IACCM - International Association for Contract & Commercial Management

Contracting Excellence Magazine - Feb 2010

Contracts And The Roots Of Trade

Trading relationships lie at the heart of human progess. Whether we look at economic or social advancement, it is our readiness to trade that drives innovation, communication, business formation and organizational design. How significant are contracts - and the skills of contract and legal professionals - in supporting the trading relationships of today and the future?

Trading relationships lie at the heart of human progress. Whether we look at economic or social advancement, it is our readiness to trade that drives innovation, communication and organizational design. How significant are contracts - and the skills of contract and legal professionals - in supporting the trading relationships of today and the future?

Given this fundamental role, it is strange that so little attention has been paid to the factors that influence the success of trading relationships. While approaches to the production and distribution of goods and services has grown steadily more sophisticated, the question of how inter-organizational trading relationships should best be managed has not been a subject for extensive study. In particular, what role do contracts, procurement and commercial staff have in driving successful relationships and what difference does 'the contract' make in their outcome?

Today, there is growing awareness among executives that 'relationship management' is increasingly important. There is some understanding that growing business complexity demands new approaches and greater discipline to support highly inter-dependent trading networks. Not only must we become better at communicating requirements and expectations, but it is also essential that we become adept at overseeing performance and managing change.

In a generous commentary about IACCM, leading blogger Jason Busch (www.spendmatters.com) recently observed: "Tim Cummins, IACCM’s president ......, in a matter of minutes, will convince you that the contracting practice is one of the most important elements of human society. Or, after a G&T or two, he might even convince you to become an evangelist for IACCM's cause. But Tim -- and his colleagues -- support their philosophical musings with fascinating research and speakers that examine all sides of the contracting process, interjecting much needed legal and sales voices into the process as well. If you’re open-minded about sourcing strategies -- and are looking to expose yourself to new thinking about the best ways of structuring "trading relationships," as Tim likes to call them -- IACCM may be just your ticket to a mind-expanding couple of days." (Jason was referring specifically to our annual conferences).

Why do we see contracting in this way (and here I emphasize that I am talking about contracting as a process, rather than simply 'the contract' as an output of that process)?

Trade certainly pre-dated contracts and both pre-date the emergence of contract or procurement specialists. But as we know, the earliest contracts go back thousands of years because, as trade became more complex (and in particular, as it advanced from simple spot-trades with immediate exchange), it became essential to 'memorialize' the agreement. Over time, each society developed a set of rules that has generally become enshrined in law to govern principles of fairness and to establish recourse for failed commitments.

Each advance in human communications has driven greater complexity in trade. Today, the development of global trading networks has revealed many challenges which are proving to be beyond our immediate comprehension and control. They have revealed the inadequacy of existing legal and other risk management structures. The sophistication of the instruments we use to sustain trade must improve, as must the organizational structure, skills and capabilities for its management.

Trade depends upon trust. And trust is underpinned by confidence in the institutions and methods through which interactions are governed. To take a simple example, 20 years ago it would have been very unusual for individuals to trade across national borders. It was costly, time-consuming and fraught with risk. Today, millions of people operate through trusted intermediaries, such as eBay, and rely for recourse not on the law, but on service providers such as Paypal. Commercial inventiveness finds its way through complexity - and that must be the mission of those within commercial functions such as contract management, procurement and legal.

Few would debate that contracts and the specialists involved in their formation and management must be material to this future definition. IACCM has been alone in bringing together the academics, service providers and practitioners who can define and develop the steps needed for improved relationship governance and performance management - including the future form and purpose of 'the contract'.

Playing to Win

Build stronger relationships and gain greater value from your outsourcing relationships by getting vested Kate Vitasek and Mike Ledyard

By Kate Vitasek and Mike Ledyard

It is much easier to say win-win than to execute win-win. People play to win. From grade school on we are conditioned to believe that there is a winner and a loser. To have two winners on different teams must require some new math or letting someone win. For the truly competitive, giving in or sharing does not come easy. After all, there is only so much pie to go around.

