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

March/April 2015 Edition

 
 
Editorial Comment

Commercial Excellence - and how it can keep you in business

 
The truth about risk is you either manage it or it puts you out of business. Although no one would argue with this, what to do about it is where opinions start to divide. Some see risk as a hot potato to be passed on as swiftly as possible to the other guy. Within organizations risk may be seen as something best left to the professionals. Others see risk and its management as a shared condition of doing business.
 
 

How much better would it be if the “in it together” concept could reach beyond just risk and include all the realities of trading relationships - the smooth as well as the rough?

We have seen that parties that construct and manage their trading relationships in a harmonious way, aligning their contracts to create targeted value, not only improve performance but also bottom line results. In challenging sectors where businesses struggle to manage trading relationships that are increasingly diverse, complex and volatile, and where such a bottom-up approach may not be practical or feasible, the relational approach is becoming a vital lifeline.

It follows that being able to recognise the advantages of shared determination to improve the performance and the bottom line – and achieving it – is a strong indication of organizational capacity to achieve a culture of commercial excellence2 across all its dimensions, with all the other benefits it brings.

The success of this overall approach and the central role of contracting within it, may also explain the growing “buzz” around the commercial side of our profession and a new proactive take on the concept of commercial excellence. This commercially proactive approach is where our profession excels, actively finding solutions to risk and supporting dynamic decision-making at the front-end of the business.

Though it is not new, it is a trend that is rapidly gaining ground, with a commercially focused approach reflected in organizational design, for example, within the pharmaceutical industry where we are seeing the emergence of “commercial excellence” executives and functions.

Beyond doubt is that change is occurring at an ever-faster pace. Rather than change being a problem, it allows us to re-think our role and purpose, together with the ways we perform; for contracting this means thinking less about control and more about enabling, with greater awareness of the commercial implications.

We have said that proactivity, commercial judgment and the ability to share information and knowledge are key skills for professionals working in our field today. But there is still a very wide spectrum of difference in perception of the role and its purpose – and the debate about the difference between a contract manager and a commercial manager continues!

END NOTES

  1. See my Commitment Matters blog (Increased risks bring unexpected consequences, Feb 4, 2015)
  2. IACCM's leadership team has designated 2015 as the year for Commercial Excellence. Tim discusses what exactly is meant by commercial excellence in this webinar.  Click on Contract and Commercial Management - what lies ahead?  ATE by Tim Jan 2015

 

 

 

 

 

 
 

Exploding a common myth about risk management

 
Are you ready for a change? When Dr David Hillson talks about risk, he challenges traditional thinking at its core, exploring and expanding today's common concept of risk. He explains how a wider view of risk in contracts is crucial if you want to maximize your chances of success.
 
 

Contracts are a mechanism for transferring risk between contracting parties. And yet many people wrongly think that transferring the risk is nothing more than choosing the right form of contract. It's puzzling. Worse, it's really problematic!

There is a better way to understand the relationship between risk and contracts. Clearly, the balance of risk ownership differs significantly between different types of contracts: time and materials, cost-reimbursable, target-cost incentivized, lump sum, fixed price, firm-fixed price and so on. 

By recognizing the true nature of risk, we can ensure that our contracts address it intelligently and appropriately.  We need to share the risk challenge equitably among contracting parties so we can manage that risk effectively and achieve the contract purpose.

Risk is uncertainty that matters

A risk can be defined as “…any uncertainty that if it occurs would affect achievement of one or more objectives...” Variants on this wording are found in international risk standards, including ISO 31000:20091 and the Institute of Risk Management (IRM), as well as risk guidelines from the Project Management Institute (PMI) and the Association for Project Management (APM).

If risk is “uncertainty that matters,” then we need to ask ourselves two questions:

  1. What types of uncertainty?
  2. What types of mattering?

Types of uncertainty

One common misconception about risk is that it refers only to uncertain events that might occur in the future. But this is a very limited view of the types of uncertainty that might affect our businesses or projects.

Of course risk does include uncertain future events, but the risk process must also address other kinds of risk. A proper understanding of risk must account for all forms of uncertainty, including uncertain future events, potential variability in planned activities, sources of ambiguity, and the possibility of the unexpected.

Three main non-event types of uncertainty:

  1. Variability involves uncertainty about some key characteristics of a planned event or activity or decision. For example we plan to conduct a test of some new equipment but we are uncertain about how long the test will take. A range of outcomes is possible but we're not sure which of these might happen.
  2. Ambiguity often exists where we are uncertain about what might happen, if anything. For example, we intend to launch a new product into a competitive marketplace – how will competitors and potential customers react?
  3. Emergence describes uncertainties that are unknowable -- risks we can't see because we don't know we should be looking for them.

Types of mattering

Another common misconception is that all risk is bad. We measure success of most projects by their time and cost performance, so usually we're only concerned about risks that could trigger delays or overspending. So typically when people think about risk, they are focusing on threats to the schedule or budget. Two weaknesses exist in this view of risk:

  1. Most businesses and projects are concerned about more than just time and cost. We need to identify and manage any uncertainties that could affect other objectives, including performance, safety, reputation, market share, competitive positioning, share price etc.
  2. Not all risk is bad. Some, if they occur, would help us achieve our objectives. Negative risks are threats.  Positive risks are opportunities.

Instead of thinking about threats as being limited to schedule or budget, we should look for uncertainties that might impact any of our objectives, and include those negative risks that could cause delay, overspend, performance shortfall or reputation damage, etc. As well, we need to look for positive risks that might result in shorter timescales, reduced cost, enhanced performance or improved reputation etc.

Risk is any uncertainty that matters

As mentioned, the commonly-adopted interpretation of risk as being limited to “uncertain future events that, if they occurred, would have a negative effect on the project budget and/or schedule” limits risk management to a mere subset of all the uncertainties that matter. Clearly any uncertainty that could affect our ability to achieve our goals must be better managed.

Figure 1 below illustrates this more complete understanding of risk, expanding both the “uncertainty” side and the “mattering” dimension.

Figure 1: “Uncertainty that matters” expanded

Risk and contracts

You likely know that contracts are the primary means for transferring risk between the contracting parties, with the aim that risk should be owned by the party best able to manage it.

Unfortunately the prevailing negative view of risk spawns a combative approach to contracting, because owning risk is always seen as “a bad thing.” Here's what often happens. The buyer passes as much risk as possible to the seller, always at the minimum price of course, while the seller is naturally defensive and reluctant to accept risk, and responds by loading the price with a “risk premium.”

The use of “standard terms” worsens this situation, because these entrench the perception of risk as unwelcome, and seek to protect positions with onerous terms. Boilerplate text locks negative views of risk into contracts, making it hard to take a more enlightened approach. What if we discarded this negative view and adopted the wider view of risk? How might we deal with risk differently in contracts?

Threats and opportunities

Our first change would be to recognize that some risks are good. Positive risk helps us create value, enhance performance and deliver more benefits through the contract. When opportunities are identified in the contract, parties will be encouraged to embrace risk more willingly, taking ownership of positive risks and seeking to manage them proactively to optimize performance. Innovation and continuous improvement would be supported and contractors would actively seek to exploit or enhance opportunities.

In this broader context, risk transfer would become completely different.  Contracting parties could conduct a mature discussion about who could best tackle threats, where opportunities could be most effectively managed, and what consideration should be applied to reflect the balance of risk.

The new approach would allow contract negotiation to start with a joint assessment of the major threats and opportunities, followed by an honest debate about where each risk should sit between the contracting parties. After an open and transparent costing of the risks owned by each party, the set of risks covered by the contract could then be explicitly included in an annex as a record of the agreement of the parties. The contractual consideration would then formally include a risk element based on a shared understanding of the major risks in the undertaking.

