Contracting technology revolution - here today, but are we ready?
New technology is recognizing the critical importance to the bottom line of effective contract management. We may be on the brink of a revolution that could make that recognition a reality, but will all areas of business be able – or willing - to adapt? IACCM research indicates casualties may lie ahead. Technology experts -- Kai Jacob, Head of Contract Management at SAP SE and Claude Marais, President of SirionLabs -- share their insights into the possibilities and practical realities of transitioning to an information rich future.
Could this be the reality of tomorrow's contracting?
Imagine a scenario where all the contracting parties have direct access to the same shared performance management information. All the terms, obligations and information of interest or concern to any team or user are available at the click of a button. A shared dashboard provides a tailored status view of progress, risk and any discrepancies covering all aspects of the business.
Is such a utopian scenario possible? Yes, definitely, our experts agree. Many of the building blocks of this joined up technology are already in place and in everyday use in enlightened organizations worldwide. Less certain is how easily full integration and “information enablement” can actually be achieved – even though it offers the opportunity for exponential performance improvement.
Where are we now?
Our experts also agreed on where the technology is today and where it is headed. They see developments as a continuum built incrementally on processes that were once entirely paper-based to today's stand-alone CM systems working alongside or linked to existing Enterprise Resource Planning (ERP) systems to provide a broader view of the data supporting the contractual process.
“ERP systems were traditionally focused on financials, the procurement process and more recently the contracting process. These tools were never developed to manage service contracts after the contract is signed. Ironically, this is where most value leakage occurs,” said Claude. The contract itself sits outside the system, on paper or as an unsearchable Word document, PDF or scan.
“Complex service agreements require a more in depth level of management starting with the obligations in the contract (what was supposed to happen), the performance data (what actually happened) and the invoice data (what am I being charged for). These elements are not compared in ERP systems and this is the underlying cause of the level of frustration of ERP users in this domain. To be fair, the ERP systems were never designed for this task.”
New technology that's here today
In what could be seen as an intermediate “obligation-level” phase, technology is now becoming available that bridges that gap, giving clear, granular visibility of what the supplier needs to deliver. With performance data for the work performed by the supplier also captured in the system it facilitates and encourages performance management at a shared level, supporting sourcing partners' relationships through more integrated management of contract, performance, financial, relationship and risk disciplines.
The system is able to paint a clear picture comparing the actual performance data with the obligation data from the agreement.
Data from the invoices submitted by the supplier for the completed work is captured in the same system.
The system is able to reference the performance data and the obligation data to instantly audit the invoice and point out any discrepancies in the invoice.
The system also captures minutes of governance meetings, issues and action items, owner and current status, providing a highly objective picture of the health of the client-supplier relationship.
“Companies will be able to much better relate performance and invoicing to the contract they signed,” said Claude. “In addition, client and suppliers will increasingly share data and have a single repository for obligations, performance data, actions and issues. Also, we will increasingly see integrated workflows between clients and suppliers. We are already seeing clients adopting these changes in their vendor management organizations.”
Next generation technology on the horizon – a step too far?
Still largely visionary, systems that would be breaking the contract down into its component parts and integrate it fully into the management of business activities at clause and term level would take this functionality to a whole new level, with “exponential performance gains.” With real-time dynamic links to enterprise-wide data, highly granular contract data, meta data and attributes would make it possible to report on 100s of thousands of contracts across multiple user-determined views in just one click, eliminating the causes of value leakage. It would also yield huge amounts of information that could be leveraged for analytics.
However, to support this level of shared information we will need systems that can effectively integrate all of these functions, and architecture that allows shared data. We also need support and an appetite for change across the professions, our experts agree - but could this last requirement prove to be a step too far?
Time for a reality check?
Though the potential for gain is huge, my recent blog Contracts and Technology gives a realistic assessment of where we are now according to IACCM research – but paints a less than optimistic picture of the potential for change. I raised these points:
Many companies have implemented some rudimentary contract management software, though rarely is it enterprise wide and in most cases it covers elements of the process only.
In most organizations, contracting remains activity-based, spread across multiple stakeholders, lacking clear authority and ownership. In such a situation, it is enormously difficult to build consensus for a solution, let alone gain funding.
The most recent IACCM benchmark data tells us that 77% of respondents have a repository. But that drops to only 52% who use software to support internal review and approval and other functionality falls away rapidly.
The lawyers and contract managers responsible for contracting have (mostly) accepted the need to use workflows and some are very proficient with a variety of applications.
Change requires a new approach
Our experts agree. Kai commented, “Coming from a world of e-mails, attachments and MS Word into a world that is fully information-enabled, we have to find ways to structure all our work and everything we do in such a way that we can re-use it, find it, track and trace it.”
“As of today we've signed the contract (electronically or via ink on paper), and one party goes right the other left. They both have their views on their contract, their own CM software, their own ERP, what happens then? Each party translates the contract to their own delivery team and soon they start to have their own views on things - which may deviate from what the parties originally intended.
“Now the idea is to keep the contract centrally – let's say on a shared platform - and maybe generate views, the legal stuff from the obligations. That way, the delivery team can focus on who is responsible for doing what when. So whenever the parties meet they are looking at the same screen. They can discuss any issues jointly, agree to changes and apply the changes directly to the contracts, send the update per workflow for approval and sign it electronically – the contract is instantly updated and both can see exactly what is happening.”
If we can't track changes we are 'blind'
Kai added, “We are moving to new ways of working that center activities around the contract, the written language, the clauses - that is the interesting part and what constitutes a relationship. But we are still in a world where MS Word is our main vehicle to negotiate contracts, with a PDF or scan representing the signed contract. But you can't easily search into that by electronic means. You have to apply OCR technology first to analyze the text, the language itself. We do already use templates that generalize and standardize, but people still deviate. With a Word template we can't tell to what extent. One single word changed in, say, a payment clause could have a massive impact, whereas a couple of sentences elsewhere would have perhaps only minor impact. We cannot track or trace these changes, we have no insight, we are blind.
