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

July/August 2015

 
 
Editorial Comment

Confront or collaborate - the contracting dilemma

 
The articles in this edition highlight the challenges - and the glaring conflicts - facing the contracts and commercial community today. On the one hand we recognise the critical importance of collaboration in driving successful contract outcomes - but on the other, adversarialism still seems endemic to contracts and their negotiation.
 
 

In his article The Logistics Industry - a Canary in the Contracting Coalmine, Phil Coughlin describes the imbalance that exists in a highly competitive environment, where customers are able to demand the most onerous terms - and suppliers simply acquiesce, to win business at almost any cost.

The price of that acquiescence is highlighted by Thomas Pfeller in his article, How to Prevent International Oil and Gas Disputes from Landing in Court. Thomas describes the growing volume and value of disputes and the expense associated with their management. He suggests approaches that might reduce both their volume and their individual costs of resolution.

Finally, Professor Rob Handfield's recent article in the Journal of Strategic Contracting and Negotiation (JSCAN) promotes an antidote to these endemic problems - the role of collaboration between trading partners. In this edition, a summary of this report titled, Relational Approaches Are More Critical Than Ever on Extreme Oil-Gas Projects concludes: “This report calls for further research on critical issues such as talent management and up-skilling of those working in major project contracting roles, with longer-term studies on both the conditions needed for collaborative relationships to take place and organizational barriers to partnering. Further research is also needed on the role of procurement and supply chain executives who, in order to manage value and risk in large projects, need to spend more time in the early phases of contract negotiation engaging and involving a larger pool of stakeholders.”

So what are the key take-aways from these articles?

Up-skilling and increased awareness

Each article illustrates how the pressures and complexities of today's markets demand improved commercial knowledge and judgment throughout an organization. Whether it is over-commitment by Sales, limited understanding within Engineering or Project Management, or use of inappropriate dispute resolution by Legal, the impacts are similar and contract risk is increased.

Traditional responses by many Contracts or Procurement groups - to seek added resources, to demand earlier engagement or to increase "review and approval' – no longer work. Our focus must be on how to enable better decision making. The main initiatives appear to be:

  • Greater use of technology - While contract management software can help by providing templates and improving oversight, creative contracts groups are also looking at the use of apps or videos, which offer on-demand information access.
  • Shared services and “help centers” - Improving ease of access to qualified support makes it more likely that such support will be used. It also ensures that repetitive issues are identified and eliminated.
  • “Commercial Academies” and training - There is a flurry of activity in creating “academies” or “excellence initiatives” which provide structured training across many functions. In more complex industries, particular focus is on defining the role of “contract owners” and ensuring they have the skills, experience and knowledge needed for performing their role.
  • Contract simplification and design - Make contracts easier to understand and you will increase the chances that they are put to more effective use. Growing evidence shows that poor design and wording of contracts is a major source of errors and misjudgements.
  • “Principles-based negotiation” - Growing use of playbooks and fall-back options is assisting improved negotiation and better management of risk.

Collaborative relationships and organizational barriers

The drive towards “relational contracts” appears unstoppable – except, that is, for the resistance or reluctance by many contracts, procurement and legal groups to adopt or understand this approach.

As performance and outcome-based relationships become increasingly critical to project and business performance, traditional contracting and negotiation models are rapidly reducing in their importance. Yet many contracts and legal professionals remain wedded to narrow, adversarial approaches based on battles over risk allocation. Each party blames the other for this lack of movement and together they are reducing their relevance and value to the business. In frustration, management turns to others (such as Project Management) to lead work on more creative contracting models.

Collaborative contracting focuses on broader selection criteria that include organizational and cultural alignment. Leaders in this field drive internal collaboration between stakeholders as well as external collaboration across supply networks. They change the focus of negotiation to ensure the contract provides a framework for subsequent business operations and they ensure that there is organizational capability to implement and execute.

The role of procurement and supply chain executives

It is not just Procurement and Supply Chain Executives who are impacted by these trends. They affect everyone charged with forming or managing trading relationships, or the policies and practices that support commercial strategies.

Businesses exist to trade. As each of these articles illustrates, the conditions for trade are becoming steadily more demanding and raising the focus on the overall contract lifecycle process. That is proving challenging for many organizations because contracting remains fragmented, poorly understood and dismissed by some as essentially an "administrative" task.

In reality, contracting is becoming the core discipline that drives quality of operations and performance. Functions such as Legal and Procurement are contributors to that discipline, not owners of it. If they wish to raise their value and status, they must grasp the opportunity to expand from their current activities – many of which will soon be eliminated through automation.