Non-event risks

If we understand that the concept of risk includes more than just future uncertain events, then the contract would need to deal with other types of risk explicitly. Taking the three classes of non-event risk mentioned above in turn, we might expect to see the following:

  1. Variability - contract terms can use approaches based on target-cost incentives to encourage contractors to manage to the upside and discourage underperformance. Explicit description of variability risks in the contract will ensure that everyone is clear about the range of possible outcomes and contract terms can motivate the effective management of such variability.
  2. Ambiguity can wreak havoc in executing the contract, like unclear terms or requirements that can be interpreted many ways. Identifying specific ambiguity risks during contract negotiation can minimize the effect of these uncertainties and lead to a more robust contract.
  3. Emergent (unknowable) risks will nearly always arise and surprise us. We can't identify unknowable-unknowns in advance, so the contract must provide appropriate contingency to account for these should they occur. Setting the right level for this contingency is not easy and should be based on previous experience of similar projects, and industry norms where available.

By including this full range of risks in our contracts, we can be more confident that we will consider and address all uncertainties that matter, and give ourselves the best chance to succeed in delivering the contract objectives.

Conclusion

We know that business and projects are risky, but one way to control the amount of risk contracting parties take is to make proactive use of formal contracts. Traditional views – those that see risk as negative uncertain events that cause delays or overspend -- have resulted in suboptimal contracts.  In this context it is natural for contracting parties to protect themselves against any undue risk exposure and pass as much risk as possible over the contractual fence.

We must recognize that we can handle risk through the contract in a more detailed and targeted way than simply selecting a particular form of contract. By expanding our view of risk to include any uncertainties that matter, and reflecting these risks properly in our contracts, the contract will finally become an effective tool to ensure that risk is owned by the party best able to manage it. 

Be sure to watch the author's previously recorded IACCM Ask the Expert discussion on Bringing a Risk Perspective to Contract Management

To contact Dr. David Hillson david@risk-doctor.com   

ABOUT THE AUTHOR

Known globally as The Risk Doctor, Dr David Hillson is an international thought-leader and expert practitioner who consults, speaks and writes widely on risk.  His ground-breaking work in risk management over three decades has been recognized by multiple awards, including honorary fellowships from both the Project Management Institute (PMI®) and the Association for Project Management (APM). The Institute of Risk Management (IRM) also named him inaugural “Risk Personality of the Year” in 2010-11.

© Copyright 2015, The Risk Doctor Partnership 

END NOTE

  1. ISO 31000:2009 – Risk management
 
 

Making room for local content in construction projects

 
In a perfect world, a contracts manager wants to find the best contractor to deliver the full scope of the project. But what do you do when the 'best' commercial and technical choice is not sustainable?
 
 

In almost any country in the world, principals (lead organizations) executing major projects are now expected to make supply and contracting opportunities available for local, regional or national enterprises (local content).1 Some of the work must go to smaller businesses operating around project sites.

Making room for local content in a major project is not easy. Local contractors often find it difficult to comply with the project's requirements. Principals and major contractors may be reluctant to engage them because they are perceived as high maintenance, more expensive and higher-risk.

The purpose of this article is to show that, with careful planning and management, you can not only to find and grow capable small and medium-sized enterprises (SMEs), but also give them real opportunities in major projects. And with smart planning and contract design at the right time in the project, you can successfully engage local contractors and create positive outcomes for the community.

SMEs may be hard to find

In many parts of the world, the right SMEs may be hard to find. And even if they can be found, it may be hard to make a place for them in a fast-moving, complex project environment. Principals tend to assume that SMEs cannot do much, and thus offer them only low-value, semi-skilled work with no growth or development potential.2

Why local content matters

Local content matters to principals - not only for compliance, but because it is in a principal's long-term interests. In any country, local content contributes to a project's Social License-to-Operate (SLO). SLO is a concept that originated in the mining industry but is now used more broadly.3

Achieving SLO means that communities around a project site are more likely to support the project. With the active participation of local SMEs they can expect to receive direct and positive benefit in the form of jobs, economic development and access to opportunities. They feel informed and involved. Not having a strong SLO can increase project risk or indeed cause it to fail entirely.4

A stronger local economy will also help the principal's future operating business. A stronger local supply base means the business will depend less on imports and may be able to source locally at lower cost.Local content is also important for the project's host country or region. It can create broader economic and social benefits for the region and the country.6 Local procurement by resource projects may well be underrated as a source of economic development.7

A bad experience can put SME support at risk

All of these benefits depend on SMEs having a positive experience with the project. If they experience financial distress, are put at risk, or do not get the benefits they expected, a push for local content can actually damage SLO. The secondary consequences of increased local content (e.g. in-migration, local inflation, environmental damage and changes in land use) can also be an issue.The challenge for the principal is to incorporate local content in a project so that both the principal and the SMEs benefit.

Who sets local content requirements?

Governments set the requirements, through general preferential procurement 9 or industry-specific legislation.10 Some activities may be restricted to nationally-registered companies, certain tax concessions tied to a minimum proportion of local content, or tariff protections applied to local industry. Project agreements between the principal, the landowners and the customary users of the land around the project site often include commitments to provide employment and contracting opportunities.11

Including SMEs can increase cost and risk

Basic business data can be hard to obtain without extensive research.12 Once contractors are identified, the principal must invest time and money to ensure they are capable. Without a pre-screening program, many under-qualified contractors may come forward expecting to be awarded work, creating both an administrative load and a challenge in managing expectations.

Specific challenges for SMEs include …

  • higher capital and transaction costs than larger firms;13
  • greater need for more supervision and support to meet project standards;
  • limited quality control which makes it difficult to produce a consistent product or service; and14
  • lower productivity, due to lower skills, older or less efficient equipment and technology, and less effective business practices.

Increased risk to both parties results from several other factors:

  • Large enterprises and SMEs think differently, and their objectives may not always align. SMEs tend to be more innovative, opportunistic, cash-focused and oriented toward the short-term than large companies.15
  • Large enterprises have much greater power in a contractual relationship than SMEs. It is easy for a vulnerable small business to be damaged or even forced into insolvency if tested beyond its capacity, or left without its primary customer at the end of a project or in a downturn.16
  • SMEs are less resilient. They often have a narrow operating margin between viability and failure, and may not be able to ride out risks a larger firm could absorb.
  • Dividing the scope of work among smaller contractors means a greater number of interfaces to manage.
  • The timeframe to develop a SME to readiness may extend way beyond the deadline for project delivery. So SMEs may miss out on opportunities, or they may be rushed into work before they are ready.

Balancing risk with local content potential

We need to identify opportunities for potential SME involvement at an early stage, while the overall contracting strategy is being defined. But the most efficient strategy for the project may not optimize local content. Choices could include, for example, whether manufacturing and fabrication should be performed near the job site and then constructed by local contractors, or large, remotely assembled modules transported into the job site. 17

A detailed discussion of optimal contracting strategies is outside the scope of this article, but is clear that the principal needs to select a contracting strategy that balances project risk with local content potential.

How the strategy is applied is important …

Assuming a strategy has been chosen with good local content potential, two sets of tactics are available - one that creates and another that preserves opportunities and ensures a positive outcome for both parties. The principal has two main options for creating opportunities - scaling down the scope of work to fit SMEs (specialization and disaggregation), or encouraging SMEs to scale up (collaboration).

