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

Contracting Excellence Magazine - Sep 2010

 
 

 

Contract & Commercial Management: An Increasing Role In The Global Economy

 
There is growing global interest in the role and practice of contract and commercial management. At this time of economic uncertainty, organizations worldwide have recognized the need to develop more rigor in their trading relationships and practices - and the contracting process offers a way to improve quality and controls. Tim Cummins, IACCM CEO, briefly reviews the trend.
 
 

According to this year's IBM CEO Survey, the growth of 'interdependencies and interconnections' lies at the heart of increasing global complexity. CEOs are anxious to improve the quality of risk management, to reduce rules and bureaucracy and to become better at managing customer relationships. Quite clearly, customers, suppliers and routes to market are foremost in these interdependencies and interconnections.

The issues of complexity go far beyond the historic need to build strong external relationships, because increasingly they span geographic borders, languages, jurisdictions and cultures. They are further impacted by the speed of change and the underlying uncertainties of a volatile and unpredictable economy, both domestic and international. Executives need tools and resources that will assist them in managing this complex new environment. In particular they need methods that can reconcile stakeholder interests and maintain the alignment of relationships (or deal with the consequences of misalignment).

This is where contracting and commercial management must play an ever-increasing role. At their best, they not only safeguard transactional integrity, but they also offer a disciplined and structured approach to exploring opportunities and investigating needs and capabilities. Through formal documentation, they ensure a record of commitment and a platform for the management of change. One of the few certainties in today's business relationships is that circumstances will change during the lifetime of a contract - and those changes will place poorly managed relationships under tremendous stress.

However, it is also clear that in order to address this changing business need, the contracts community must tackle some fundamental issues to make their work and their output 'fit for purpose'. Amongst these is the need to become more focused on business and market intelligence; to create a stronger link between risk management and economics; and to reshape the way that contracts are worded and structured, to make them useful instruments for communication and business management. These issues raise fundamental questions over aspects of today's business organization. One is the extent to which those in 'the business' can be provided with the skills and tools needed to be better commercial managers. The other is to determine the role of the lawyer and the approach to law in a global economy. IACCM is of course not alone in raising those questions.

That is why IACCM is finding a dramatic growth in interest in this field of expertise. The requests for us to speak with management groups or at international conferences has reached a new level. In the last four weeks, IACCM has presented in forums in China, Singapore, France, Denmark, Germany and the Netherlands, as well as multiple sessions in the US and the UK. In the next four weeks, Canada, Brazil, Turkey, Belgium and Sweden will be added to the list. Countries that traditionally operated with very different (and non-contractual) approaches to relationship management have awakened to the benefits that contract management can offer. As one CEO recently observed: "Dealing as we are with so many different languages and cultures, the room for misunderstanding is simply too great. We need a control process and a communication method - and that is what we have found the contract can do for us".

In this new world, contracting is more than just a control and compliance instrument. The process has always been about ensuring needs are recorded and commitments aligned (and not overstated). However, today's contracts and commercial process also needs to be more proactive in recognizing needs. That means growing attention to market trends and intelligence, so that policies, practices and procedures are under continuous review for possible improvement. Indeed, it is through this method that the contracts and commercial community will respond to the needs of the CEO to "improve the quality of risk management, reduce rules and bureaucracy and become better at managing customer relationships".

This edition of Contracting Excellence illustrates some of these points, with articles that highlight the role and extent of market intelligence and the alignment of law and economics. But perhaps most important, the increasingly global nature of contract and commercial management is emphasized by the two articles contributed by IACCM members in India, part of a rapidly growing membership group that is remarkable for its enthusiasm to learn and to establish 'best practice'.

 
 

 


 

 

Risk Management As A Source Of Risk

 
Risk management and economic analysis must become more integrated disciplines. IACCM has observed that organizations regularly undermine their results through inappropriate forms of contract and negotiation which overlook the connection between risk and economic outcomes.
 