When this attitude is mixed with perverse incentives, dramatic negative results can occur. Yet, deep down, if we really think about it, we realize that the amount of pie is not a fixed amount. More pie is made by sharing and creating conditions where everyone can win. However, a strong trusting relationship is required to achieve mutual success.

Economics can and does validate that the benefits of developing a win-win relationship. Behavioral economics – or the study of incentives and strategic interactions – is more popularly referred to as game theory because it attempts to model human behaviors, especially when there is an incentive at stake. Specifically, game theory attempts to model how an individual’s success in making a strategic decision depends on the choices of others.

Deeply rooted in mathematics, game theory began to raise eyebrows when John Nash, a Princeton University mathematician and game theorist, published his theory of equilibrium in 1950, commonly called the Nash equilibrium. For this contribution, Nash received the 1994 Nobel Prize in economics, shared with John C. Harsanyi and Reinhard Selten.[1] One of the core principles of game theory that Nash made famous—and the one that is of particular interest to Vested Outsourcing—is the concept of equilibrium. Nash’s early work in game theory led to what is commonly known as the Nash equilibrium. In a game involving two or more players, the Nash equilibrium occurs when each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep their strategy unchanged.

Can you improve your payoff? Later economists have studied game theory further and shown that it is possible to improve results beyond that of a Nash equilibrium. The key lies in players working together toward a mutually beneficial strategy that optimizes for the cumulative payoff. In other words, the power of partnerships and collaboration is not to optimize for the status quo (e.g., Nash equilibrium) but to look for ways to change the game to create an overall larger payoff. In short, the size of the pie is not fixed, and companies can and should work together to find ways to make more pie.

But there are barriers…

Our research has identified ten of the most common flaws we have seen afflicting outsourcing relationships. We can think of these as ailments— illnesses or, bad habits— that weaken an outsourcing relationship. A few are obvious. Most are not. One characteristic these ailments share is they drive perverse behaviors, leading to uncomfortable relationships and wasted opportunities for gains in efficiency.

In some cases, the ailments simply causes mild symptoms, so the companies or outsource providers never bother treating the condition. They suffer the symptoms, thinking they can learn to live with them, but the symptoms soon become so debilitating that they must be treated. Or they may have no visible symptoms, like a person with high cholesterol; but if they avoid regular healthcare and never get diagnosed, their ailment will weaken or harm them. In the worst case, the ailment becomes an outright disease that is so severe that it eventually causes the death of the relationship, causing the company to either bring the outsourced services back in house or switch vendors.

Let’s start with the easiest ailment to identify: when a company outsources based purely on costs. We’ve all heard the warning to not be penny wise and pound foolish. Unfortunately, many procurement professionals are still in the dark ages. Too many companies profess to have an outsource “partnership” but behind the scenes they focus solely on beating up their service providers on price.

When outsourcing, you need to think beyond the short-term bottom line. The danger in focusing on the cheapest offer is like anything else -- you make tradeoffs in quality and/or service. Unfortunately, many executives view outsourcing as a "quick fix" solution to resolving balance sheet problems. Often companies suffering from a case of Penny Wise and Pound Foolish fall into a loop of frequent bidding of their work to the lowest price provider and transitioning to that supplier. This can lead to a vicious cycle of bid and transition, bid and transition, bid and transition. When a company gets caught in this cycle they often end up with one or more of the following unintended consequences.

· Outsource providers that work with the company over time will refuse to work with the company again. They get tired of getting beat up on price only to have their efforts rewarded by losing the work the next time around and ultimately choose to pursue revenue from more productive outsourcing relationships. In one extreme example we witnessed a company re-bid their transportation services every three months. In this extreme case the company had churned through nearly all of the top 20 suppliers over 5 years and was forced to work with suppliers of lesser quality.