Creating opportunities: scaling down the work to fit

Local contractors may take part of a large, complex scope of work, if they are operating in a management framework provided by either the principal or a managing contractor. This provides essential project functions such as planning and cost control, that are beyond the capability of a small contractor.

Specialization means dividing an area of the project's scope into specialized packages that are of a manageable scale and complexity for local contractors, such as testing or maintenance services, and which do not impact the project's critical path.18

Disaggregation means taking a distinct area of the work, such as road freight or local roads construction, and dividing it into smaller packages with similar scope, with the principal or managing contractor planning and sequencing the works and managing issues and risk.

It is important to recognize that including local content adds cost and risk for a prime contractor. The principal should expect to adjust the contract risk allocation and compensation, to make including local content attractive to the prime.

Creating opportunities – encouraging SMEs to scale up

SMEs can scale up to meet project requirements in a number of ways, such as collaboration, licensing, technology transfer and joint venture.

  • SMEs that may be too small on their own can combine specialized expertise or pool resources to collectively deliver.19
  • Major international contractors can enter into joint ventures with local contractors.20
  • The principal can provide co-investment to develop local facilities if it is strategically important to build local long-term capability.21
  • As an alternative to joint venture, international firms can enter into licensing and technology transfer arrangements, where the local firm acts as a distributor, agent or licensed manufacturer for the international firm.22

Ensuring a contractor has the best chance of success

The story does not end with a pool of potential contractors waiting to be contacted. The principal must also do the following:

  • Communicate opportunities proactively to community groups, ensuring SMEs have time to organize and respond.23
  • Ensure contractors can do the work, can cope with the scale and duration of the scope being offered and fully realize the commercial risk they are assuming.
  • Ensure the contractor both delivers the work and earns a reasonable return.

Outside any strict contractual responsibilities, when engaging local contractors a responsible principal should also ensure that the contractor...

  • has been tested and proved capable of doing the work;
  • is not excessively vulnerable and has a reasonable buffer against any unforeseen events;
  • fully understands its responsibilities, risks and liabilities, and has well-developed management plans in place in case things go wrong.

Principals should also ensure they are will not be exposed to either significant delivery or reputational risk should the contractor fail.

Avoiding and managing financial distress

Even the most astute and observant contract manager will not catch every contractor in financial distress. More often than not, the trigger for such distress will have been external factors, not actions of the principal.

Small, local contractors may be particularly vulnerable due to their tendency to take on work with little or no financial buffer and may find it difficult to generate enough cash flow to meet the payments on debt and liabilities (e.g. payroll).24 Developing economies in particular may face difficulty in obtaining finance.25 They may also have limited understanding of the potential commercial risks they are accepting. Lack of liquidity or a tight credit market also increases the likelihood of contractor default.26

Principals can actively reduce a small contractor's exposure through a range of contractual measures. While shifting some risk back to the principal, the principal is generally able to bear or offset this risk at lower cost than the contractor, so it makes commercial sense. In certain circumstances the principal can do the following:

  • Provide advance or pre-mobilization payments to support contractor cash flow that is recoverable at the end of the contract.27
  • Agree to pay for sub-orders when the order is placed (title transfer on payment mitigates some of the risk).
  • Provide direct-purchase and free-issue major items of equipment to minimize a contractor's up-front expenditure.28 Costs are often reduced because of the principal's greater buying power and the removal of contractor mark-up.
  • Structure packages to favor labor-intensive cost-reimbursable or unit-rate contractual arrangements rather than more capital-intensive fixed-price forms of contract.
  • Pay part of the contractor's remuneration as a fixed (but auditable) management fee.
  • Waive or limit withholding or deduction rights. Withholding of disputed amounts can be a significant source of financial distress to a contractor. The principal still has the right to receive a credit if the issue is later resolved in the principal's favor.

Regardless of the positive measures taken, the principal has a general duty to ensure the following:

  • Their own actions do not push an otherwise capable contractor into financial stress (e.g. by failing to pay on time).
  • They are aware of the contractor's commercial status and prepared to take appropriate action if the contractor is having this difficulty. (This may mean having to manage the contractor out of the contract if all reasonable measures have been exhausted and the contractor is genuinely unable to perform).

Smart planning and contract design key to success

In summary, making room for local content in a major project is not easy, for all the reasons we have explored. But with smart planning and contract design at the right time in the project, you can successfully engage local contractors and create positive outcomes for the community.

So what do you need to do as a contract manager?

  • Develop a clear local procurement policy as early as possible.
  • Ensure local content opportunities are identified in the planning stage.
  • Tailor procurement processes and terms to fit local capability.
  • Work with engineering and construction to structure scopes of work to local capability.
  • Look carefully at the commercial risk allocation of the contract and reserve excessive risks to the principal.
  • Ensure the tender and selection process provides transparent and equitable (or even favorable) access for local contractors.
  • Ensure contractors understand and are prepared for the risks they are taking on.
  • Provide appropriate post-award support.
  • Be prepared to be an advocate for your local contractor if they run into trouble.

END NOTES

  1. Local content: Some of this needs to come from small enterprises (SMEs) operating around the project site. Definitions of SME vary. The World Bank definition encompasses businesses with up to 300 employees and annual sales of USD15m.
  2. Ana Maria Esteves et al, 'Procuring from SMEs in Local Communities: A Good Practice Guide for the Australian Mining, Oil and Gas Sectors' 72.
  3. RG Boutilier, L Black and I Thomson, 'From Metaphor to Management Tool – How the Social License to Operate Can Stabilize the Socio-Political Environment for Business,' International Mine Management 2012 Proceedings (2012) 227.
  4. See e.g. the events that overtook the Malku Khota project in Bolivia http://rabble.ca/news/2012/07/bolivian-government-indigenous-communities-resolve-nationalize-canadian-mining-company.
  5. See e.g. the IFC publication 'Investing in People: Sustaining Communities through Improved Business Practice.' http://www.ifc.org/wps/wcm/connect/1dc2e10048865811b3fef36a6515bb18/CommunityGuide.pdf?MOD=AJPERES.
  6. Increasing Local Procurement by the Mining Industry in West Africa.
  7. Michael Warner, Local Content in Procurement: Creating Local Jobs and Competitive Domestic Industries in Procurement (Greanleaf Publishing Limited, 2011) 227.
  8. AM Esteves and MA Barclay, 'Enhancing the Benefits of Local Content: Integrating Social and Economic Impact Assessment into Procurement Strategies' [2011] Impact Assessment and Project...
  9. Increasing Local Procurement by the Mining Industry in West Africa.
  10. See e.g. the preferential procurement obligations of the Ghana Minerals and Mining Act (2006), and the Senegal Mining Code Law n°2003-36 of November 24, 2003 and Regulations (Decree) n°2004-647 of May 17, 2004, as cited in Ibid.
  11. See e.g. Aboriginal Participation Agreements in Canada - https://www.nrcan.gc.ca/mining-materials/aboriginal/14694.
  12. 'Developing a Transparent System for Local Contracting: A Manual for Practitioners Based on the eProcurement Experience in Chad Version 1.0' (2008) 91.
  13. Warner.
  14. Increasing Local Procurement by the Mining Industry in West Africa.
  15. Esteves et al.
  16. Esteves and Barclay.
  17. Warner.
  18. Increasing Local Procurement by the Mining Industry in West Africa; Esteves and Barclay.
  19. Esteves et al.
  20. Warner.
  21. Increasing Local Procurement by the Mining Industry in West Africa.
  22. See, e.g. Xiaolan Fu, Carlo Pietrobelli and Luc Soete, 'The Role of Foreign Technology and Indigenous Innovation in the Emerging Economies: Technological Change and Catching-Up' (2011) 39 World development 1204.
  23. Esteves et al.
  24. Ibid.
  25. Increasing Local Procurement by the Mining Industry in West Africa.
  26. Bode and Wagner.
  27. Increasing Local Procurement by the Mining Industry in West Africa.
  28. Ibid.

