has observed, it is frequently the imitators who gain the greatest benefit from innovation, because they make it marketable. Kay concludes his article with the comment: “Innovative success is based on matching capabilities to market.”
In a services and outcome based world, it is the commitments we make – and our ability to reliably perform them – that represent innovation and competitive advantage. In the words of Tim Cowen, former General Counsel at BT Global Services and IACCM Chairman: “In IACCM, we use the language of ‘Commitment Management’ to highlight the fact that relationships matter and that what is taking place is commitments, ultimately in the form of contracts between organizations and in the form of personal commitments that need managing jointly. The three stages of commitment management are making a commitment (defining the demand and response); meeting a commitment (the deliverables and mechanisms); and managing a commitment (overseeing and adjusting what is delivered)”.
The contract embodies those commitments; the contracting process should assist in identifying the needs of the market and quality assessing the capabilities to deliver against them.
Escaping the straitjacket of traditional legal systems
At the corporate level, the trend towards alternative dispute resolution will continue, including increased mechanisms to anticipate and resolve potential sources of dispute through proactive management of contracts and relationships. A key goal of best practice contracting will be to avoid the likelihood of dispute through improved transparency and reporting. This will shift the focus of many terms, with greater incentives to share information and collaborate in issue resolution, rather than apportion blame.
This trend will be mirrored at a global level as governments seek to address the impacts of global trade and its implications to governance and equity. For example, we will see the emergence of more international bodies to oversee regulation or simplify dispute resolution. For world trade to flourish, consumer trust, government control and corporate risk management demand clear and enforceable codes of practice and instruments of enforcement. These will start to emerge in 2010, especially in areas such as e-commerce.
Increased integration of contract management and relationship management
Professor Leslie Willcocks sees ‘contract management’ maturing into ‘relationship management’ and certainly it is easy to see how these activities will increasingly combine on the buy-side of business operations. However, it is less clear whether this role will fall to Procurement, or whether there will be alternative organizational models. During 2010, specialist groups will increasingly emerge in areas of high complexity and strategic importance in order to improve management of risk and market change. In particular, areas such as outsourcing, managed services and IT procurement will frequently develop their own integrated contract and relationship management capabilities, unless Procurement rapidly responds to the need for such skills.
Mark Pedlingham, from the UK’s Office of Government Commerce, summarizes the challenge: “Procurement needs to take maximum advantage from its relationship with the suppliers it engages to deliver complex projects. (This will happen) in three stages – pre-competition, the contracting phase and contract management, where continuous adjustment aimed at delivering true value should be the focus. For me, procurement should be seen as an extension of risk management, but through the engagement of capability within the market”.
On the sell-side, transition will prove more complex due to the embedded role of relationship management within Sales. However, the pressure for greater commercial and contracting capability – and a more responsive process – will cause many to explore new approaches. Proactive commercial / contracts groups will move towards the strategic high ground of enabling organizational capability and responsiveness to market and customer needs. Those that remain transactional in their approach will increasingly find they are squeezed between a growing role for account managers (transactional contracting) and business development (commercial strategies).
Buy-side or sell-side, there is general agreement that improvements have a dependency: “The challenge is to provide sound practical guidance on how this is achieved and create the momentum and skills necessary to take advantage of it”. IACCM’s work in this area will be the development of published best practice guides and the introduction of advanced training options, both through the Association and through a range of academic partners - universities and business schools offering higher level qualifications for a contracting / commercial management career path.
Organizations will show greater sophistication in evaluating relationship value and segmentation. This will include a need to rethink price-based decision making and develop improved approaches to costing risk and evaluating relationship cost and value. While the pressure for change may focus on complex contracts and ‘strategic relationships’, organizations will recognize that sustainable progress requires a more structured approach to market management through a portfolio of contract offerings.
Contracting and relationship processes will also be remodeled to reflect this contracts portfolio, enabling better structured review and approval, negotiation planning and post-award resource management. Segmentation will support improved definition and use of contract management software tools, ensuring that the applications are aligned with the relationship type and goals.
In conjunction with this modeling, more thought will be given to the types of measurement and KPIs that are appropriate to different relationship types. By greater understanding of goals, and application of the appropriate relationship model, negotiations will become more focused and take less time. Use of the right metrics will assist contract management and ensure improved outcomes.
Jon Hughes of Vantage Partners sums up the opportunity this: “Research we undertook with IACCM and others was noteworthy in highlighting the huge amount of contract value – nearly half – that buyers and sellers report on average leaks away or goes unrealized ...... To approach negotiation and contract management with a goal of value realized surely needs to become a greater priority for the community. The research also showed a meaningful statistical correlation between a more collaborative approach ... The connection between collaborative, high-integrity business relationships (at the individual and organizational level) and contract and commitment management will be an area of increasing importance”.
Increased automation will start to be more actively promoted by the contracts and commercial community, both as a source of greater efficiency and to enable the higher value tasks outlined above. Today’s advanced contract management solutions increasingly offer data collection and analysis that lifts contracting from a transactional and operational activity into a strategic role, managing and advocating change at both a deal-based and organizational level.
While some leaders will recognize this value and its role in establishing competitive advantage, many will be driven primarily by tactical needs. In the words of Ashif Mawji, CEO at Upside Software: “Legal has taken a commanding position in actively seeking automation for contract lifecycle management and is genuinely interested in implementing efficiencies. Companies want to implement in an expedient manner and start reaping rewards sooner – the pressures of increased workloads with reduced staff are taking a toll”. Ashif also observes that more deployments are phased, starting with simpler forms of agreement and progressing to areas where there is more complexity.
Summary: The Challenge For Our Community
2010 is the year when commercial and contract professionals must step up – or risk being pushed aside. This paper explains the pressures for an increased role, the demands for commercial and contract strategies that align with market needs and improve the management of business risk. Contracting must become a proactive discipline, providing positive differentiation, rather than constraining the business and its trading relationships.
The challenge is real and immediate. It also offers a period of unparalleled opportunity for those who wish to make a real and visible difference.
I will conclude with the comments of Professor Rene Henschel, from Aarhus School of Business in Denmark:
“I agree that the Williamson Nobel prize and the recent Willcocks/Cohen research will put more focus on the interaction between law & economics, between contracts and management and economic theory. I also agree with the other view on flexibility, the outsourcing trends and so on, BUT: The big question is: how do we actually create lean, flexible, innovative, fast-moving contract management organizations that balance between the need for control, compliance and accountability, and the need for adaptability, agility and change-management? This is a management innovation question, and involves not only contracts but also relationship-building. There is a very interesting gap between "hard" and "soft" contracting - how much is left to the contract (e.g. control/information of the known), and how much is left for other factors, such as relationship building and trust (e.g. how do we manage the unknown)? That depends to a large degree on the type of contract (Sale, Service, Project), and the relationship (new/old customer or supplier? Domestic/Export contract?). Here, more research has to be done, so we can improve the way we select the right technique and contract for the particular relationship.
This also means choosing the right way for solving conflicts, for example mediation, and there is much more to be done in order to avoid conflicts and costs.
Contract managers have (or have access to) a lot of valuable information and this they must start to share with other stakeholders. For example, on outsourcing decisions (what is the cost/risk of this type of offshore supplier?) or on supply chain management (which kind of contract clauses will best motivate suppliers).
Consequently, one of the key trends must be that the top decision levels in a company are better aware of the great importance contract management has in modern business life. And that contract management truly is a cross-functional and interdisciplinary applied science”.