· Outsource providers bid such low prices in order to work with a company that they go out of business and put the company in a jam to find a new outsource provider. One company, as an example, was referred to by their suppliers as the “800 Pound Gorilla.” This company dabbled with outsourcing their manufacturing and had some successes. They decided to outsource all of their manufacturing to allow them to focus on their core competencies (which is usually a smart move). The book of business was worth roughly $100 million in revenue for the winner. In this case there were three contract manufacturers that had the experience and scale to manage the work volume. The 800 Pound Gorilla went through several rounds of extreme negotiations to save the last possible dime on the multimillion dollar outsourcing deal. They awarded the work to a $1 billion outsource provider – an estimated 10% increase in revenue for the outsource provider. The problem? The outsource provider “bought” the business, and eventually could not sustain the losses of profit. They gave the 800 Pound Gorilla a 30-day notice they would no longer manufacture their products and went into bankruptcy – eventually tanking what was once a successful and profitable $1 billion firm.

Organizations with this ailment give outsourcing a bad name– and should not be outsourcing in the first place. Their myopic focus might pay off in the short term, but this approach has proved time and time again that it does not pay to be Penny Wise and Pound Foolish. In fact, Oliver Williamson won a Nobel prize for his work in the area of Transaction Cost Economics. In one of his most recent articles he shares “….”.

WIIFWe versus WIIFMe

While many organizations tout they have "partnerships," our experience and research found that most organizations have an internal desire to optimize their own self interests. This is often known as a "What's in it for Me" approach (WIIFMe). How could they not when we are ingrained with "winning" from early childhood and most business schools and law schools focus on "winning." Procurement and sales professionals are trained in the art of negations to help them "win."

A “What’s In It For We (WIIFWe) philosophy strives to increase the size of the entire pie (unlock a greater opportunity than is currently realized by either party) versus maximizing the size for any one player (e.g., lower costs at the expense of the outsource provider's profits). WIIFWe challenges the conventional win/lose mentality and tosses it out the window. Because both organizations are working together to achieve their goals, Vested Outsourcing works as a true win-win relationship, which is what partnership is all about.

In our experience, only those organizations that truly challenge the WIIFMe mentality are able to achieve true Vested Outsourcing partnerships that deliver outstanding results. In our opinion, adopting anything less than a WIIFWe philosophy will result in less-than-optimal results.

Deeply wedded to the WIIFWe philosophy are the following five major rules.

Outcome-based versus transaction-based business model
Focuses on the "what" not the "how"
Clearly defined and measurable desired outcomes
Pricing model incentives optimized for cost/service tradeoffs
Insight, versus oversight governance structure

The five major rules of the "What's in it for We" philosophy.

How Vested Outsourcing Rules Work Together

In Vested Outsourcing, the organizations work together upon a foundation of trust, with mutual accountability for achieving the outcomes. Through the careful alignment of performance objectives, accountability and control, the service provider, while absorbing additional risk, is empowered to pursue improvements that will deliver improved performance, higher profits and lower total cost of ownership. Vested Outsourcing uses the power of free market innovation to improve the outsourcing relationship. This can be challenging to achieve, but the Vested Outsourcing journey should always strive to arrive at this idealized end state to achieve the performance pyramid where both the company outsourcing and the outsource provider are consistently applying a WIIFWe foundation and applying all five of the Vested Outsourcing rules.

For the service providers, Vested Outsourcing is an opportunity to exercise greater flexibility in deciding how support is provided, to ensure cash flow stability through long-term contracts, and to increase revenue by rewarding the service provider's investment in improving processes. For the company that is outsourcing, it is a chance to obtain improved performance while decreasing costs and assets by partnering with a highly competent and properly motivated firm.

To say that Vested Outsourcing represents a departure from conventional outsourcing practice would be to seriously understate the case. Vested Outsourcing changes the fundamental business constructs of the typical outsourcing approach.