ABOUT THE AUTHOR

Joanne Simpson is Principal Advisor – Procurement and Contracts within Rio Tinto's Technology & Innovation group. As well, she is a senior commercial manager with 20+ years of procurement, contracts and commercial experience in major studies, projects and operations in the resources industry. Joanne has been involved with construction projects in at least 13 different countries, and is familiar with the challenges of contracting in developing economies.  She holds Masters Degrees in Business Administration from the University of Western Australia and in Construction Law from the University of Melbourne in Australia.

The views expressed in this article are the author's only and do not necessarily reflect the views of Rio Tinto.

 

 

 
 

Are commercial issues killing transformation?

 
How do we stop commercial issues from killing the successful execution of an IT transformation program? Here is some practical advice on what goes wrong and how good contract management can help fix it.
 
 

Instead of dealing with how to develop IT strategy or to manage corporate change programs, this article focuses on the relationships that can affect transformation and unveils practical advice on mitigating seven common causes of failure in transformation execution.

What contract managers need to know

According to Hemant Kogekar,1 more than 60% of transformation programs fail.  Much can be done through developing better IT strategies and managing corporate change programs, but that's not the challenge facing most contract managers on a day-to-day basis. Contract managers don't change the IT strategy, and they aren't running corporate change programs.  What they can do is recognize where things are likely to go wrong in transformation execution, take action to prevent risks maturing into issues and mitigate any adverse impacts.

Technological evolution and the economic climate are providing dual pressures to shorten the duration of IT outsourcing contracts.  In her article Kate Vitasek2 demonstrates that the duration of IT outsourcing deals is declining to three to five years. This doesn't leave much time for the outsourcer to recover an investment if a typical transformation program is projected to complete in 12-18 months after it starts.  For the supplier to hit its financial targets, transformation programs must deliver on time and to budget.

What motivates the CIO?

Teams from large outsourcing companies move from customer to customer, making the bid, closing the deal, setting up the account and delivering the transformation.  It's different on the customer side: for many on the team (including the CIO), this challenge may be their first of a major outsource project.  It may also be their last!

Startup and transformation is a tense time for the retained IT team.  They are judged on maintaining a high quality IT service to the business while overseeing changes to the service designed to reduce the costs of delivery. 

While this is happening, business requirements are shifting as technology evolves.  The business may not support additional funding for any further enhancements, and it's not unusual to encounter resistance to the necessary change and standardization not only from the business, but also from elements of the retained team itself.  And a federated environment can further exacerbate this problem where strong CIOs in business units are accustomed to running their own ships.

So is it easier for the account executive?

If the CIO is having a tough time, it's not much easier on the supplier side for the account executive.  The account executive needs to keep the services running without degradation.  As the negotiation team hands over the contract, the account executive must understand the contract scope and obligations while setting up the account, service delivery and transformation teams. Even within the largest outsourcers, financial pressures have eliminated surplus resources.  In other words, they may lack people with the right skills for immediate deployment.  Escalations on getting the right resources on time are frequent, and often heated.

Account executives must meet ambitious revenue and margin targets.  This means increasing the value of the contract through change and project work, and managing costs even when they have little control over internal charge allocations. Account executives are also often personally evaluated on the relationship with their customer through “balanced” assessments.  This can force account executives to avoid issues that customers would not welcome, even if addressing these issues is vital to the contract. How do we resolve this?

Understand the customer environment

The customer's economic and internal political environment massively impacts the success of transformation. At best, CIO and account executives work together to win over the customer internal stakeholders to drive change.  But, too often, as the pressure builds around transformation, delays fracture the relationship.

By helping the supplier to understand customer internal influences and drivers, the CIO can improve engagement with key stakeholders. This can improve chances of transformation success. In return, the account executive and the contract manager can enhance the CIO's control of the overall IT landscape by improving the engagement with business users at a local level and imposing common standards, particularly in federated environments.

Understand the scope

Initial drafts of scope documents are usually prepared at an early stage of the bid process.  Drafts are updated through the bid process and subsequent negotiation, and many significant changes can occur. A couple of years may have passed by the time the contract has been agreed.  It's not unusual for team members to form misconceptions about the extent of the scope.  A review of the final documentation by new members of the customer and supplier teams with the support of contract managers can help to clarify what is actually documented in the agreement and assess whether this meets up to date customer requirements.  If it doesn't, some urgent change work is required.

Loose drafting and deliberate or inadvertent omissions in the negotiation process can also create confusion.  Supplier bid teams generally seek clarity in scope documents because they know they are more likely to bear additional costs after the contract is signed.  Procurement teams use sweep clauses to protect the customer from omissions but this doesn't always lead to good collaboration on transformation and is likely to increase the bidder's risk budget and/or contingency.  A pragmatic approach by both the vendor and contract management teams to cost and risk allocation will be more productive. 

What obligations should each party fulfil? 

While the contract sets out the obligations on each party, difficulties can arise in execution and a pragmatic approach will be required.

People move to different companies when a new contract starts and some may no longer be available at all, especially if they stay with the exiting service provider.  This means the customer and the supplier may find themselves short of the resources and expertise needed to meet their dependencies.

Suppliers can call on their internal resources to bridge any skills gap but there are different problems if the customer is impacted. This often surfaces as a slip to a dependency by the customer, a request for support to the supplier and then delivery of a dependency that may not provide enough information for the supplier to proceed.

It's not unreasonable for the customer to ask the supplier to help, but there is a cost and sometimes additional risk for the supplier to fulfil customer dependencies.  It's also not unreasonable for the supplier to ask for some additional funding to cover the extra work and risk and this needs to be agreed and documented with the support of the vendor and contract managers. Getting accurate information at the right time benefits both parties and will reduce costs and risks for all involved.

Resource availability

Even though major outsourcers have large numbers of skilled resources, they aren't waiting around for the next assignment.  It's difficult for account executives and transformation leads to get the resources they need, and resourcing is a constant escalation item on new contracts. The contract manager can help with internal escalations by providing a clear statement of the supplier's contractual obligations in respect of the timely provision of resources – and the consequences of failing to meet them.

The customer can improve behaviors by using the right incentives: create a payment milestone around filling key roles in the supplier transformation team and agree with the account executive how to manage resourcing escalations with supplier management.

We can't leave this topic without asking: does the customer have the right number of resources to complete the transformation?  If the retained IT team is too large, it will create work by looking over everyone's shoulder, if too small, then the customer may not be able to meet its dependencies.

Do we send enough change and delay notices?

Robust change and delay management are not only best practice but also contribute materially to reducing issues in transformation programs.3 They are also obligations on both parties in nearly all contracts and contract managers need to explain to account teams that failing to use change processes is a breach of the contract. 

So why do articles advise CIOs that “a customer should only sign a change order when adding a new service or making a material change?”4  This breaches most contractual change processes and would lead either to a solution that won't address the issues, or to a contract that doesn't match the solution that has been delivered. 

The reason for this advice is the widely held belief that change is the mechanism for suppliers to increase revenue. Some changes are chargeable, but there are also changes (whether formalized or not) for which there are no charges. Account executives want to keep their customer happy, so if the supplier doesn't need to charge for a change, then it will often not be formalized.  This is a common cause of major problems in transformation – the contract doesn't reflect the solution and there is no audit trail of why, who agreed to it, or where risks and costs should fall.