 

 
 

The logistics industry - a canary in the contracting coal mine?

 
Commoditized pricing, lopsided shifting of risk and onerous terms and conditions: do third party Logistics Providers (3PLs) realize what they are signing? And are the service contracts that Global Shippers and Consignees (GSCs) require 3PLs to sign hurting the industry?
 
 

Dr. David Hillson's article “Exploding a common myth about risk management,” that appeared in our March/April edition,sparked a robust response from transportation and logistics industry expert, commentator and author, Phil Coughlin – and a new white paper titled Unpacking Risk Shifting: Challenging Unreasonable Risk-Shifting in the Transportation Logistics Industry. 2 The white paper is a call to action for GSCs and 3PLs to drive proactive and positive changes in the transportation and logistics industry to create fair and balanced commercial agreements that promote healthy businesses on both sides.

On reading Dr. Hillson's article Phil Coughlin had this to say, “It was a thought-provoking article - the following point jumped off the page: 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.

Risk is loaded onto service providers

In particular, I point to the words underlined above. This “loading” does not happen in the logistics industry. Procurement professionals have calculated correctly that they can separate risk from price, thus they treat the buying of transportation services as a commodity – like buying basic office supplies. Yet, at the same time through the contracting process they shift lopsided amounts of “inherent risk and cost” in their supply chain over to their 3PLs.

There are a few key reasons why this happening:

  • GSCs are under extreme price-per-unit pressure from their own customers, so have turned their attention to their supply chain in an effort to drive down transactional cost and shift inherent risk in their business model.
  • The GSCs have learned that 3PLs will recklessly pursue more freight.
  • Once the procuring is finished, procurement moves on to the next category or purchasing initiative. The true cost of this methodology is felt across a disparate network of entities in dribs and drabs - the true impact of which will only be apparent if and when someone adds it all up.
  • The result is generally not a single nor a series of big service failures, but rather the slow drip of service degradation across a global network and the withholding of innovation.

Are 3PLs aware of these onerous and lopsided contracts?

Too many 3PLs are either not fully aware of these contracts (signed below the corporate radar) or do not fully appreciate the risk exposure tucked into them. They either adopt a “cross that bridge when they come to it” approach, believe in the myth that they can fully insure their exposure, or simply have no intention of honoring those contract terms (one of reasons we now see GSCs requesting a right of offset). Is the logistics industry the canary in the coal mine when it comes to current procurement and contracting practices? Procure as if you are buying a commodity, i.e. the service provider is of no strategic value, and the buyer has options:

  • Orchestrate an RFI / RFQ process with service requirements that call out for “strategic partnership,” high value-added services and innovation.
  • Bridge this gap between paying for a commodity, yet requiring a strategic partner, by imposing an onerous and lopsided service contract.

“Heads I win – tails you lose”

Most GSC service agreements that I come across are loaded with onerous terms and conditions. The following are a few of the many examples the “standard” demands being made in GSC's service agreements:

  • Liability - It is commonplace for a GSC to demand full value replacement liability for cargo loss or damage while expressly invalidating international industry standards such as the Warsaw Convention3 or the Montreal Protocol.4  I liken this to a commercial passenger airline losing their luggage and informing the airline that their Rolex was in it. The airline will not and cannot pay for the lost Rolex. The airline must know their liability limits (costs) if they are going to offer a $200 fare from Boston to Chicago. In the logistics-transportation sector the GSCs are commoditizing the rates, while simultaneously requiring excessive liability limits, i.e. free “all risk” marine cargo insurance. It is a myth that you can “load” the cost of full value replacement liability into a commoditized quote. You're likely to wind up with a version of Russian roulette, with the GSC and the 3PL hoping a major cargo loss or damage incident does not occur. It is reasonable for a GSC to require a 3PL to take a calculated risk, but that risk should be calculable.
  • Codes of conduct - Almost every GSC service agreement requires the 3PL to agree to comply with the GSC's code of conduct. On the surface this seems like a reasonable and straightforward request. After all, a code of conduct addresses ethical, social and moral standards, so why not? The challenge occurs when the 3PL has its own substantive code of conduct. Logically, a GSC retains the unilateral right to add, modify and delete its code of conduct to fit its mission, vision and cultural attributes. One GSC's code of conduct may share common themes with another GSC, but each GSC's code will be different. How is a 3PL required to adopt each GSC's code of conduct to comply with this request? How does a 3PL comply with 10, 20, or 30 different codes of conduct? More importantly, what does this willingness to say “yes” to everything mean for the 3PL's own code of conduct? A company that says “yes” to everything is likely to stand for little. Most GSC service agreements consider violation of their code of conduct a breach of contract, thus subject to penalties, indemnification exposure, or termination for cause. Can a 3PL consume, implement and comply with 10, 20 or 30 different codes of conduct throughout their company and subcontractor network? No they cannot: so the GSC and 3PL implicitly enter into a “nudge-nudge wink-wink" arrangement of “just sign that you will comply, so we can check that box.”