Companies wanting to embark on a Vested Outsourcing partnership will need to deeply understand both the central core of the WIIFWe approach and the five rules. They will need to treat them as rules to live by. In our opinion, a Vested Outsourcing partnership that does not strictly adhere to the entire WIIFWe core and all of the five rules can easily fall victim to one or more of the outsourcing ailments that we have identified in our research. We like to think of a Vested Outsourcing partnership that does not adhere to the rules as a pig with lipstick. You can't simply pretty up something that is essentially ugly!

In Conclusion…

While the ailments afflicting many outsourcing arrangements occur as frequently as the common cold, they share a common cure: Vested Outsourcing can and does create an outsourced business model where both the company outsourcing and the service provider make every effort to achieve the elusive win-win. And the risk of catching one of these ailments through outsourcing is more than made up for by the achievement, through a productive Vested Outsourcing partnership, of lower costs by the outsourcing company and higher profits by the service provider, neither of which can be attained by each organization working alone.

Our upcoming book, Vested Outsourcing: Five Rules that will Transform Outsourcing is published by Palgrave Macmillan and offers a comprehensive guide for developing successful Vested Outsourcing partnerships. It is designed to help all companies begin their effort to take their outsourcing relationships to the next level. For those wishing to explore Vested Outsourcing further today, we offer four resources:

The University of Tennessee offers a three-day open enrollment class at its Center for Executive Education, "Vested Outsourcing: Buying Results, Not Activities!" (See http://VO.utk.edu) You can contact Bric Wheeler at the University of Tennessee to learn more BWheeler@utk.edu
Visit our blog at www.vestedoutsourcing.com and receive additional resources, success stories and insights offered by the authors. The book is available at Amazon
Contact the authors at the e-mail addresses with their bios below.

About the Authors: Kate Vitasek is a thought-leader in the area of Supply Chain Management and is a well-recognized authority on performance management and performance-based approaches for business. She is the lead researcher and faculty for the University of Tennessee's Center for Executive Education work in the area of outsourcing and performance-based approaches. She is also the Founder of Supply Chain Visions, a Top 10 supply chain management boutique consulting firm. She can be reached at kvitasek@utk.edu

Mike Ledyard is a veteran of international sourcing, manufacture and importation of product and tooling, especially from China and Eastern Asia. He is an author and frequent speaker on process measurement and improvement, and was selected as one of the Top 20 Logistics & Supply Chain Executives of 2001-2002. Mike is also a co-founder of Supply Chain Visions. He can be reached at Mike@VestedOutsourcing.com.

[1] B. Cole, “Bill Gates Could Gain a Lot from a Little Game Theory,” EE Times, June 19, 2000.

Legal And Contract Management: Should They Be Outsourced?

In a recent blog on Commitment Matters, IACCM CEO Tim Cummins reported on a conversation he had with Law & Economics professor Henrik Lando and outsourcing expert David Karabinos. They were debating the merits (or otherwise) of outsourcing contract management and related areas of legal services.

Can contracting be outsourced? That was the topic I discussed this weekend with Henrik Lando, Professor of Law & Economics at Copenhagen Business School and David Karabinos, co-founder of EquaTerra and a leading expert in outsourcing.

David made the following observation about corporate outsourcing strategy: “Imagine a two-by-two matrix with core and non-core activities on one axis and Do-Well and Don’t-Do-Well on the other. If you do a true and accurate analysis of what your company does, and plot them in the matrix, then you have a better feel for what you should outsource.”

Our discussion was driven by my response that, if you believe outside observers (The Economist, miscellaneous governments etc.), most organizations don’t do contracting very well. So on that count, it should be a candidate for outsourcing. Yet if you believe academics like Leslie Willcocks, Kate Vitasek and Oliver Williamson, then the growing uncertainties of a global economy mean that contracting is fast becoming a critical area of ‘core competence’. So that would imply it should be kept in-house.