“We have to extend ERP to manage contracts better, get rid of files and move to clause-based contracting. You can generate as many views as you want if you can identify the parts, making it possible to report on 100s of thousands of contracts in just one click, and with meta data and attributes yielding huge amounts of information that can be leveraged for analytics. Via the 'dashboard' CEOs can get a view of what they are interested to see, from how many deals they have in the pipe or fully executed to who is assigned to which deal. Work balancing is possible because there is full transparency into the end-to-end process.
“It's important that you have a solid integration in the up and downstream processes to make sure the system reacts in real time. In addition all the master data and all links should dynamically update if something happens in the leading application, so your CM is updated accordingly.”
An insurmountable issue?
In moving to a new information-enabled way of working that relies on granularity of its individual components and clause-based contracting, change management is without doubt the biggest task and hurdle ahead.
Kai said, “By standardizing the vast majority of clauses that don't require specific approval, and providing alternative options, including their commercial implications, for those that do, it would become possible to monitor exactly to what degree a contract deviates from a standard. But this new transparency would be a huge step for commercial functions and in particular for legal, a completely new way of working. There is naturally much anxiety about a clause-based contracting approach. Communication and building trust are key.”
So will it (can it) ever happen?
Whether such a transition will ever be possible remains to be seen. If and when it happens, the systems are ready with tools to support it.
Claude was less optimistic and sounded a clear note of caution, saying, “Industry standard agreements are slow to take hold and will likely not become widely used in the foreseeable future. Even if it is achieved at the terms and condition level, it is unlikely to be used widely at the SOW and exhibit levels. Technology designed on the assumption of standard agreements is likely to fail. For now the key barrier to the effective use of technology in contract and supplier management remains the unfortunate focus on pre-contract rather than pre and post contract activities in many companies today. They still have not come to grips with the fact that significant value leakage takes place after the contract is signed and that they therefore need to focus much more on the governance of contracts after signature.”
ABOUT OUR EXPERTS
Kai Jacob - Vice Chair Europe, Middle East & Africa
Being a German qualified Lawyer, Kai joined Lufthansa Systems AG, Frankfurt, in 2004 where he held different roles: starting his career as legal counsel for the purchasing department, he became Head of Contract Management Services before he moved on to the corporate strategy department. During this time, he developed a concept for the introduction of corporate wide contract management process at Lufthansa Systems. Since August 2008 he has worked for SAP in Walldorf, contributing his share as Senior Legal Counsel to the SME Line of Business, but with the same focus: creating a concept for a new contract management solution at SAP. In parallel to his professional career he joined IACCM in 2004, became a board member in 2012, supporting the board as Officer & Vice Chair EMEA since January 2014.
Claude Marais, President, SirionLabs
Claude has been a leader in the global sourcing domain for over two decades. Prior to SirionLabs, Claude pioneered ISG-TPI's supplier governance solution. During his leadership the practice grew to $11bn in managed TCV. Earlier, Claude was the global leader for contract management and strategic sourcing in GM's $3bn/year ITO organization. He is a co-founder and past National Chair of the Society for Information Management IT Procurement Working Groups, a founding member of the ICEX Outsourcing Forum and a Fellow and Honorary Vice Chairman of IACCM.
Non-Disclosure Agreements - treat them right or they'll pick your pocket!
Businesses across the world spend an incredible amount of time and therefore money trying to get Confidentiality or NDAs in place with their numerous prospective customers or suppliers before they can even start talking to them about buying or selling their products or services. As I was reviewing yet another NDA recently, I thought there must be a simpler and better way of addressing the issue of establishing the principle of confidentiality for disclosures made during the course of routine sales negotiations for products and services.
Although I entirely accept that other transactions may very well justify an individually crafted NDA, in essence such agreements are all very similar indeed and should be relatively straightforward. Although some of the detailed wording of each NDA has historically been different, at heart they all:
- limit disclosure, generally on a ”need to know” basis;
- restrict use to discussions and evaluation related to the prospective transaction which is under consideration; and
- oblige the parties to put in place a reasonable level of security to safeguard the information they have been given.
A new approach?
Therefore it occurred to me, how much simpler and cheaper would it be to develop some sort of even-handed NDA, one that parties in negotiations could adopt to govern their discussions, without having to sign anything and without having to conduct extended (or even any) discussions about choice of law and jurisdiction, indemnities for breach etc.
This approach will not appeal to everyone. After all, every company wants to make sure their agreements are watertight and drafted to their own individual satisfaction. But is the expenditure of time and effort on each and every occasion remotely worth it? Almost certainly not, particularly considering the sums involved. Given how rarely breaches of confidentiality occur in relation to sales-related information (and query if most of the information is even really confidential at all?), surely it makes sense to use, so far as possible, a standard document that:
- has been tailored so as not to favor one party or the other;
- omits provisions that are inessential and that are likely to prove contentious; and
- achieves the essence of what both parties want from the document?
Such an approach would also avoid delay and enable the parties to get into discussions without first having to endure negative or destructive arguments that could damage the goodwill they are trying to foster before they have even got past first base.
As with most contracts, the key must be to try to make yourselves as easy to do business with as possible, while acting reasonably to protect your own interests. With that in mind, wouldn't it be great if the parties could simply agree in an exchange of e-mails, taking no more than a few minutes, that all discussions will be treated as being subject to an independently developed and widely trusted NDA? I therefore started trying to develop just such a document.
A new type of document
I checked a fairly standard NDA template to ensure it covered the three essential elements described above and modified it by removing any inessential part that was likely to prove contentious. Examples of the clauses I omitted are below - some containing more balanced wording as an alternative:
Choice of law and jurisdiction
- Although for most commercial contracts such choices are extremely important for reasons of certainty, in reality they are nearly always contentious in an international context because each party has its own preference. In other situations it is worth spending the time having the debate and reaching a definite choice, but in this context I would suggest it is not. Most, if not all, jurisdictions recognize confidentiality as a fundamental concept and the basic laws of confidentiality are very broadly the same. Therefore choice of law makes relatively little difference.