It is reasonable for GSCs to require their 3PLs to have “skin in the game,” (i.e. incurred monetary risk in achieving the goal). 3PL's should be held accountable for their performance. However, it is important to note that in almost every GSC service agreement a section exists that expressly states that the GSC is under no contractual obligation to provide any business to the 3PL. Where is the mutual beneficial commitment?

Our white paper outlines the issues now facing the logistics industry and expands on my observations with some graphic examples.  The white paper was inspired by a discussion between Phil Coughlin and Kate Vitasek, faculty member, the University of Tennessee's Haslam College of Business Administration, about poor contracting practices in the logistics and transportation sector. The discussion expanded, and the concept of a white paper was born. Passionate industry leaders joined in the discussion, becoming authors and contributors. All felt strongly that the entire industry—buyers and suppliers—will benefit from this paper.

Taking advantage of risk naivety?

Pleased with the interest his original article has generated, author Dr. David Hillson, agreed that risk balance can often be asymmetric, resulting in one party carrying more risk than they realize, or can bear. He commented, “This often arises from a difference in risk maturity between the contracting parties, allowing one to take advantage of the other's risk naivety. Tackling this requires education, and this article is a small step towards this goal.”

END NOTES

  1. Dr. David Hillson's original article “Exploding a common myth about risk management” appeared in the March/April edition of Contracting Excellence.
  2. “Unpacking Risk Shifting: A White Paper Challenging Unreasonable Risk-Shifting in the Transportation and Logistics Industry,” by Kate Vitasek, Phil Coughlin, Peter Moore, Adrian Gonzalez, Karl Manrodt, Emmanuel Cambresy and Andrew Downard (University of TN http://www.vestedway.com/vested-library/)  Sign in required for reading access, but free of charge.
  3. The Convention for the Unification of certain rules relating to international carriage by air, commonly known as the Warsaw Convention, is an international convention which regulates liability for international carriage of persons, luggage, or goods performed by aircraft for reward https://en.wikipedia.org/wiki/Warsaw_Convention.
  4. The Montreal Protocol is an international treaty designed to protect the ozone layer by phasing out the production of numerous substances that are responsible for ozone depletion. https://en.wikipedia.org/wiki/Montreal_Protocol

ABOUT THE AUTHOR

Philip Coughlin has worked for Expeditors International of Washington Inc. for 29 years, and is currently the President of Global Geography and Operations.

 
 

How to prevent international oil and gas disputes from landing in court

 
Let me be frank. Conflict is common in international oil and gas construction projects. If you and your contractual counterpart do not agree on proper dispute resolution, you will end up either having to write off what you believe are your contractual rights or end up in a lengthy - and costly - court case. Either way, it's painful. This article tells you what you need to know to put agreements into place, saving money and time.
 
 

While it's possible for parties to achieve agreement after a dispute develops - even though their contract does not provide proper dispute resolution mechanisms - clearly, having that agreement in place before a dispute arises or even before the contract is signed is a far better way to go. This is simply because in almost all cases the applicable legislation does not provide for faster and cheaper non-court dispute resolution (such as adjudication under the HGCRA 19961 and the Construction Scheme 1998 in the UK2 for standard construction projects) and agreement might be hard to achieve.

When disputes do arise, most go into arbitration at the end of the project. Very few arbitration proceedings are initiated during the project execution phase. Unfortunately, this leaves disputes unresolved, leading to delays and cost overruns on both sides that need to be settled by arbitration at the end of the project. So it is a “catch 22” situation.

Despite the fact that the tribunal has no power to enforce an award, and can be time consuming and costly, arbitration provides a legally binding award that can and will be enforced by the relevant courts.

Are there alternatives to arbitration?

Every now and then large project contracts provide a dispute resolution board (DRB) for escalating disputes to management level, but such contracts are not the norm. Despite their obvious benefits, dispute resolution methods such as mediation, expert determination, or mini-trials are unusual.

So what are these alternative methods and how do they work?