In reality, relatively few companies have undertaken extensive outsourcing of their contracting process. And one reason for this is that very few have grasped that it is a process. In most places, it remains a relatively disjointed set of activities – which is of course why it is done so badly. Roles and responsibilities are frequently not well defined; stakeholders work to different agendas and objectives. Risk is not well communicated or managed. And things that are not understood make very poor candidates for outsourcing, because no one has any real idea of the underlying cost and it is almost impossible for the outsourcer to deliver services when there is no clear point of internal ownership.

Henrik Lando recently had the chance to discuss the role of contracting with Nobel prize-winning economist Oliver Williamson. Their conversation confirmed Prof. Williamson’s view that a ‘well-governed contract’ may do more to deliver results than a hierarchical relationship – hence supporting the idea that contracting competence is increasingly ‘core’. So does that mean we should not consider this a candidate for outsourcing?

David, Henrik and I all agreed that some areas of contracting can be outsourced. David cited the extent to which it is already happening with the Legal role, but admitted that other areas have been slow to follow. “Elements of complex contracting can certainly be outsourced (legal, financial monitoring, performance monitoring, contract administration). We tried to sell this as something third-parties could do for our clients at both TPI and EquaTerra. However, only legal is something that our clients (buyers) really accepted as legitimate to give to a third-party.”

In my opinion, the reason for this is largely due to the poor definition of process and the fact that this leaves affected resources hard to identify. ”Because virtually no one sees it as a process, there is no definition of activities that allows intelligent division between what should be retained and what could be outsourced. And it is this lack of definition that results in the fact that companies are generally ‘not very good at contracting’.”

Companies incur heavy costs because of this failure to develop robust contracting procedures. For contracts and legal professionals, it means we remain overwhelmed with tactical support and cannot readily drive strategic change because of poor visibility into data and because we lack the time. Selective outsourcing is the right way forward. Leading the changes needed to make it happen is a great way for contracts and legal professionals to be seen in a new and more strategic role by executive management.

A winning approach to Executive Education from Manchester Business School

IACCM has built a strong relationship with Manchester Business School, a world leader in commercial management programs. This article outlines the structure and thinking behind these programs and their continuing development. Cliff Mitchell and David Lowe, Manchester Business School, The University of Manchester

Cliff Mitchell and David Lowe, Manchester Business School, The University of Manchester

Key points:

Delivering rigorous and tailored learning in the most recent principles, processes and techniques of commercial and contract management
Combining the best features of executive education to deliver award bearing programmes for the commercial and contract management community
Offering flexible, joined-up qualifications: an MSc, a postgraduate certificate or diploma, or a pathway to gaining a specialised MBA

One of Manchester Business School’s (MBS) most successful executive education programmes, now in its third year, is the bespoke BP Managing Projects programme. Its success has been attributed to a unique set of features designed to meet the challenges faced by today’s leading businesses. An approach that is essential if Business Schools are to survive in the Executive Education market.

When approached by BP to develop an executive education programme in Managing Projects, the University was faced with a challenge: how to combine the best aspects of experiential learning, professional practice, tutor-led workshops, case-based instruction and distance learning for busy senior executives located at different global locations. We knew from experience (CEEBL, 2009) and from the literature that a blended learning approach delivers the best results (Garrison and Kanuka 2004) but when delegates can only be released periodically for short periods of time from their workplace, and you have also been asked to deliver a programme leading to a postgraduate award and a path to a MBA, the challenge starts to look ‘scary’.

In addressing this challenge an approach was developed that has now been proven with the BP Managing Projects (MP) programme and subsequently on the BP Engineering Management (EM) programme, and is now being applied to programmes in the commercial and contract management field. It can, we believe, be widely applied to other Executive Education programmes and offers a framework and path for executives through Postgraduate Certificate, Diploma, Masters, and MBA.

MSc. Commercial Management

MBS has delivered an MSc. in Commercial Management for several years. Initially commissioned by BT, but more recently offered to a closed consortium of private sector companies, including Rolls Royce, who have been able to enhance their commercial and contract management capability through the rigorous academic learning of an MSc provided through a world class business school.