 
An IACCM member recently reported that his company had achieved 10% savings by moving from penalty-based to incentive-based contracts. 
IACCM's joint study with the Rand Corporation revealed that the risk-averse nature of EU public procurement policy results in a price premium of more than 20%.  
A major global telecommunications company discovered that its approach to contractual risk was causing annual lost sales estimated at more than US$200 million.
These examples demonstrate that contracts are primarily economic instruments and that 'best practice' contracting, procurement and commercial management is driven by economic understanding of risk. There are a growing number of examples that illustrate this need for greater alignment between the contracting process and the economic value that it generates.
Trading relationships are established only when each party perceives the potential for economic gain. The contracting process – and the contract itself – is a key method through which those gains must be safeguarded. A primary risk for both sides is that the anticipated gain may be lost. However, there is another risk – which is that the relationship could result in some form of consequential loss far exceeding the original anticipated value. Examples of such losses might be third party claims, damage to reputation, or increased costs or lost revenues due to failures in service or supply. For the sake of clarity, I will refer to these as 'Type 2 risks'.
The contracting process should be assessing all identifiable risks and estimating the scale of the consequence of such risks occurring (i.e. how much might they cost?) and the probability that they will occur.  However, as the examples in the introduction to this article show, there is a very real risk that in seeking to protect against losses, the potential gains are diminished or eradicated. In particular, the terms and conditions that are used to protect against Type 2 risks frequently have this effect because of the behaviors they induce on both sides.
For both parties to a contract, there is a point at which the risk of loss begins to outweigh the potential for gain and therefore starts to affect behavior. In particular, terms that generate a need for self-protection tend to undermine results. This can take many forms, for example:
·         Aggressive pressure on price will frequently cause a supplier to take cost-cutting measures that may substantially add to performance risks.
·         Service levels or performance indicators may induce risky behavior. For example, unrealistic availability dates or time between failure can result in short-cuts which jeopardize quality or safety.
·         Onerous 'penalty' provisions such as liquidated damages, liabilities and indemnities result in a culture of secrecy and blame, which frequently add to the risks of poor performance and project failure.
·         Powerful organizations that believe they can manage risk through onerous contract terms often fail to develop the implementation and execution resources needed for success. Customer organizations in particular tend to believe they have passed responsibility and 'performance incentives' to the supplier; yet performance frequently depends on a mutual commitment to governance.
It is an inability to grasp and discuss the economics that drives the adversarial behavior in many negotiations. Procurement groups tend to think in terms of minimizing the headline price and maximizing the supplier pain for non-performance. Suppliers are frequently driven by an attitude of win the deal and worry about the consequences afterwards. Far too often, the relationship that emerges is not aligned with the aspirations or best interests of either party.
Of course, the best companies do not think this way. They are far more selective about their trading relationships (buy and sell). Yet even they are frequently guilty of not understanding the economic value or incentives of risk. Their contract terms are frequently driven by standard policies and procedures directed at risk aversion more than economic balance. Behaviors occur in spite of the contract, rather than because of it.
 There is evidence that a good contracting process leads to better relationships, where the parties remain mutually committed to goals and outcomes. In most of the publicized cases, the parties have worked jointly to agree and mitigate risks throughout the contract lifecycle. There are incentives for the right behavior – and penalties are restricted to situations in which there was a true failure to live up to the spirit of the agreement.
The core of any contract should be related to ensuring each party achieves its economic goals. Such agreements also recognize that the situation may change at some point during execution. It therefore enables the potential for disengagement, on terms that also maintain equity.
Overall, it appears that organizations which think in economic terms (what is the gain I am attempting to achieve or protect, what is the loss I am attempting to prevent or protect against?) equip their negotiation and contract management teams with the ability for different conversations, which lead to far more successful contract outcomes.
In particular, organizations must think carefully about the way they deal with the Type 2 (consequential) risks and the impacts these will have on the quality of performance, both their own and that of their partners.
 
 

A View From India: How IACCM Is Assisting The Development of Contract & Commercial Management

 
Among IACCM’s fast-growing membership in India, one of the most active and enthusiastic has been N. Balachandar, Head of Contract Administration & Management at Technip India Limited. Technip is a major engineering, procurement and construction company with annual sales of almost US$10bn. Balachandar has graciously acknowledged the value of IACCM’s advisory and networking services in assisting successful bids and negotiations – and has been a powerful advocate of IACCM membership to his fellow professionals in India. We recently interviewed him to discover the aspects of IACCM services that have been most helpful.  N. Balachandar, Technip India Limited
 
 

Balachandar, you have been an active contributor and participant in a wide range of IACCM activities. Can you briefly outline those for us?