- In terms of jurisdiction, I would also argue this can be omitted. Very few NDAs end up the subject of court proceedings and where they do, the parties might very well welcome having the flexibility to bring proceedings in the most appropriate court, depending upon the circumstances.
Marking documents confidential
- Often there is a provision stating that disclosures only count as confidential if they are marked as such or, where disclosed orally, they are subsequently identified in writing as being confidential. These requirements to my mind ignore practical reality. Genuinely confidential information should not lose protection simply because it is not stamped as “confidential” (although that is always a risk).
- Equally, identifying oral disclosures and confirming that the information is confidential would be a practical administrative nightmare, likely to never be complied with when it comes down to it, with the result that genuine confidential information is again at risk if this is made a contractual obligation.
Deletion of copies
- There is frequently a requirement to delete all copies of confidential information held electronically. Let's face it, the time when confidential information was only handed over physically in hard copy form has long since passed. Most disclosures are now made electronically and then further distributed internally, electronically, by the recipient, often as e-mail attachments. That confidential information will then be reflected in many different versions of draft reports, e-mail discussions, draft contracts etc.
- It is simply impractical to expect all of those copies to be deleted. Locating each and every copy (including back-ups) would be almost impossible. Even were it to be achievable, the recipient would typically want to keep archive copies for risk/liability management purposes so that they could establish, if necessary, what had been disclosed and to whom, and what use had been made of the information.
- Much better to recognize practical reality and provide that where copies are retained they are not used other than for record-keeping purposes, and that the information must continue to be treated as strictly confidential.
Indemnities for breach
- These are becoming more and more common, and I believe this is an unwelcome development. They have a superficial attraction for disclosing parties, particularly if they are - as is typical - entirely unlimited in terms of the scale of any liability. However, not surprisingly, they are incredibly contentious for recipients of information - and query if they actually achieve what the disclosing party intends.
- Indemnities are entirely dependent upon their drafting to determine their scope. Usually they are drafted in extremely broad terms eg. “an indemnity in respect of all losses suffered as a result of a breach…”
- Those seeking the indemnity would presumably argue that it makes it much easier to establish a claim, should that be necessary, and all-inclusive wording avoids arguments about what types of losses can be claimed. I am not sure that is true. Any claimant would still have to prove the scale and validity of any particular losses claimed and that they were suffered as a result of the breach. This is the case with or without the benefit of an indemnity.
- As you would expect, information recipients do not favor such indemnities. Again, it is feared that, depending on the way they are drafted, an indemnity may have the effect of expanding the scope of potential liability - which would exist at law anyway under a simple claim for damages. Such additional liability might not be covered by insurance, depending on the terms of any policy.
- Given these issues and the fact that any injured party still has the benefit of a claim for damages in the event of a breach, I do not believe that the inclusion of an indemnity for general loss is worth the arguments that undoubtedly follow.
Guarantees of information security
- Absolute guarantees of information security (effectively, strict liability provisions) in the event of any unauthorized access can be considered by some as unduly onerous.
- NDAs generally fall into two discrete types: some seeking to impose absolute security requirements and some requiring that a party “puts in place the same security measures that they do to protect their own equivalent information but at a minimum, exercising reasonable skill and care.” The simplified draft NDA I am proposing follows the latter option.
Individual employees' obligations
- Obligations to get individual employees to sign specific confidentiality obligations in favor of the disclosing party would be extremely problematic and burdensome from an administrative point of view. In reality it almost certainly would never happen and is arguably unnecessary. Employees and others to whom confidential information can be disclosed are routinely subject to confidentiality obligations by virtue of their contract of employment or engagement terms.
- Therefore I have proposed a more sensible and acceptable middle ground whereby any recipient must make sure that any employee or representative who receives confidential information must be subject to corresponding confidentiality obligations and the receiving party must take reasonable action to enforce the same where necessary.
Accuracy of Information
- It is pretty typical for NDAs to expressly provide that the disclosing party gives no warranty whatsoever regarding the accuracy or completeness of the information disclosed. Although the basic rationale for this can be understood where the parties are simply in pre-contractual, preliminary discussions and where no money is changing hands, it has always struck me that this perhaps goes too far. The draft NDA therefore includes some limited warranties to the effect that, so far as the disclosing party is aware, the information is not materially misleading.
- It then goes on to state that the only obligation on the disclosing party is to correct the misleading impression reasonably promptly once it comes to its attention. That seems a better and more reasonable balance.
I am certainly not claiming that my draft NDA is perfect, far from it. No doubt it can be improved and refined and in that respect I would welcome discussion and feedback. In addition, to some extent I realize I have been deliberately provocative in order to illustrate the general point made above that a huge amount of time and money is wasted negotiating NDAs, when the process could be so much simpler and cost effective.
Copies of the draft NDA can be downloaded from http://www.trglaw.com/LegalUpdates.html.
Please let me know what you think (by emailing me at email@example.com) and, more importantly, whether you think your company might adopt a similar approach if a suitable “independent” NDA was available.
Tune into the IACCM 'Ask the Expert' webinar titled The European Community's proposals for a Common European Sales Law and notions of 'good faith' that occurred 19 May 2015 (open to IACCM members).
ABOUT THE AUTHOR
Paul specializes in technology, outsourcing and other types of commercial contracts. His experience encompasses IT and Business Process Outsourcing contracts, contractual joint ventures, teaming agreements, technology/IP licenses and exploitation, e-commerce related and data protection issues and regulations governing online trading and marketing.
A regular speaker at public and client conferences, for several years Paul has presented the Contract Law paper at the Commerce & Industry Group's Annual Legal Update for 200+ in-house lawyers.
Negotiation - how much hidden value are you leaving on the table?
If you believe negotiation is all about price, you're probably one of the majority who don't see the many opportunities there may be to make a better deal. How?... by creating added value.
In my work as a consultant I often meet negotiators who have this attitude: “There aren't many variables in my sector.” (A variable is a subject for negotiation; for example, price, terms of payment, storage, extra equipment, etc.) Sometimes they're right - but by far most overlook the many ways there may be to make the cake bigger. They don't realize that by creating added value they can leave the negotiation table having gained far more - without their counterparts losing out.