If it's difficult for change notices, it's much worse for delay notices.  There is a strong perception that delay notices are a mechanism for the supplier to allocate blame for project slippage to the customer.  As ever, there is a grain of truth in this.

Issuing delay notices and requiring the supplier to escalate delays in dependencies is not only best practice, but also a common contractual obligation.  It's also one of the key responsibilities of the contract manager, even if it's not welcomed by the account team!  In certain jurisdictions there is even a general responsibility for the supplier to make sure that the customer is aware of program management requirements and performance.

A solution to this is to establish change and delay as purely administrative, fact-based processes.  All changes and delays should be documented, and only those that are contentious or which have cost implications should be escalated to leadership levels. Both parties should be encouraged to issue change and delay notices which report on their own performance and for which the causes are not disputed.  This will help build trust and embed best practices.

Why doesn't “customer sign-off” work for either party?

The acceptance process is designed to establish when a deliverable has been completed to an agreed standard.  Acceptance should be granted when the deliverable meets objective and agreed criteria, but customers often ask for additional flexibility to reject a deliverable even if the objective criteria are met.

Perhaps the customer may get closer to what they want today, but subjective acceptance criteria increase costs and risks to the supplier and this will be reflected in both price and timescale. Instead of the uncertainty of subjective criteria, a more productive approach is to grant acceptance against objective, but flexible criteria.  In the author's experience, technical teams often need help from contract managers with this approach: otherwise the criteria can end up in a binary situation as either totally objective, or totally subjective.  When acceptance is granted, the milestone is met and any rework on the main deliverable becomes subject to change.  A small (pre-agreed) retention is made from the payment until minor issues have been resolved within a reasonable timescale.

Governance: who is running the transformation?

Customers need to understand how transformation is proceeding and gain confidence in the supplier when they can see that the program is making satisfactory progress. The simplest way to monitor progress is for the customer to use the supplier's toolset and reports. Using a separate toolset (for example from a consultant) increases workload and costs for little benefit.

It's important that the supplier maintains control of the transformation – that's what the customer is paying for.  When transformation is slipping, there's a strong temptation for the customer to seek to exert control over the program and this can increase risk. Contract managers can explain the supplier's obligations under the contract and help both sides to agree how to manage the transformation program.

If you're on the operating table, and your operation isn't going well, would you really want to take over from the surgeon? When there is a major slip, the customer can ask for an intervention. Most outsourcers maintain an experienced team of fixers who are empowered to remediate difficult situations. With a wide remit and an intense approach, these teams usually have a significant positive impact on transformation and service delivery.

If you take nothing else away from this…

Here are a few brief suggestions that will help keep your next transformation program on the straight and narrow.

  • Invest in relationships and maintain an open governance process.
  • Understand the underlying drivers on the other party.
  • Transformation is a collaborative process: both sides must be prepared to accept valid criticism and work on improvements.
  • Address any ambiguity in scope as early as possible.
  • Take a pragmatic approach if either party can't deliver on its obligations.
  • Processes such as Change and Delay are best practice for program management and help both parties: they are not just a tool for the supplier to charge more. In most contracts they are also an obligation on both parties.
  • A robust acceptance process with objective criteria will speed up transformation, reduce costs and benefit both parties.
  • The customer needs to monitor the supplier's performance, but it's an indicator of problems if the customer is controlling the transformation.

END NOTES

  1. Hemant Kogekar, “Transformation success – Top 10 barriers and how to overcome them,” CIO 18 June, 2012.
  2. Kate Vitasek, “Contracts: Going for the Long-term,” Vestedway July 18, 2013.
  3. Ward and Uhl, “Success and Failure in Transformation,” 360 – The Business Transformation Journal.
  4. Stephanie Overby, “10 Steps to Ensure Your IT Outsourcing Deal Fails,” CIO, September 27, 2013.

ABOUT THE AUTHOR

Grahame Bartleet is an experienced Commercial Director who has worked for over twenty years in technology, consulting and IT outsourcing. He was Head of Commercial Management, UK&I and MEMA for HP Enterprise Services before joining HP's Global Transaction Strategies team and subsequently its global troubleshooting team for red accounts. He is now Managing Consultant in Artecontracta Ltd, a specialist supplier of interim commercial resources.

 
 

Building a business case for a sell-side contract lifecycle management solution

 
When working with sell-side agreements, too many companies rely on homegrown contract lifecycle management (CLM) solutions that lack the flexibility and responsiveness needed to effectively manage contracts and quickly close business. So, if your company does not have an automated CLM solution, how would you develop the business case to make that investment?
 
 

It's important to identify the business need for CLM, but first you need to understand the many factors that pressure the contracting process, buy-side or sell-side. This article looks at the risks, the opportunities – and the experience of three companies that are reaping the benefits.

Millions of dollars may be left on the table

Most companies still rely on rudimentary processes and homegrown systems to manage contracts. In today's volatile business environment, this approach is dangerous. Companies may leave millions of dollars on the table, waste valuable resources, and expose the business to non-compliance risks.

Organizations of any size can realize positive impacts in all areas of business by implementing a comprehensive CLM system. Research from IACCM member companies highlights the significant benefits of improving CLM practices and processes on both the buy and sell-sides. Buy-side contract management has long focused on cost reduction, risk avoidance and compliance to justify the return on investment (ROI) of an automated CLM system, and as a result, has seen more advanced acceptance of the technology.1

But there is just as much opportunity for ROI on the sell-side of the business. IACCM benchmarking data shows that medium-to-complex sell-side contracts typically consume more than 76% of contracting resources. For half of these contracts, the average cycle time for domestic agreements from bid to execution ranges from nine to more than 21 weeks; for international agreements, it ranges from 17 to more than 21 weeks. Based on this data, implementing integrated sell-side CLM systems will yield significant quantifiable results for many organizations.2/3

Identify the business need for CLM

When identifying the business need for CLM, understanding the many factors pressuring the contracting process will help you quantify the potential benefits:

  • Revenue factors, including rising contract volumes, might come from organic growth or, increasingly, growth by acquisition. The length and complexity of contract negotiations rise due to competitive pricing pressures and the added scrutiny of contract performance objectives, as well as the typical commercial terms and legal language review.
  • Operational factors, such as maintaining static or reduced headcounts to support current and future contract volumes. The variation of standard contract terms and conditions often increases as business practices evolve to support organizational growth. Demands of mobile and remote user communities with staff located across the world increase complexity and strain existing manual standard operating procedures (SOPs).
  • Compliance and risk mitigation factors are critical, since sales contracts represent an organization's pipeline. This drives many global contracting operations to “partition” contracts at the individual, local business unit level, while granting access and visibility of all contracts to corporate operations.

Analyzing organizational process compliance, providing overall operational performance metrics, and producing regulatory and financial reporting at both the local and global level are challenging, intense manual processes. Producing timely responses to internal and external audit requirements is also resource intensive, detracting from an organization's ability to respond to the work at hand. Quantifying these factors will help your own organization see the potential benefits of reduced contract cycle time, increased win rate of opportunities, and accelerated responsiveness to corporate compliance mandates.

Three companies tell their stories

Three scenarios below illustrate the value and benefits of cutting contract cycle time, CLM integration and achieving consistent worldwide standards and storage.