As soon as I enrolled as a member of IACCM, I started to utilise & actively participate in the 'Message Board' of the IACCM site. I also responded to most of the relevant surveys initiated & conducted by IACCM. And as soon as I had the chance, I volunteered to be a part of the IACCM working group to deliberate on 'Complex Project Contracting' with ICCPM - an initiative led by Mr. Tim Cummins.

Today, I am also participating and contributing in many of the Webinars, Webcasts, 'Ask the Expert' calls of specific interest.

After a few months of experiencing IACCM and its members, I wrote an article on 'Transformation to Pro-active Contracting Model' which was well received & appreciated by Technip group personnel & IACCM, and subsequently got published in the Special edition of the "Contracting Excellence" News Letter.

Of course, when the chance came around, I also volunteered to be a part of the core group reviewing the IACCM Contract Management Book (that will build on IACCM's eLearning modules).

Finally (a moment to cherish), earlier this year I was inducted into the 'Advisory Council' of IACCM representing India.

In what ways do you feel you have benefitted from your connections to IACCM and to the member network?

Whenever I feel the need of having clarity on certain areas of 'Contracting' or approached by others on complex topics, my first source of contact is IACCM. I started effectively utilising the 'Message Board' of IACCM site. I used it not only to get clarification but to initiate debates and try to get maximum insight into the subject. Moreover, I did not hesitate contacting fellow professionals through the on-line ‘Member network', to raise queries relating to specific Project or topic. In almost all the cases I get positive & fruitful response from the members, many of whom hold high positions in their respective organisations. Interestingly, some of the responses come from academic world.

Has your management been supportive; do you think they appreciate the value of those connections?

In India, these kind of activities are just not possible without the support of the Management. It will not be out of place to mention the tacit support & inspiring guidance I receive from Mr. K. Shanker, Managing Director, Technip India.

My Colleagues & Superiors are convinced that my connection with IACCM has certainly enriched my knowledge on the subject over the period of time and they do not hesitate in approaching me on issues related to 'Contracting'.  It is widely believed that most of my rulings on the subject have the backing of IACCM. I am slowly but steadily moving towards my goal of becoming  'Anchor point in Commercial Contracting related issues' in my Organisation.
 
What inspired you to set up the network within India? (Last year, Balachandar initiated a LinkedIn group that ties through to IACCM)

In India, most of the companies do not have a separate Contract Management division. These activities are being performed by Projects Personnel or Procurement Personnel with the support of Legal experts. This made me to think & create awareness among Project Professionals about the importance of 'Contract Management' per se. Since I am already confident of drawing expertise from IACCM, I felt the need of creating a 'Networking group' in India, which could act as a bridge, connecting the members to the activities of IACCM and ultimately populate IACCM membership in this part of the world. Nevertheless, my primary goal is to create a vibrant Contract Management community among young professionals in India.

How mature is contract and commercial management in India today?

In India, Contract and Commercial Management is just one step above the nascent stage. Contract management is mostly restricted to 'Progress measurement for payment' in Civil related works or only as a tool for (extra) 'Claim Management'. But the global exposure experienced by Indian Industry over a period of the last two decades has certainly created much needed awareness about Contract Management. But still a long way to go.

What are your hopes for contract management in India in the future?

By seeing the overwhelming response to the 'Indian Association of Contract & Project Management' - LinkedIn Network, I am confident that the Contract Management community in India is getting more vibrant day by day.

I draw strength from the interest shown by the members of this group in IACCM activities and in particular to the 'Commitment Matters' blog of Tim Cummins. I am convinced and confident that the day is not far off when the Contract Management community of India could be considered 'at par' with Europe and that of Americas.

 
 
 

 


 

 

Market Intelligence & Research For The Contracts Profession

 
IACCM is the primary research and market intelligence organization for contracts and commercial management. In addition to our regular studies (Most Negotiated Terms, salary survey etc.), we undertake a wide variety of occasional or commissioned studies and work increasingly with top academics and business schools. This article provides a brief summary of recent work; the results of completed surveys can be found in the IACCM Member Library.
 