Executive commercial and contract management education is about developing individuals with the essential skills and knowledge to support key inter-organisation exchanges, who are able to formulate, implement and manage appropriate contracting and procurement policy, strategies and tactics under conditions of uncertainty and rapid change. Skilled practitioners who are adept at considering and accounting for the various interdependent factors that need to be addressed when they put together new deals and supporting contracts; these include:

the nature of the transaction
supplier and client capabilities
market conditions
institutional constraints

These attributes are also relevant to practitioners managing the private-public interface, as well as to those overseeing business to business exchanges.

The MSc. in Commercial Management provides a thorough understanding of the key principles of:

Commercial Leadership
Reflective Practice
Market Driven Strategy and Innovation
Risk Management
Financial Engineering
Commercial and Contracting Strategies and Tactics
Law & Ethics in International Contracting

The course is delivered through an innovative blended learning format, combining substantial face-to-face contact with independent study supported by a virtual learning environment: a flexible alternative to full-time study. The distinctive features of our approach are:

Blended learning

Our programmes are designed around the provocation of ideas. This is achieved by combining a variety of pedagogic approaches, which include: case-based teaching, discussions, experience sharing, group work and individual activity, reflective practice, research, distance learning, reading, literature reviews and analysis, work based application and peer support.

Reflective practice

Experiential learning is a central feature. It facilitates the integration of concepts, theories and practice introduced during formal sessions and through distance-learning into the delegate’s working practices. It also provides a mechanism for developing the delegate’s competence in real life work situations.

Reflective practice papers are used as a dynamic learning framework to help structure the reflection process around the delegate’s current role and responsibilities, including their professional experience to date.

The whole process is about enriching the delegates’ current knowledge and experience through structured reflection and clearly relating the codified knowledge discussed in workshops with tacit knowledge of the subject area.

Rich web-enabled tutor and distance learning support

One of the difficulties of Executive Education is the limited time that senior managers can take away from their primary responsibilities. Our programme structures addresses this directly by incorporating a limited number of short but intensive residential sessions. Delegates on the MSc in Commercial Management, for example, attend a series of eight three-day workshops, based at MBS, spread over a two-year period. The programme, therefore, is not too disruptive to lifestyle and work commitments. Moreover, workshop sessions – as well as being ‘paced’ – are made relevant to the delegates’ professional contexts.

During these sessions and for the remainder of the programme we use web-enabled tools (based on a core Virtual Learning Environment) to support delegates, provide distance learning, access to a vast body of electronic literature via the John Rylands University Library, tutorial support and a ‘community of practice,’ team communications and support facilities. This also encourages delegates to develop an external curiosity in seeking new ideas, and to be less internally focused.

Award bearing and integrated into a suite of learning opportunities

We have found that the inclusion of a formal assessment process provides a clear focus and an additional motivation for delegates. Feedback from participants is that, although initially daunting, the assessment component actually proved helpful and that they found the entire reflective practice process extremely valuable in improving real work situations and their understanding of programme concepts and principles.

Besides obtaining a MSc. in Commercial Management, the flexible learning approach embraced at MBS allows delegates to achieve a shorter postgraduate certificate or diploma. Alternatively, credits gained on the programme can be used to obtain a specialised MBA.

Cross faculty input

Recognising that many of today’s business issues cross traditional functional boundaries, our programmes include significant contributions from other faculties. For example, the MP programme is run jointly with the Faculty of Engineering and Physical Sciences. This ability to offer cross-faculty Executive Education is a real strength of MBS and a direct benefit of having a business school that is part of a major University rather than a stand-alone entity.

Research based but grounded in practical experience

MBS comprises several research centres, for example, it is home to the Centre for Research into the Management of Projects (CRMP). Senior researchers lead the design and delivery of course content, which provides delegates with access to the latest world leading research and thought leadership – something that only a research based Business School like MBS can provide.