Even big negotiators don't see the potential
I have been in on the preparation and completion stages of negotiations worth up to US $200m where negotiators were only aware of six identifiable variables, when in fact there were possibly more like 200, such as those we look at below, which could give each individual the ability to create added value.
We work with a large retail chain that buys for approximately US $12bn per annum. They tend to negotiate eight variables when conducting negotiations with suppliers. A major wind turbine manufacturer that manufactures and erects wind turbine parks worldwide for millions of $US only negotiated seven commercial variables.
Find your traditional and added-value negotiation space
In any single negotiation there is traditional negotiation space plus the potential for added value (see Figure 1 below). Only by adding the two together can the true negotiation space be realized. When you find this, two things happen:
- Negotiation becomes easier as there is more space for finding common ground;
- Because additional space has been used, negotiations lead to improved results.
Figure 1. Traditional negotiation space plus unused value available1
Look for opportunities to capitalize – find out what is lacking
One of the most important things to consider when attempting to create added value at the negotiation table - beyond consideration of trust and credibility - is to create opportunities to capitalize on the variables. These may be lacking for many different reasons: lack of knowledge or creativity, secrecy, tradition, tunnel vision, zero sum game, poor preparation, etc. In other words, you should appraise the many variables that frequently arise at the negotiation table.
Extra variables can be created!
Creating extra variables is not rocket science. It requires creativity, a new way of perceiving things and openness to change. I like to use the illustration of all the considerations (or variables) you probably make when buying a car.1 How many variables? When I ask this question, I often get the answer “two or three I assume!” The answer is closer to 40. Some people might prefer an Audi over a Volkswagen because of any one or a combination of different variables in the package. We can divide these into several different types:
- Commercial variables involving a contract or financial result. As well as the starting point of price, these could include a range of other factors such as terms of payment and finance, etc.
- Technical variables, also have financial consequences, but lead to improvements or changes to whatever the car has to offer. These could include size of engine, or choice of model.
- Objective variables are those that it is possible to place a value on and capitalize, such as time of delivery (delivery in one week is more expensive than delivery in two months) or metallic or standard paint (metallic costs US $1,000 more than standard). Others might include tires, navigation, interior options, leather seats, mats, radio, TV/DVD or other extra equipment.
- Subjective variables are more difficult to price. Why would some people prefer one model over another, five doors rather than three or a red rather than a black car? At first glance, there is no appreciation in value either way!
- Variables generating added value such as servicing and insurance, a petrol (fuel) agreement or discount or guarantee.
Which variable is worth more?
Let us assume that servicing your car will cost approximately $600 per visit. You will perhaps have two service visits per year; that is at an annual cost of $1,200. What do you assume is the easiest for your negotiator to give you: a reduction in the price of $1,200 for your car? Or two free service visits during the first year? Chances are it is much easier to go for two free service visits since the negotiator's actual cost for carrying out the service will be less than $600 per visit.
A combination of an objective variable and a subjective variable could be choice of color. Perhaps you would like your next car to be red. To get a red car might mean the negotiator ordering a car from the factory, which takes time to arrive and which means extra work and financing for him. Perhaps he has in his warehouse the same car and model you wanted, but a white one, not a red one. Perhaps he would like to sell off his stock and is therefore contemplating another price if you choose the color he has in his warehouse! (It is always possible to debate the second-hand value of a used car in different colors).
A deal far bigger than either party thought possible
Today's high-risk negotiation climate calls for a new style of negotiation – one in which cooperation builds powerful partnerships that allow hidden value to be found. Once uncovered, the extra value can be skillfully debated and divided. This process requires going far beyond understanding the ins and outs of a contractual agreement; it involves creating trust, sharing information, and dividing up a deal that's far bigger than either party initially thought was possible.
Negotiations should begin as a joint project where the goal is to find the most cost-efficient solution, minimize the risks, and create improved earning possibilities.
This article is based on Keld Jensen's original articles as follows, and all data referenced is his own.
1. Is there anything else besides price when purchasing a car? www.keldjensen.com © 2015 Keld Jensen.
2. Power Up Negotiations through NegoEconomics, www.keldjensen.com © 2015 Keld Jensen.
ABOUT THE AUTHOR
Keld Jensen has more than 20 years' experience in international management, negotiation and communication. He is Associated Professor at Thunderbird University, US; associated professor at Baltic Management Institute in Lithuania and Associated Professor at Aalborg University, Denmark. Other achievements include former chairman of the Centre for Negotiation at Copenhagen Business School, Denmark and contributor to Forbes Magazine; board member, Danish American Chamber of Commerce and the Danish Contract Management Association; published author of 23 international business books on negotiation and related communication published in 17 countries and in 37 languages; and Chairman, Center for Negotiation, an international negotiation consultancy company.
Choosing the right sourcing model
In that article,1 we profiled seven sourcing business models that span the make-versus-buy decision process (shown below in Figure 1). But which is most appropriate for your situation? And how should you make that choice? After all, you don't need a sledgehammer to tap in a thumbtack. Likewise you don't need a Performance-Based relationship to buy pencils.
There's no “one size fits all”
While the short answer is “it depends,” the good news is that researchers at the University of Tennessee have been working with participating organizations to pilot a new resource/toolkit designed to help buyers and sellers answer just this question. The result is an open source (i.e. free to access) Business Model Mapping toolkit, that organizations can use to “map” their various spend categories.
Before sharing how the Business Model Mapping toolkit works, it's important to recognize that no single sourcing business model is preferable over another; there's no one-size-fits-all. Rather, most organizations probably should use multiple sourcing business models. First let's look again at the sourcing continuum, discussed in detail in Part 1 (Figure 1):
For simple transactions with abundant supply and low complexity, a transactional model is likely the most efficient way to go.
However, more strategic, complex sourcing initiatives often require a relational Performance-Based (Managed Services) or Vested sourcing business model.2
At the more complex end of the continuum, suppliers are motivated to invest in continuous improvement, transformation and/or innovation.