1.  Benefits of cutting contract cycle time

25% of deals were slipping to the next quarter

A global technology company with $1 billion in annual revenue was facing many of these pressures in their contracting process. Each local market had its own independent contracting process, all of which required corporate legal and commercial review. This created a significant contract backlog and extended cycle times. As the business grew, 25% of its deals began to slip into the next quarter, resulting in $60 million of at-risk revenue each quarter. Sales forecasts were inaccurate because of delayed deals, and the company was wasting money managing and training temporary resources to try to reduce the contract backlog.

To help solve these problems, the company implemented a single global CLM solution to speed up contract cycles. The automated solution now allows for implementing localized variations of workflows, content, language and currency through divisional controls - enabling individual business units to work independently while adhering to corporate standards.

Global security and accessibility controls ensure local teams can only access appropriate contract information, while the corporate team has complete control over all regions. When the company acquires new business units, they are easily added as another division, using existing standards and controls with new localized variations.

As a result, the company was able to reduce the legal review process by one day, and cut down the overall contract lifecycle by five and a half days. By moving to a cloud-based solution, the company can manage its contracting environment faster and more effectively, and stop relying on internal IT resources. As an additional benefit, the online training and education included in the solution simplifies onboarding of new employees, shortening time to productivity for all new stakeholders in the contracting process.

The result? The company reduced contract approval cycles, cutting deal slippage to less than 5% of total deals and protecting $60 million of at-risk revenue.

2.  Benefits of CLM integration

Another scenario involves a global aircraft manufacturer operating multiple divisions in several countries and managing business-to-business (B2B) relationships and contractual agreements in multiple languages and currencies.

Scattered documents, spreadsheets and shared folders 

The company managed its complex sales and supply chain contracts and request for proposal (RFP) responses manually, using spreadsheets, email, and shared folders. This posed a significant problem: without a system to track progress, push through processes, or streamline communications during contract development, the company was experiencing issues with version control and approval delays. It was difficult to locate scattered documents or resources, which not only affected employee productivity, but negatively impacted negotiations and customer relationships, putting opportunities worth $50m at risk. These problems were further magnified under the microscope of the meticulous government RFP process, which required strict attention to minute details.

Lack of integration of the contracting, ongoing relationship and revenue management functions was causing costly mistakes. And when the company needed to develop new agreements, the lack of insight into past performance made it difficult to know which actions were profitable and which were not.

To alleviate these issues, the manufacturer implemented a CLM solution across multiple business functions, including its sales, operations, supply chain, and RFP teams, and integrated it with its customer relationship management (CRM) system. Automating its RFP response process allows the company to bid on more RFPs and increase win rates. The solution enables efficient authoring, review, approvals, amendments, and renewals with proper version control. E-signature functionality enables users to complete tasks on the go, further preventing any contracting process or deal cycle delays.

The CLM solution also provides milestone management, protecting the manufacturer from penalties that could damage important customer relationships. Integrating the CLM solution with its enterprise resource planning (ERP) system helps ensure contract pricing terms and conditions are executed accurately. This prevents errors that contribute to profit margin erosion and pose compliance risks – and enables the company to extract more value than before when each of its systems functioned in a silo.4

The CLM solution also enables the manufacturer to assess contract performance and gain insights that can be leveraged when developing future agreements and pricing structures.

3.  The value of worldwide standards and storage

A third company, an image technology provider with offices around the world, had been drafting and storing contracts using a wide range of programs and processes, causing fragmentation and inconsistency.

Chaotic processes needed to change

Sales teams drafted customer contracts but didn't always follow standards for language, format, or recordkeeping. The company didn't have a global document management process or central repository – so they had no consistent way or place to store the contracts and manage every iteration.

Thousands of contracts were created each year, typically more than 2,000 contracts for just one business unit in a given region. Often, paper copies of contract drafts were stored in file cabinets or in employees' home offices. It was challenging to manage and track such large volumes and still remain compliant with the Sarbanes-Oxley Act5 as well as internal control standards. Company management reported spending many hours of valuable time searching for the final versions of contracts. The process was unruly, even chaotic, a drain on productivity - and it needed to change.

The company had many different types of contracts, agreements and arrangements of varying duration, many highly complex. Without a universal system for contract creation, many agreements weren't written in standard contract language, and consequently were more difficult to administer. Without a central repository, the company struggled to track and retrieve contracts for reporting, litigation, and audit purposes.

Initially, the CLM solution was implemented for sell-side contracts only and limited to a single business unit. However, the company has now expanded use to multiple business units throughout the United States, Canada, Asia-Pacific region, and Europe. Latin America will complete a global rollout that supports more than 34,000 agreements and more than 750 users.

During a recent corporate audit, the company was able to easily search the repository and provide the information to the audit team in less than a week. Business units not using the repository had a much more difficult time locating and producing the contracts, taking weeks rather than days.

A fourth benefit of integrated CLM for sales

Successful companies need an arsenal of selling tools to produce results. One of the most important and undervalued is effective sales contract management. Delays in creating, negotiating, and approving contracts can have major consequences — an end-of-quarter sales backlog, missed opportunities, and lost revenue. But experience has shown that adding staff doesn't solve the problem; it only drives up expenses.

By understanding the benefits achieved in implementing an effective sell-side CLM solution, and building them into your business case, you can help your organization deliver the power of best-in-class sales contract management to do the following:

  • Accelerate revenue: A sell-side CLM solution can improve standard operational cycle time to close deals faster and recognize revenue sooner. By integrating CLM with a CRM system, organizations can engage earlier in the process, from RFPs to renewals.
  • Improve operations: CLM accelerates an organization's responsiveness to sales requests, increasing its competitive advantage to win more opportunities. It also enables organizations to configure contract processes, workflow, content, and data to match the unique way each business unit operates.
  • Promote compliance and mitigate risk: By integrating with other enterprise systems, such as CRM and ERP, CLM supports compliance with contract revenue objectives, providing line of sight to all contract commitments.

Conclusion

The objective for defining your business case is to gain executive support for change. But that is only the first step. CLM integration provides actionable insights into operational efficiency, contract effectiveness, and contractual and organizational compliance requirements. Tracking ongoing improvement through CLM automation will allow you to deliver your original business case as part of your ongoing operations.

END NOTES

  1. The Revitas Blog: “Buy-side versus sell-side contracting: Who's got it right?” Interview with Tim Cummins. May 16, 2012.
  2. IACCM Benchmarking Study, January 2012: https://www.iaccm.com/resources/?id=4211&cb=1424464692
  3. Commitment Matters Blog, “The Value of Contract Management: Evidence Mounts”, June 12, 2013  https://www.iaccm.com/resources/?id=6991&cb=1413572797
  4. Think you know your CLM risks? If you're in a systems silo, expect surprises.” Contracting Excellence, January/February 2015 Edition
  5. Sarbanes Oxley Act - a United States federal law that set new or enhanced standards for all U.S. public company boards, management and public accounting firms.

ABOUT THE AUTHOR

Hie Jung Yoon is the Manager – Solution Engineering for Revitas. She has been with Revitas for nine years, focusing on enterprise contract management in the life sciences and commercial markets. Prior to joining Revitas, her enterprise software and solutions experience includes consulting and implementing solutions for enterprise channel management and supply chain management for high tech and complex manufacturing, as well as enterprise resource planning solutions focused on process and pharmaceutical manufacturing. She holds a BA from Northwestern University.

ABOUT REVITAS

Revitas helps organizations accelerate revenue through diverse, multi-level sales channels by delivering enterprise-class solutions that tailor channel and contract management to the needs of the business. For over 25 years, Revitas has enabled companies in the most challenging, channel-intensive industries to achieve best-in-class performance and sustainable competitive advantage. For more information, visit http://www.revitasinc.com.