 
4th quarterly report on the Global Economy. These studies attract increasing levels of member input and provide the current and projected state of economic demand by industry and major geography. They are unique in taking both a buy-side and sell-side perspective and include data on subjects such as the current focus for negotiations. Each study results in a report and also a webinar series in which we discuss the findings and also put them into a wider context of current events and trends. The webinar recording is available in the IACCM Member Library.
 
Cloud Computing. This study assessed trends in demand and compared buyer and seller perspectives. It sought to understand the primary ‘value propositions’ for cloud offerings and the extent of buyer understanding / value perceptions. It is being used by a working group on cloud computing offering development and revealed continued uncertainty over the precise direction and value proposition related to The Cloud. 

International ‘ease of doing business’. This ground-breaking study compared the commercial attributes of 45 major trading nations. It revealed many areas of ‘hidden risk’, as well as providing a league table of international performance. It should be used extensively within member companies as they assess the cost and risk of doing business in various jurisdictions. The study has been gaining press coverage and governmental interest. We are now engaging in a campaign to highlight the results and we hope to create awareness within governments of the role and purpose of IACCM and its potential contribution to trading policy and capabilities 

Contract Management Organization. A member company requested input on the extent to which contract management is being centralized and the benefits / disadvantages of this approach. With almost 500 inputs (and more than 80 companies volunteering for follow-on interviews), this has been a useful insight to the latest trends – and confirms the drive towards centralized CM. We also explored reporting lines as part of this study. 

‘What is Contract Management?’. The IACCM Board recently acted as the judging body for selected inputs on a 30 second ‘elevator pitch’ for contract management. This contest stimulated wide interest and produced a helpful outcome – not only in confirming the breadth of the role, but also the growing international consistency in its definition. It was especially gratifying that our winner was a Malaysian attorney practicing as a CM within a Malaysian company in Kuala Lumpur – demonstrating the global reach of our profession and the IACCM community.
 
CURRENT STUDIES
 
Most Admired Companies for pre-award bid / contracting: This is the third in our successful ‘best practice’ series (2008 – post-award contract management; 20009 – negotiation). A key question must be ‘Will the list once more be dominated by the major outsourcing providers?’ These studies are widely cited and used by members to assist in their reengineering efforts. Importantly, they are also used by some to promote their own credentials and competencies, bringing useful publicity to the Association’s work. For example, IBM produced several videos and has quoted the report in various press releases. Accenture uses the results in its job advertisements for contracts and commercial staff. The current study has to date resulted in the nomination of more than 800 companies and the results will be published in October.
 
Trends in IT & Outsourcing Procurement. With many commentators suggesting that the CIO of the future must be far more competent at commercial and relationship (versus technical) skills, we ran a survey to test whether there was agreement with this hypothesis and the extent to which change was occurring. The initial results show a strong agreement that there is a big shift underway; and that this is also having significant impact on the criteria on which suppliers of technology and outsourced services will be evaluated. The survey also highlights the challenges of adequate commercial skills within many procurement groups. This study should be of major interest to many executive members and we presented the results at the 360IT Exhibition at Earls Court last month.
 
Accounting & Consulting Firm Contracting. Also on an ‘ease of doing business’ theme, but this time a commissioned study that benchmarks the performance of the top 8 consulting and accounting providers. It explores what ‘ease of doing business’ really is when it comes to contracting and negotiation – the relative value of responsiveness, flexibility, empowered resources etc. The depth of a study like this (it also involves extensive client interviews) provides extensive insights and action points for companies wishing to streamline their approach to the market and to build improved relationships with their trading partners, whether customer or supplier.
 
CONCLUSIONS / ACTION
 
IACCM's capabilities in undertaking research continue to grow, partly through the breadth of experience we now have, but also thanks to the strong growth in membership, allowing a far more extensive survey audience and the ability to undertake wide segmentation in validating results or ensuring an appropriate group for input.
 
It is our firm belief that members who use these studies (either by commissioning or by participating and receiving the results / briefings) are able to gain far greater management attention and be more effective in advancing the contracts / commercial / procurement agenda within their company. We offer facts and insights that cannot be obtained elsewhere, or which are available only from less objective / far more expensive sources. It is, however, sometimes disappointing that their use is not more widespread and that we have no specific methods to push our community into becoming a more authoritative, research-based profession.
 