Moving up – or down – the continuum
Sourcing business models can evolve over time as the business changes and events occur. You might start out with an Approved Provider model, and shift along the sourcing continuum to a Preferred or later even a Performance-Based relationship model. Shifting up the sourcing continuum to more sophisticated models allows organizations to move from value exchange to value creation because the deal architecture is designed to motivate suppliers to invest in continuous improvement, transformation and/or innovation, geared to reducing cost structure or other strategic business outcomes.
Simply put, each of the sourcing business models works. The key is to know when to use the right sourcing business model for the right situation as each serves a different purpose and will garner different results and behaviors from your suppliers. The Business Model Mapping Toolkit is your guide.
The two key components of a sourcing business model
A crucial part of determining the right sourcing business model for your situation is for stakeholders to answer two important questions:
First, what is the most appropriate contractual relationship framework for your situation? There are three choices: transactional, relational,3 and investment-based approaches. You will need to ask (and answer) questions spanning 14 attributes such as:
- What is the overall level of dependency associated with my spend category?
- What is the strategic impact of the spend category?
- Does this spend category provide the organization with a core competency or competitive advantage?
- What is the degree of risk associated with this spend category?
The second question is, what is the most appropriate economic model? An economic model defines how you will measure and ultimately compensate your supplier. Again there are three choices - for a quick review:
models pay a supplier for every transaction (per hour, per mile, per minute, per unit). The more transactions the more revenue a supplier earns.
- Output based
where a supplier's payment is tied to the achievement of pre-defined measures, such as process based Service Level Agreements (SLAs). Performance-based (managed services) agreements use output-based economic models where a buyer negotiates pre-defined efficiency or performance targets.
An outcome-based economic model is more sophisticated than one that is output-based because it typically ties the supplier's payment to mutually agreed-upon and boundary-spanning business outcomes, not just process or functionally focused performance outputs. To achieve true business outcomes, a buyer and supplier must work together in a highly integrated and collaborative fashion. There is shared risk and shared reward when business outcomes are reached.
To determine if you should use a transactional, output, or outcome-based economic model, you will need to consider 11 attributes such as:
- How much potential is there to create mutual advantage by collaborating with a supplier?
- What is the nature of the scope of work?
- What is the criticality of the work?
- What are your risk tolerance preferences?
A four-step business model mapping process
Although an individual involved in the sourcing initiative can conduct a business model mapping exercise, we recommend you think of it as a “team” approach that consists of a cross-functional group of subject matter experts and business users. Key suppliers can also provide valuable insights as they will provide an interesting perspective. The various perspectives will actually help you create a more accurate assessment of the appropriate sourcing business model to use.
There are four steps to determine the most appropriate sourcing business model for your situation:
Step 1: Select the defined spend category/categories you are sourcing or potentially sourcing. This includes products and/or services that are currently insourced, currently outsourced, or possible new products or services needed in the make or buy decision.
When most organizations consider spend categories they usually think in terms of direct spend (e.g. facilities management) or indirect spend (e.g. accounting services). For example, an organization might look at the facilities and real estate management spend and within that at four spend categories: project management, facilities management/maintenance, real estate transactions, and space and asset planning. Each spend category should be mapped separately. We also suggest “bundling” the various spend categories to see if it will make a difference in thinking about the category from a more strategic perspective. For example, Procter and Gamble chose to bundle their real estate and facilities management into one globally integrated agreement that ultimately used a Vested sourcing business model with the goal of achieving strategic desired outcomes and driving innovation (this case study is profiled in Vested: How P&G, McDonald's and Microsoft are Redefining Winning in Business Relationships).4
Step 2: Use the Business Model Mapping template to determine the best relationship model for what you are sourcing. This will help answer questions about the business environment, such as the overall level of dependency, the risk comfort zone and strategic impact of each spend category. For example, one of the attributes to “map” is the level of supplier integration/interface. The answers (in Figure 2 below) range from none to critical.
Step 3: Use the Business Model Mapping template to determine the best economic model for what you are sourcing. As noted, the most widely-used economic model in businesses today is a transactional-based model. The reason? They are the easiest to administer - typically the supplier is paid per activity. However, as you shift along the sourcing continuum you will want to shift to more of an output or outcome-based economic model because it gives the supplier greater degrees of freedom to provide solutions that will create value and drive innovation. Figure 3 below illustrates one of the Business Model Mapping attributes when determining the best economic model—potential efficiency gains:
Step 4: Use the Business Model Mapping matrix to develop a consensus view of the sourcing business model that is right for your situation. The best sourcing model will be a combination of the relationship model and the economic model you choose. For example, if your map indicates you should use a relational contract model (column D) and an output-based economic model (column 4) – the matrix will indicate a Performance-Based agreement is the most appropriate sourcing business model for your situation. See Figure 4 below:
Note again that that no one model is better than another. The key is to let the Business Model Mapping process guide you to the most appropriate model. It might be tempting to think that a Performance-Based or a Vested sourcing business model sounds good because it motivates a supplier to invest in innovation and transformation. But if the mapping exercise indicates a Preferred Provider model is more appropriate for your particular situation, you will just be over-engineering your approach.
After all, you don't need a sledgehammer to tap in a thumbtack. Likewise you don't need a Performance-Based relationship to buy pencils.
- Your sourcing model can make or break the deal appeared in the March/April edition of Contracting Excellence.
- Vested Outsourcing business model - definition
- Relational - as defined and detailed in Tim Cummins' Commitment Matters blog, Feb 19, 2015
- How P&G, McDonald's, and Microsoft are Redefining Winning in Business Relationships
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 relationships. Her work has led to five books. Vitasek has been featured on CNN, Bloomberg, NPR, and on Fox Business News and she has authored or been featured in hundreds of articles in publications including Forbes, Chief Executive Magazine, CIO Magazine, The Wall Street Journal, The Journal of Commerce, World Trade Magazine and Outsource Magazine.
Get your requirements right - or expect the unexpected!
Author Dan Mahlebashian looks at the key steps that will ensure this doesn't happen to you, as a buyer, and underlines the importance of:
- having all the correct requirements in place throughout the sourcing engagement and understanding how this impacts post award contract governance;
- using correct measurement in both contract execution and supplier relationship management; and
- understanding the roles we play not just as contract managers -- but as commercial and sourcing professionals.