 

 
 

Your sourcing model can make or break the deal

 
Whether a company is looking to outsource a non-core function across the street or across an ocean, choosing the right sourcing model is crucial: it will make or break the deal. Seven key models along the sourcing continuum, from approved supplier to equity partnership, are examined in this article.
 
 

Progressive companies and their suppliers are looking beyond typical transaction-based procurement models for their sourcing needs. This is because outsourcing today is not a simple make versus buy decision, especially when it comes to complex strategic business relationships: it's a continuum.

Outsourcing – a transaction or a relationship?

Unfortunately virtually all businesses use the same transaction-based approach for procuring strategic services (including outsourcing) as for buying more simple commodities and supplies. Most complex outsourcing efforts tend to be conventional agreements with detailed transaction level pricing on a per headcount or per business task basis (for example, cost per warehouse pallet stored, per minute of call, or per IT server).

But a transaction-based approach is not necessarily the best basis for every business and sourcing relationship. For simple transactions with abundant supply and low complexity, a transactional model will likely be the most efficient way to go. The real weakness of this approach emerges when things are more complex, with variability, mutual dependency or customized assets or processes. A transactional approach cannot produce market-based price equilibrium in variable or multi-dimensional business agreements: other approaches are likely to be more appropriate.

Outsourcing choice determines how you do business

Companies looking to outsource will generally go through a rigorous make-versus-buy decision process.  A key factor typically revolves around whether the function at issue is a core competency, where performing the work “in-house” would provide a competitive differentiation. Unfortunately, it is virtually impossible for a company to be good at all activities and these inefficiencies drive up costs. At the other end of the continuum, companies that do choose to outsource typically go to the open market, where market forces determine not only price but how companies will do business.

The “open market” mode assumes that free market forces incentivize suppliers to compete on low cost and high service. There is also an absence of dependency; if buyers or suppliers are not happy, they can move on with relative ease. Governance of the supply base is typically achieved by switching suppliers or customers if a better opportunity emerges. As a result, the market approach can rely purely on classical contract law, with little administrative control.

Beware the double “no-win” scenario

The decision along the insource versus outsource hierarchy is rarely cut and dried, however. Although each approach offers advantages, a double “no-win” scenario emerges for companies that want to drive innovation and create a competitive advantage, yet still want to outsource a particular activity. This occurs when companies using conventional arrangements find their service providers may be meeting contractual obligations and service levels, but are not driving innovations and efficiencies at the pace they would like to see. Suppliers argue that investing in their customer's business is risky because buyers will simply take their ideas and competitively bid the work. Companies want solutions to close the gaps, but they do not want to invest in people, processes and technology where they do not have a core competency.

Because of the transaction-based way they have structured their relationship, they are at a crossroads, with both buyer and service providers wanting innovation – but neither wanting to make the investment. Thus, a hybrid approach may be best suited to such a situation, where complex services have a high level of dependency, suppliers cannot be changed freely and an insource solution may not be a good fit.

Companies using a hybrid approach have a number of different ways to create strategic and longer-term relationships with suppliers that can offset the weaknesses of a pure market or insource-based approach. This hybrid approach is based on research by the University of Tennessee and known as Vested, because the both parties are committed to collaborating on the best sourcing solution.

Seven sourcing models examined

Research by the IACCM has found that most companies currently operate under conventional transaction-based models that are constrained by a formal, legally oriented, risk-averse, and liability-based culture.1

The seven sourcing business models span the continuum of the make-versus-buy decision. It is important to use the right tool for the job. Figure 1 is a quick overview. The University of Tennessee, SIG, IACCM, and CORE white paper describes each model in detail, and the complete white paper is available as a free download at the Vested website.

Figure 1 shows how the sourcing business models relate to each other along the sourcing continuum.

Basic provider model

The basic provider model is a transaction-based economic model, where there is typically a set price for individual products and services for which there is a wide range of readily available, standard market options, with little differentiation in what is offered. This model is best suited to a situation where there are low cost, standardized goods and services in a market with many suppliers. Buyers typically use frequent competitive bidding (often with pre-established e-auction calendar events) and there is little or no impact to the business when switching suppliers.

Approved provider model

An approved provider model is also a transaction-based approach, with goods and services purchased from suppliers that meet a pre-defined set of qualification characteristics, quality standards, previous proven performance or other selection criteria. Frequently organizations have a limited number of pre-approved suppliers for various categories from which buyers or business units can choose. In these transactions risks and costs are known or are relatively low. Multiple suppliers mean costs are competitive, and one firm can easily be replaced with another if the supplier fails to meet performance standards.

Preferred provider model

A key difference between the preferred provider and other transaction-based models is that the buyer has made the strategic choice of moving to a more strategic relational approach. Buying companies seek to do business with a preferred provider to streamline their buying process and build longer-term relationships with key suppliers. They often enter into multi-year contracts using a master agreement that allows them to conduct repeat business efficiently. It is important to point out that the preferred provider model is still transactional, but the way the parties work together and efficiencies achieved go beyond the simple purchase order.

Performance-based/managed services model

A performance-based model is generally a longer-term formal supplier agreement that combines a relational contracting approach with an output-based economic model, based on a supplier's ability to achieve pre-defined performance parameters or savings targets. Performance-based agreements shift thinking away from activities to predefined outputs or events. Some companies call the results “outcomes,” but in performance-based agreements the meaning of “outcome” is well-defined as the achievement of an event or deliverable that is typically finite in nature and is therefore easily understood. A good example of an output is a supplier's ability to achieve pre-defined service level agreements (SLAs).

Vested business model

A Vested business model is a highly collaborative sourcing business model where the buyer and supplier have an economic vested interest in each other's success. A Vested sourcing business model combines an outcome-based economic model with the Nobel award-winning concepts of behavioral economics2 and the principles of shared value.3

Using these concepts, companies enter into highly collaborative arrangements designed to create value for the buyer and supplier above and beyond the conventional buy-sell economics of a transaction-based agreement. A Vested business model is best used when a company has transformational or innovation objectives that it cannot achieve by itself or by using conventional transactional sourcing business models (basic provider, approved provider, preferred provider) or a performance-based agreement.

Shared services model

A shared services model is an internal organization based on an arms-length outsourcing arrangement. Using this approach, processes are typically centralized into a “shared service” department or organization that charges members for the services used. Organizations use this model for a variety of functional services such as human resources, finance operations, administrative services (such as claims processing in health care).

Equity partnerships

If an organization does not have adequate internal capabilities to acquire mission-critical goods and services, but does not want to outsource or invest in a shared services organization, it may opt to develop an equity partnership. Equity partnerships create a legally binding entity, and take a number of different legal forms, from acquisition of a supplier or creation of a subsidiary, to equity-sharing joint venture.

Conclusion

As companies strive to transform their operations by outsourcing, or seek higher levels of innovation from their suppliers, they need a clear understanding of their business environment and the various sourcing business model options available. It is important they align with their suppliers and pick the right model for the right environment, the right approach for the right job.

The bottom line: outsourcing today is more than a make-buy decision, it is a continuum. Sourcing, contracting or outsourcing professionals need to understand their business environment and use the right sourcing business model to best accomplish their objectives.

INFORMATION SOURCE

This article is based on the Unpacking Sourcing Business Models: 21st Century Solutions for Procuring Services white paper, the result of a collaborative effort by the University of Tennessee, the Sourcing Interest Group (SIG), the Center for Outsourcing Research and Education (CORE), the International Association for Contract and Commercial Management (IACCM) and industry and academic leaders who want to improve the way companies approach procurement and working with outsourced service providers.