To ensure we meet the needs of our client companies such as BP, BT and Rolls Royce, and in order to provide an appropriate balance between original thinking and current practice, we work closely with subject matter experts (SMEs) from sponsoring companies on the design and delivery of our programmes. Additionally, external speakers participate in the programmes to provide additional breadth.

There are also very real benefits to the University of Manchester, Manchester Business School and its academics and researchers: relationships and contacts within participating organisations, insights into their structure and culture, and the potential for exploring future research ideas.

The relevance and ‘freshness’ of our programmes is maintained by a rigorous continuous improvement process based on detailed analysis of the effectiveness of every delivery – we do not believe in a “steady state” for our programmes!

Open access to the Programme

Manchester Business School is delighted for 2010 to be able to open up this highly sort after programme to the wider commercial and contract management community across both public and private sectors.

Key benefits:

Delegates achieve an MSc from one of the world’s leading business schools without interrupting their career
The course is recognised by the International Association of Contract and Commercial Management (IAACM)
Delegates gain immediate practical benefits which they’ll be able to pass on to the sponsoring company
A self-driven, self-selected dissertation provides the opportunity to undertake a research project on a practical commercial management issue, while also providing a return on investment to their employer.
Face-to-face workshops provide the opportunity to network with academics and fellow delegates from different industry backgrounds.

www.mbs.ac.uk/executive/open-programmes/msccommgt

or call +44 (0) 161 275 2917

Contact points:

Janine May

Senior Programme Administrator

Executive Development Centre

Manchester Business School

janine.may@mbs.ac.uk

John Christopher

Business Development Manager

Executive Development Centre

Manchester Business School

john.christopher@mbs.ac.uk

Dr David Lowe

Programme Director MSc Commercial Management

Manchester Business School

david.lowe@mbs.ac.uk

Original Thinking Applied

www.mbs.ac.uk

Dr. Cliff Mitchell

Senior Fellow

Deputy Director, BP Managing Projects Programme

cliff.mitchell@mbs.ac.uk

Dr David Lowe

Senior Lecturer in Commercial Management

Programme Director MSc in Commercial Management

david.lowe@mbs.ac.uk

Manchester Business School

The University of Manchester

Booth Street West

Manchester M15 6PB

Risk Management: Things About Which You Should Be Aware

For all our investment in new technologies, the ability to manage commercial risk is coming under severe pressure. Several recent reports and articles highlight the complexity of anticipating and managing risk. They point to the urgent need for us to improve our performance in a risk management role.

A recent report by Mactavish, a UK-based research and consulting organization, provided fascinating insight to the problems created by the recession. Desperate to cut costs and project short-term revenues, executive management has embarked on a range of high risk measures that impact contract commitments, liabilities and supply chain security.

Mactavish CEO Bruce Hepburn, in an interview with IACCM (recording available in the member library) expanded on the potential consequences of these risk decisions and what they tell us about the ability of business to anticipate and manage their consequences. In particular, he highlighted that many companies will have invalidated their insurance cover (which they and their trading partner may be relying upon to mitigate risk); and he observed that companies in general tend to ignore 'new' forms of risk - they focus almost exclusively on things that they or others have experienced in the past.

Among the major risks that were identified, many have direct connection to commercial or procurement activities:

Moving into unfamiliar product areas and territories (including taking on new and untested contractual commitments or trading / distribution partners)
Speeding up product launches (creating unknown quality or liability issues, internally and with suppliers)
Weakening supply chains and increasing vulnerability in order to reduce costs (for example by cutting the number of suppliers and distribution centers, or by relying on lowest cost suppliers regardless of their reliability or capability to sustain claims)
Increased outsourcing to unknown or high risk locations (pushing down unit cost at the probable expense of quality and reliability)
Acceptance of extra contract liabilities in sales bids and negotiations (warranties, recall costs, indemnities etc.)
Reducing supervision in key areas such as health and safety or contract oversight (driven by ’suicidal’ bidding practices)

Over on gtnews, an excellent article drew attention to seven supply chain risks and various regulatory trends and initiatives about which our community should be aware. Many will increase commercial obligations and frequently could result in the need for additional terms and conditions, depending on which countries are involved.