When the pizza is round not square …
To illustrate, think of a simple transaction like ordering a pizza. By placing the order you establish a simple contract with the supplier. Let's say you order the special, a $15 deal with three toppings. Pizza arrives on time, hot and fresh -- but it's round not square! And what if you had envisioned a square pizza? And what if you then refuse to pay? Likely the delivery guy will correctly claim that your order did not specify a square pizza, that the restaurant met its requirements – and that you added a requirement after the deal was made. Would you still refuse to pay?
That's too often the issue with Statements of Work (SOWs) where requirements are unclear or missing. Nowhere in the contract did you establish that you were buying a square pizza! In short, you failed to properly define your requirements up front as part of the commercial agreement.
Incomplete requirements are a silent killer of expected results
Because it describes the essential and technical requirements for what you want to buy – or sell – including the standards that will determine whether those requirements have been met, your SOW is a very important document.1 A properly-crafted set of requirements is critical to a solid commercial arrangement between buyer and seller, and can become the cornerstone of the contract. Getting your requirements right will ensure desired outcomes are achieved by:
- eliminating ambiguity; and
- allowing for fair bids.
And because the supplier knows exactly what's required this also enables you to:
- optimize cost;
- improve implementation and eliminate cost overruns;
- use time and resources efficiently;
- achieve satisfactory performance; and
- obtain a much better solution.
Know who's responsible: the requestor writes, the buyer reviews
It's also very important to ensure that roles and responsibilities are properly aligned between stakeholders and purchasing. Stakeholders own the SOWs. The stakeholder or requestor is responsible for writing the SOW - not the supplier - whereas the buyer or sourcing professional is responsible for reviewing the SOW and ensuring completeness.
Although purchasing, sourcing, or contracting do not control the content, commercial professionals need to point out any deficiencies and ensure the SOW is complete – a very important role. As commercial experts, we are, in a way, gatekeepers to ensure success for both the stakeholders and suppliers on both sides of the commercial or trading arrangement. As such we ensure that we meet all deliverables, realize the outcomes, achieve cost and profit objectives and last but not least – enable innovation. Top tips to success in our role are therefore to:
- Ensure requirements are fact based and not simply someone's opinion. Do not leave anything to chance or interpretation.
- Avoid being so restrictive that we leave no room for creativity, new technology etc. as part of the supplier's delivery solution.
Key steps to ensure your requirements are complete
Before you start:
- Make sure you have the right team members assembled to assist including stakeholder subject matter experts (SMEs) representing the business.
- Consider things like technical specifications, information technology, data and physical security, etc.
- Validate all stakeholder input is comprehended.
As you start writing your SOW be sure to describe the background and give a high level description of the overall objectives.
Make sure you define:
- all aspects of the SOW;
- what is expected of the supplier in terms of tools they will bring into the deal; and
- acceptance criteria that will signify completion and delivery to the defined requirements.
Ensure the SOW incorporates:
- all necessary policies, procedures etc. (see below);
- any necessary timelines/milestones;
- a responsibility matrix defining roles and responsibilities; and
- all provisions for termination or transition assistance.
Remember that corporate policies, procedures etc. should be presented upfront to the supplier at the request for proposal stage, and bear in mind that modifications may be needed to reflect the supplier's business solution.
Think through two rights:
- intellectual property rights; and
- asset management, software license access and transfer rights.
Measure and track
Finally, track precisely all changes to the SOW over the term of the agreement. Do not simply rely on a casual acceptance by the supplier. Write it down and secure explicit agreement by both parties - buyer and seller - as to acceptance, associated pricing and levels of expected service. Note that pricing is not just about compensation, but if constructed properly, the right pricing can incentivize the supplier to deliver the outcomes desired from the deal.
The essential parts of a great commercial agreement
A properly constructed services or product contract connects and integrates all elements of a good agreement together, as set out below, each complementing all the others. Importantly it also provides for:
- any add-on work;
- termination assistance including service continuation; and
- benchmarking to enable continuous improvement.
The essential elements of a properly constructed contract include:
- terms and conditions (legal provisions, not scope definition);
- SOW describing and defining the requirements for what you are buying:
- describe the “what” and let the supplier define the “how,” including a supplier technical solution; and
- provide attachments to give any additional details.
- Service levels, quantifying the expected level of service and including:
- metrics and key performance indicators (KPIs); and
- measurement criteria and outcome examples.
- Pricing provisions defining payment and associated timings and
- methodology; and
- currencies, timings and invoice provisions.
The critical role of supplier relationship management
One final consideration as you work on your commercial agreements is supplier relationship management (SRM). Although not the main focus of this article, a strong SRM process is critical to a successful commercial engagement between buyer and seller. A working relationship built on trust and collaboration allows you to share information proactively and adaptively, and provides the space you need for creativity and development of new technology, etc., as part of the supplier's delivery solution.
In summary, requirements matter. They are one of the most critical elements of a successful contract and are one of the keys to ensuring that we get the outcomes we desire.
- For more details about what makes a good scope of work and the role of requirements management in quality assurance, click on Contract and Commercial Management, the Operational Guide, IACCM 2011.
ABOUT THE AUTHOR
In addition to Dan's role at General Motors, he is also Chair of the IACCM Board of Directors. At GM he is responsible for three key value enablers for the business: 1. Global Purchasing Services for Indirect, Pre-Production and Direct Purchasing, including transactional execution, tactical buying and end to end commodity management; 2. global process owner for Request to Pay including request management, purchasing and financial Settlement; and 3. Enterprise SAP Business Management covering all global SAP deployment activities and COEs.
Procurement reform journey in Scotland - could a look back forecast a bright future?
How do you sum up five years and seven months?
Much has changed, and largely for the better, but big challenges remain if Scotland is to remain a global leader in public procurement. In 2009 Audit Scotland1 had just published Improving Public Sector Purchasing, a report that examined the achievements of the first three years of the McClelland reforms2. “Lots done, but more to do” was the overall message – and the same, arguably, could be said today as Scotland embarks on the next phase of the public procurement reform journey.