 

 


 

 

Methodical Approach To Contractual Compliance Assurance

 
Uncertainty in environment and the complexity of relationships has seen managing contractual risks becoming a key success factor. Organizations have matured their contracting processes, but post execution compliance assurance is a big challenge still. Contractual compliance assurance is a path most of the organizations have started taking seriously. With this comes the challenge to adopt a method that gives reasonable assurance with ease to implement and understand. Rajeev Thykatt
 
 
Contractual risk has gained momentum in the last decade, which in-turn has a given way to a new era of challenging contract compliance environment. The interaction between the stakeholders, the contract clauses and documents, as well as within the compliance team is getting complicated and cumbersome. A common, easy to understand language and implementation method is the need and solution every stakeholder is looking at. Compliance has become a discipline in itself, with the kind of high value the stakeholders perceive. The expectation is reasonable assurance of compliance. Is not fair to expect that?  
Of course, it is not only fair, but, now an essential element to do business.
The organization should look at a method/ system which is capable of evaluating, monitoring, auditing and improving the whole process of contract compliance. The method should enable de-skilling and should be easy to understand. It should be strong on change management and governance front.  An easy method would be to break-down this whole process of reasonable assurance requirements into a common business language following a systematic approach. Following is the approach an organization can consider to establish and demonstrate a reasonable assurance of compliance of its obligations.

 


Step 1
. Identify the contract document, list all the clauses verbatim into a spreadsheet or any other comfortable medium. (Figure 2)
Step 2.  (a) List out the ingredients of each contract clause.
(b) List out the specific documents and the implied documents mentioned in the contract clause.
(c) List the Acts, regulations and standards mentioned in the contract clause.
(d) List all the Penalties and Discounts.
 
Step 3.  This is little tricky, ease of implementation and comfort level to all the stakeholder depends on this step a lot. Clause Compliance Specification (CCS) is derived by formulating simple questions from the list created during Step 2. Closed and direct questions are preferred to get a better accuracy. One may look at further open question once the implementation has gained a level of maturity in the organization. (Figure 2)
 

 
 
Step 4. Once Step 3 is complete for all the clauses, list out the General Compliance Specification (GCS), i.e., list out all the redundant CCS that can be figured out when looking at the output of Step 3 together for all contract clauses. The rest of the clauses not considered to arrive at GCS are the Residual Compliance Specification (RCS). GCS and RCS put together constitute the Contract Compliance Assurance Specification (CCAS). (Figure 3)
GCS + RCS = CCAS
Note: It is recommended to maintain an audit trail throughout Step 1 to 4 to establish the Integrity and Completeness of the CCAS.

 
 
Step 5. (a) Fix the period of certifying compliance of item in CCAS.
(b) Map the owner of the each item in CCAS in the organization.
(d) Trigger the Non-compliant items to the owners.
(e) Generate a metrics to track the health of compliance.
(f) Schedule a Management review. (Figure 4)
 

 
This method is simple enough to be managed over a spreadsheet and has all the aspects to be easily converted into an application to benefit from automation. The organization which have implemented some form of Contract management System (CMS) can easily embed this method into the existing system. A methodical contractual Compliance assurance program with adequate governance mechanism reduces the high inherent contractual risks in any business relationship by identifying, analyzing, mitigating and helping in taking informed decisions at right time. This method can be applied to the regulatory compliance program of the organization, too, with customisation.
 
 

IACCM Conference Report: Singapore .. and 2011 Plans

 
In September, IACCM concluded its 2010 series of regional conferences with an event in Singapore, for its Asia Pacific members. It continued the theme of 'Contracting As A Corporate Competence' and attracted a lively and highly participative audience from 11 countries.
 
 

Once again, IACCM partnered with Shared Services and Outsourcing Network to run the event at the Hard Rock Hotel, Singapore. In total, more than 500 delegates participated and the IACCM activities attracted an excellent roster of speakers from around the world.

The presentations from this event are available in the Member Library.

Detailed plans for 2011 are still in process. However, it is currently anticipated that IACCM will continue its SSON partnership, with various adjustments and improvements, and will also reinstate a dedicated contract and commercial management event for the Americas Region. Our SSON events will be in March (Americas, Miami); April (EMEA, Amsterdam); and September (APAC, Singapore). The focused Contracts, Commercial & Relationship Management Forum is likely to be in October and currently targeted for Arizona.

 
 
 
 

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