Security. "The fight against terrorism will remain a priority worldwide. Security changes and requirements will continue to affect international trade for the foreseeable future, with an emphasis on advance data and self-reporting," according to the article. It goes on to list a number of the major initiatives being implemented by governments worldwide and highlights how 'the onus for their enforcement will continue to fall onto the trade community."
Importer filings. With effect from January 26th, the US has imposed new security requirements for imported goods. "To help avoid liquidated damage penalties, the trade community has dedicated resources to implement the processes and procedures necessary to comply and will require their supply base to do the same. Evidence to this effect will be necessary when being considered for current and future product procurement."
Food safety. Another US initiative that will shortly be implemented is PREDICT, a system by which customs authorities will undertake random sampling that may cause delays to imports and which will also apply 'risk categorizations' that will have greater impact on some exporters than others.
Trade Enforcement. Yet again a US initiative that is likely to become law this year and which rewards companies that enter into voluntary controls over supply chain integrity. There are some industry concerns over data security.
Sustainability. Somewhat at variance with the findings of the Mactavish survey mentioned above, the authors of this article see a shift in larger companies away from simple cost reduction to more sustainable supply chain policies. "Decisions made previously based solely on cost will be held accountable to a whole new set of additional questions by executives, board of directors and shareholders. The conversation and questions will shift from: "Can we?" to: "Should we?" and "How long can this last?"
Entering new markets. In accord with the Mactavish findings, the likelihood of management pushing into new and higher risk markets is rated high. The authors question whether companies have built the systems and resources necessary to assess and manage the risk involved.
Flexibility. As with many other commentators, the article highlights the need for flexibility, but makes the point that this itself creates potential problems. As sourcing switches between low cost providers, the need to maintain integration between different parts of the supply chain will prove increasingly demanding.

Congratulations to Dave Sadler
Completing the Fastnet Race 2009

On Sunday 9th August the world's A-List sailors from around the world in the strongest international line up of 300 grand prix race yachts hovered in Cowes waters, waiting for the horn to start one of the toughest events in the international yacht racing calendar, the biennial Fastnet Race. The competitors (from the UK and across Europe, USA, Hong Kong, Chile and Australia) faced brutal weather, complexity, foul tides and at times calm, during their 608 mile ordeal out through the Solent, negotiating numerous tidal gates past the Needles, Anvil Point, Portland Bill, Start Point, and Lands End, as well as the open ocean as they crossed the Celtic Sea to round the famous Fastnet Rock 10.8 nautical miles off the coast of southwest Ireland, before returning round the west (open sea) side of Scilly Isles and the home run in to Plymouth.

Portland Bill was probably the defining moment of this year's race, with most of the big boats managing to make it past before the tide turned foul, with the rest (including some notable professional boats and Dave Sadler) becalmed on an adverse tide.

Dave Sadler was one of a crew of 7 on the 36' Dehler db "Draig O'r Mor", finishing a very respectable 28/59 in class placing the team 14th out of 114 in IRC3 for the RORC 2009 offshore season to date.

The race in context: This year was the 30th anniversary of the tragic 1979 Fastnet Race, when gale-force winds battered the fleet. 15 yachtsmen lost their lives, and a total of 23 yachts were sunk or abandoned. A massive search and rescue operation resulted in over 130 sailors being rescued at sea, a feat of courage overcoming technological disadvantage as the limited communications and satellite navigation at that time meant that one of the greatest difficulties facing the rescue services was locating each boat. In 2007, the last race, conditions were so poor 207boats of the 247 field retired. This year all the yachts and sailors returned to port safely.

Contract Management Community of Interest

CM Organization and Management COI

Sourcing Community of Interest

Supplier Relationship Management COI