2009 – strong beginnings, new horizons
In 2009, Public Contracts Scotland, the national procurement portal3, was in its infancy. The first round of procurement capability assessments was about to begin, systematically measuring levels of capability and capacity across some 150 public bodies for the very first time. In that year we also saw the launch of the Sustainable Procurement Action Plan. An early challenge for me was to articulate clear and simple strategic priorities for procurement reform. Those strategic priorities – improving access, delivering savings and benefits, enhancing efficiency and collaboration, and placing sustainability at the heart of all we do – became the key ingredients of what we now know as the Scottish Model of Procurement.
Combining those different strands of activity into a single, simple and coherent model was fundamental to maintaining the profile and momentum of procurement reform. It needed to promote the belief that public spend on goods and services should be used to deliver economic and social benefit - positioning procurement firmly as a strategic enabler of both policy development and service delivery.
Clear, simple message - and lever for reform
By 2009 the concept of procurement reform being government led but owned by the public sector was already well established. The Procurement Reform Board, chaired by the Cabinet Secretary for Finance, was responsible for driving progress. The Sectoral Centres of Expertise were tasked with championing collaboration and capability improvements.4 The autumn of 2009 also saw the establishment of a project level partnership with business and third sector organizations with the creation of the Supplier Engagement Working Group. The group was charged not only with identifying the principal barriers that small businesses and the third sector faced in accessing public contracts but coming up with practical, affordable and legal solutions. From their work developed groundbreaking initiatives such as the standardized prequalification questionnaire (now embedded in PCS-Tender) and the Supplier Journey toolkit.
Model inspiring international interest
Fast forward five years, and the basic tenets of procurement reform still hold good. The public sector ambition to deliver a world-class service is as keen as ever, and the profile of Scotland's achievements has never been higher. From the use of community benefit clauses in public contracts through to the leading-edge use of e-commerce, the Scottish Model is inspiring governments and administrations across the world. Over my last three months in the job alone, we shared our experience with the World Bank, the Australian Federal Government and the Governments of Queensland and Victoria.
The Procurement Reform (Scotland) Act 2014, passed unanimously by the Scottish Parliament, puts a statutory framework around the Scottish Model, and the introduction of the Sustainable Procurement Duty places an unambiguous incentive on all public bodies to look for value beyond savings in how public money is spent. It establishes across the political spectrum a clear understanding of the basic tenets of how public procurement should be conducted in Scotland.
Social benefits in the spotlight
The social benefits from public procurement have come increasingly to the fore, and the use of the living wage has been the subject of much public commentary, not all of it accurate. The living wage is promoted by a not for profit foundation as being the hourly rate necessary to guarantee an acceptable standard of living. It is significantly higher than the National Minimum Wage, set each year by the UK government. The Living Wage Foundation has been incredibly successful in promoting the social benefits of paying this higher level, with most political parties expressing their support.
Despite the claims of some lobby groups, it is simply not legally possible to make the living wage a contractual requirement in a tender - essentially because the Living Wage, unlike the National Minimum Wage, does not have a basis in statute. The European Commission made that crystal clear. So a public body in Scotland, or England and Wales for that matter, cannot run a tender competition that guarantees the successful tenderer will pay their staff the living wage. Not, ironically, because of European Procurement Directives, but because of the completely separate Posted Workers Directive. Those who claim otherwise are either laying themselves open to a successful legal challenge; are confusing encouragement to pay with contractual requirement to pay; or are treating the living wage as a post-award contract variation - and paying the price.
Contracting approach supports living wage
But in Scotland, we devised an approach that can reward tenderers who choose to pay a living wage as part of a package of broader workforce-related matters, but which does not treat the living wage as a pre-condition of contract award. At the beginning of February, just before I left, we issued policy guidance for how workforce welfare – including the living wage - can be considered in the course of a public procurement exercise as key driver of service quality and contract delivery. The guidelines can be found in this Scottish Procurement Policy Note.5 They go further than any other published in the UK in using procurement to promote fair employment practices. They will form the basis for the Statutory Guidance under the Procurement Reform (Scotland) Act that will come into force at the end of this year. The Scottish Government is now out to consultation on the broader provisions of the Act, and on the European Directives.
Of course, any job has its frustrations, but having once been described in the Scottish media as “relentlessly optimistic” (an unpardonable sin in a civil servant, but I am unrepentant) I prefer to dwell on the positives. I believe that public procurement in Scotland at its best is genuinely world class, and through the Scottish Model we have set clear standards that all public bodies should aspire to. We have shown how innovation and social good can be delivered through public contracts, and how capability can be underpinned by the systematic use of e-commerce.
Model's lifeline for supported businesses
For me, the supported business sector in Scotland is an example of everything the Scottish Model stands for. Supported businesses employ high proportions of people with disabilities, and are afforded special treatment by the European Procurement Directives. The withdrawal of financial support by the UK Government a few years back caused a number of these businesses to fold, with devastating consequences for the employees, most of whom found it impossible by nature of their disability to find work in mainstream employment.
In Scotland, we used public contracts to provide a lifeline to these businesses, creating the confidence necessary to bring in private investment to restructure them and help them flourish. By using public procurement to enable the restructuring and growth of an economic sector, we not only delivering value to the economy, but provided hope and dignity to some of society's most vulnerable. Visiting the new factory site at Larbert, in Scotland's central belt, where four supported businesses are collocated in one modern industrial unit, and meeting some of the workers whose lives had been given meaning by sustainable employment, has to be one of the highlights of my time in this job.
Business friendly-socially responsibility challenge
There are, of course, challenges. The balance between the business friendly and the socially responsible aspects of the Scottish Model is a fine one, needs to be maintained with care. Just as in other administrations the drive to deliver cash savings to the exclusion of all else has been to the detriment of the broader economic contribution procurement can make, so equally there are dangers in focusing too exclusively on the social aspects of procurement, without giving due regard to the wider value for money considerations. And the siren calls of protectionism from all points on the political spectrum will not go away.