Stay tuned for Kate's next article that will explore the 'how' of matching your sourcing models to the appropriate business models and their implementation.

END NOTES

1  “Contract Negotiations Continue to Undermine Value,” IACCM's Ninth Annual Top Ten Terms Report, April 2010.

2.  Behavioral economics is the study of the quantified impact of individual behavior or of the decision makers within an organization. The study of behavioral economics is evolving more broadly into the concept of relational economics, which proposes that economic value can be expanded through positive relationships with mutual advantage (win-win) thinking rather than adversarial relationships (win-lose or lose-lose).

3.  Shared value thinking involves entities working together to bring innovations that benefit the parties - with a conscious effort that the parties gain (or share) in the rewards. Two advocates are Harvard Business School's Michael Porter and Mark Kramer, who profiled their “big idea” in the January–February 2011 Harvard Business Review magazine. The article states that shared value creation will drive the next wave of innovation and productivity growth in the global economy. Porter is renowned for his Five Forces model of competitive advantage. Due to his prominence, it is likely that his take on shared value, although focused on society, likely will cause practitioners to embrace shared value approaches.

ABOUT THE AUTHOR

Author, educator and business consultant, Kate Vitasek is an international authority for her award-winning research and Vested® business model for highly collaborative and strategic relationships.  Kate has appeared on Bloomberg radio, CNN, NPR and on Fox Business News. Her work has been featured in over 300 articles in publications like Forbes, Chief Executive Magazine, CIO Magazine, The Wall Street Journal, Journal of Commerce, World Trade Magazine and Outsource Magazine. To learn more about her, click on her website.

 
 

IACCM supports commercial leadership in UK government contracting

 
Tim Cummins, IACCM's CEO, set the tone at the recent UK Ministry of Justice (MoJ) Contract Management conference in the Central Hall, Westminster, London, providing a key cross-industry perspective.
 
 

Supporting IACCM's ongoing commercial leadership training work with the UK government, the conference aimed to give an overview of external best practices and insights into future strategy and challenges for MoJ staff with roles connected to contract management.

Sam Bromiley, Deputy Director, Contract Management Improvement Program, who facilitated the day said: “We are changing our focus from procurement to a more complete commercial lifecycle which is why it's important that some of the people here today, who don't naturally assume themselves to be involved in managing our suppliers, will be able to better understand how they might contribute valuable inputs without realizing.” The audience included staff from Analytical Services, Finance, Internal Audit and other “support” services to MoJ's contract management activities.

Some of the audience who come from MoJ's support services have also now opted to take up IACCM's Contract and Commercial Management certification program.

The conference's free-flowing style provided a forum for cross-functional networking across various programs of work.

Bill Crothers, Cabinet Office, UK Government, provided a Civil Service perspective on core skills required for the emerging public sector contract management profession and this was further emphasized with an outline of the UK's National Audit Office perspectives of cross-government requirements by Joshua Reddaway.

Speakers from both the private and public sector aimed to give new insight into best practices in contract management, with their own personal perspectives on the profession. They included Mike Taylor, Commercial Director, Central Government, BT Global Services, Ericsson and David Camp, HP Enterprise Services UK Legal Director.

Vincent Godfrey, Paul Kempster, Peter Savage and John Sirodcar provided an overview of the MoJ's current contract management model, and actions already underway and planned as part of the department's Improvement Program.

Tim Cummins explained the IACCM Certification curriculum, what it involves and how it can greatly support the Improvement Program. Some of the first MoJ graduates from the department's training program, Mike Pillen and Julie Hartless shared their experiences of IACCM's Contract and Commercial Management on-line training program, with positive messages for the next pool of MoJ trainees - already more than 120.

Ann Beasley, Director-General, MoJ, opened the event by saying, “It's great to see MoJ getting together across departments and having them look at commercial and contracts in a holistic way.”

The conference ended with closing comments by Dame Ursula Brennan, Permanent Secretary to the MoJ, who was encouraged to see the contract management profession developing.

A post-conference survey was undertaken with an overwhelmingly positive response from all attendees.

 
 

Free on-line business relationships course opportunity starts April 27

 
Learn to build business relationships and manage contracts successfully with a no-cost online course starting April 27, 2015. This is your free opportunity to learn alongside contract professionals worldwide!
 
 

“If you're not in control of your contracts, you're not in control of your business,” says Kai Jacob, Vice Chairman IACCM Board of Directors, one of many advocates of this course featured on this short video. This three-week free-to-join course, Contract Management: Building Relationships in Business, is part of a “massive” scale learning opportunity being offered globally as a result of IACCM's partnership with the UK government and Southampton University, and is being co-delivered by IACCM's CEO Tim Cummins.

Your chance to raise contract and commercial awareness with colleagues in sales, finance, project management, this course builds on the common pitfalls in contract management to build appreciation for the value of good contracting. Sponsors include the UK Crown Commercial Service and Civil Service Learning and it is being co-delivered by Douglas Macbeth, Professor of Purchasing and Supply Management, Southampton University.

You'll spend 3 hours per week for 3 weeks total duration. This is an excellent opportunity to gain continuing education.  Offering unlimited participation and open access via the web, the course has been designed with the busy person in mind.

If you want to better understand...

  • what is involved in commercial business relationships;
  • the process of managing contractual agreements, particularly in the public, private and third sectors; and
  • hear presentations and discuss your own ideas with practitioners from public and private sector organizations around the world.

...this course is for you!

For more information and how to join click here

Though the course is freely available to all, it supports IACCM's commercial leadership training work with the UK government. It is being offered via Future Learn's “massive social learning platform,” part of the UK's Open University. The Future Learn platform provides interactive user forums and is shared by many of the best universities from the UK, Europe, Africa, Asia and the Middle East. There are one million learners worldwide.

Contract Management: Building Relationships in Business” is structured in three weekly modules:

  • Relationship fundamentals - exploring what can go right or wrong in relationships; the rules governing public and private sector procurement; and to make sure what you buy (or sell) is what you and your customer/client really needs.
  • Relationship complexities – looking at complex supply chains and networks involved in many contracts, how to manage interdependencies and the needs of multiple stakeholders.
  • What does this mean to you? The final part brings these ideas together, using an example scenario (the challenge of building your own house) to put theory into practice.

For more information about this free-to-access course go to: https://www.futurelearn.com/courses/contract-management

 

 
 

IACCM Europe Forum June 15-17 in London

 
It's that time again! Reserve your seat at the 2015 Europe Forum in London, June 15 through 17, for three days of intense networking, learning and actionable insight. No other event offers such a packed agenda - buy and sell-side - with hands-on interaction, thought leadership and latest industry case studies.
 
 

Join up to 17 interactive sessions and set your own agenda to...

  • Gain better techniques for maximizing the benefits of business relationships and capitalizing on everything you can bring to the table;
  • Get your road map for contract and commercial leadership; and
  • Pick up more benchmarking tips.

You will also discover new ways to...

  • Create efficiencies and bottom line value through contracting and post-award governance;
  • Improve contract performance and reduce value leakage;
  • Get better balance between risk and opportunity;
  • Simplify your contracts and contracting process and make them fit for the purposes of all parties; and
  • Realize and convey the value of strategic contracting throughout your organization.

To register

… and for the complete event program and speaker listing
visit
www.iaccm.com/europe

Questions?

Let us help you make an educated decision about joining the IACCM Europe Forum.

Email me, Carina Kuhl, VP Events & Marketing, IACCM, at ckuhl@iaccm.com.

 

 
 

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This work [illustration above] is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License. Based on a work at www.revitasinc.com/blog.