These challenges are not new, though, and they can be managed effectively, but doing so requires constant vigilance. The long-term credibility of the professional procurement function must not be put at risk to deliver a short-term political fix, however tempting that may be. Public procurement in Scotland is well served with highly capable, experienced and talented teams, in the Scottish Procurement and Commercial Directorate, as well as the Sectoral Centres of Expertise, and the broader public procurement community in Scotland. Without their commitment, dedication and partnership, the Scottish Model would have been nothing more than a collection of words. Through their continued professional excellence, the story of the Scottish Model goes on.
The views expressed in this article are Alastair's personal views and do not necessarily reflect those of the Scottish Government.
- Review of public procurement in Scotland
- McLelland Reforms defined, purpose. See also How Scotland boosted economic recovery, delivered benefits to taxpayers and The secret behind Scotland's procurement transformation (both articles by Alastair Merrill appeared in the November 2013 edition of Contracting Excellence).
- Public Contracts Scotland online national procurement portal
- See also National Procurement Centre of Expertise, http://www.gov.scot/Resource/Doc/1265/0054365.pdf online Vision article titled We will contribute benefits to the people of Scotland through the development of efficient and effective national procurement strategies.
- Scottish Procurement Policy Note
ABOUT THE AUTHOR
Alastair left the Scottish Government In February 2015 to become Vice Principal at the University of St Andrews. His past career spans a wide range of public sector and international roles, including time as a UN peacekeeper and as private secretary to NATO's Secretary General.
Europe and Australasia forums coming soon!
Time to enter IACCM's Global Innovation Awards 2015
- Award for personal initiative
for an individual practitioner who has shown outstanding leadership or endeavor in delivering value and raising the profile of contract and commercial management.
- Award for operational improvement
for initiatives that have delivered significant business value through improved commercial or contracting process or practices.
- Award for strategic direction
for initiatives that have raised the strategic profile and contribution of the commercial or contracting process or function.
- Award for outstanding service provider
for consultants, service or application providers who have led or enabled high value initiatives at client organizations.
How do I enter?
To enter please complete the Innovation Award Survey by Saturday, 8 August: https://www.surveymonkey.com/r/InnovationAwards15.
Finalists will be notified no later than August 28. The winners in each category will be announced during the Awards Ceremony at the IACCM Americas Forum on 7 October in Henderson, NV, USA.
For further submission details and to review case studies of previous winners please visit https://www.iaccm.com/innovationawards/
Wishing you success and victory!
Carina Kuhl, VP Events & Marketing, IACCM
Interactive workshop - your chance to get the skills you need!
A great success with both new and experienced commercial managers, attendees agree it's an "excellent opportunity to develop the skills you need and get useable results instantly, regardless of experience or background."
When – date and time?
Tuesday 7 July 08:30 through Thursday 9 July 17.30 (5:30 pm)
The Green Park Conference Centre, 100 Longwater Avenue, RG2 6GP Reading, UK
Sponsored by Devant, a contract creation, negotiation and education firm in the UK.
Instructor Tiffany Kemp, founder and managing director of Devant, author of the books Deal Makers and Essential Contract Drafting Skills, and contributing editor to IACCM's Contract and Commercial Management Operational Guide.
Who should attend? Commercial and contract managers find their chosen careers many ways. The Devant training provides an excellent opportunity to develop the skills and understanding they need to perform effectively in their role, regardless of their experience or background.
Benefits - Each delegate attending receives a copy of Tiffany's books, Deal Makers and Essential Contract Drafting Skills. One delegate said that her copy of Essential Contract Drafting Skills has: “lived in my laptop bag for the last two years. It's my 'bible'!”
Combining invaluable nuggets (such as why indemnities don't work for either clients or suppliers) with practical tools (like how to prepare effectively to significantly increase your negotiation successes), this is an opportunity no commercial or contract manager should miss!
Feedback - Instructor Tiffany Kemp says: “This workshop series gets such fantastic feedback because it focuses on the practical realities of the contracting profession rather than just legal theory. I use stories, cases and learning techniques like memory stacking to help delegates understand, remember and use their new knowledge.”
Previous delegates include Richard Dietrich, Associate Director for Roughton International, who said: “Tiffany has both a business and legal background and was able to address the concerns and queries of the participants a lot better than a lawyer may have done. She prepared and presented well, adopted a flexible and interactive approach and made the learning experience entertaining. It never was boring!”
Richard's feedback is typical of many delegates, who love the lively, practical and interactive nature of the Devant training. Ann Riddy, a Contract Manager for Savvis, agreed: “I would definitely recommend [this training] to colleagues. Really helpful in understanding how and why contracts work.”
How to register - To make reservations for you or your team, register online here or contact Tess Eagles at firstname.lastname@example.org. Tess will also be pleased to advise on local hotels, and on transport from London's Heathrow Airport or Reading's main railway station, which has frequent fast trains to London Paddington.
Discover more and download the full agenda for each day here.
DEVANT is an accredited IACCM training provider, and successfully delivered its first two IACCM Fundamentals of Contract and Commercial Management courses in the spring of 2015. If you'd like to arrange an in-house training course (IACCM Fundamentals or any of Devant's workshops), contact Tess for details.
ABOUT THE INSTRUCTOR
Tiffany Kemp is Founder and Managing Director of Devant Limited, UK - a contract creation, education and negotiation organization. Tiffany pairs her commercial contract creation and negotiation expertise with solid practical business experience, to produce outstanding deals, create effective contracts and deliver innovative training solutions. Her innovative and thought-leading approach to business has seen Tiffany rise to prominence amongst her peers. An engineering graduate with a Masters Degree in Business Law, she began her working life as an RF Engineer. A successful corporate career encompassed a variety of roles, including managing software development projects (Racal and Triad Special Systems), support and maintenance contracts (Anite Telecoms), multi-national bid teams (Convergys) and developing lucrative new revenue streams (Anite). As Commercial Manager for Convergys, Tiffany negotiated high-value deals with telecoms operators across Europe. She launched Devant in 2003. Check out Tiffany on LinkedIn