  • Mediation is a process that involves an external mediator who tries to achieve an amicable agreement between the parties. The mediator is not an arbitrator; he or she should not get involved in the facts of the case. The mediator's sole task is to be a messenger between the parties in trying to find an acceptable solution. In practice they commute between the parties sitting in separate rooms, conveying their settlement offers. One reason mediation is not often used is because it is non-binding. With no real pressure to achieve an outcome, either party can leave the mediation at any time and the mediator has no power to enforce whatever agreement was achieved.

  • Expert determination - In oil and gas projects technical issues very often lead to disputes best solved by technical experts. However, the involvement of one or more experts to evaluate the case is rare. In theory, each party appoints an agreed number of experts who individually prepare their reports. The experts then meet to resolve any differences of opinion and write a final report about the subject under dispute. If the parties would commit themselves to the outcome of the report, expert determination could be a very effective dispute resolution method. However, it seems that both legal departments and management are wary of being bound by a purely technical viewpoint on the particular issue under dispute. This may be because limitations in their technical understanding affect their ability to judge their lose/win position.

  • Mini-trials: A mini-trial is much like a court trial but with senior management presiding instead of judges. Project teams and their solicitors (attorneys) prepare their case and present it to the top management of both parties. After presenting the issues, the parties can negotiate a settlement that can then be formalized in a legally enforceable written agreement. The management must be senior enough to make binding decisions and they should not have been involved in the dispute before the trial.

Include the right provisions in your contract

To make sure disputes are handled properly it is important to include provisions in your contract. The most common dispute resolution feature is the arbitration agreement. Standard form contracts3 such as JCT, NEC, and FIDIC include relevant clauses. However, such contracts are of very limited use in international oil and gas contracts. Some contracts might borrow parts of standard forms but most contracts are specifically drafted for a particular project.

Arbitration agreements require two key obligations. First, the parties must agree that any dispute falling within the contract will be resolved by arbitration and second, the parties must agree that they are bound in an arbitral award. Arbitration agreements must therefore either be part of a substantive contract or they may be entered into as the result of an existing dispute (called ad-hoc agreement). When such agreement exists, the parties waive their right to take a dispute to the court. It should also be mentioned that in certain scenarios an arbitration agreement could also be oral or assumed.

A very interesting scenario results when a dispute arises over the existence of a contract, meaning one party claims that no contract was in place and the other party refers this dispute to arbitration (e.g. terminating a letter of intent or LOI). If the arbitration tribunal finds that no contract is in place, how can a tribunal, appointed under the non-existent contract, have any power to issue an award? The answer is severability. Arbitration clauses are severable from the main contract - they can be enforced even though the contract never came into existence. This fact plays a major role when drafting the arbitration clause, because if a party decides to refer a dispute straight to the courts, it may find that the courts will, upon application of the other party, stay the proceedings, leaving the claiming party with the choice of abandoning the claim or arbitrating it.

International arbitration basics

No international law governs commercial arbitration. The underlying laws will always depend on the applicable law agreed on in the contract. The only common denominator is the UNCITRAL Model Law 1985 (MAL)4 that provides guidelines to countries on how to implement international arbitration into their national legislation. Currently 69 countries have adopted the MAL and implemented it, with or without modifications, into their national legislation. This allows parties from different jurisdictions to resolve their disputes based on a similar set of laws in an efficient and fair manner. It is, however, recommended that all parties scrutinize applicable laws to be certain how the MAL specifically applies.

In addition to the UNCITRAL Model Law, the UNCITRAL Arbitration Rules5 were published and revised in 2010. In contrast to the MAL, the Arbitration Rules do not include recommendations for national lawmakers but provide a set of comprehensive procedural rules guiding arbitration proceedings.

The Arbitration Rules include a model arbitration clause and cover all relevant issues such as appointment of the tribunal, the arbitration conduct, and the effect and interpretation of the award. Including the model arbitration clause in the contract is usually sufficient to base arbitration on these rules. However, most of the time the UNCITRAL Arbitration Rules are used in ad-hoc arbitrations only.

If an arbitral award in an international dispute has been issued, the question of enforceability inevitably arises. Imagine an arbitral award issued in England against an unwilling employer located in France who executes a project in Oman, while the claimant is located in Singapore.  It's a very common scenario in oil and gas projects and one of the reasons why the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 exists.6 About 150 countries that ratified this convention committed to enforce international arbitration awards against incompliant parties not only located in their countries, but also having assets there. So let us assume our unwilling employer has assets in Germany, the Singaporean claimant could call the German courts to get their award enforced.

Which arbitration institute to choose?

Apart from ad-hoc arbitration pursuant to UNCITRAL Arbitration Rules, the parties are free to decide on an arbitration institute to administrate their proceedings. This is called administered arbitration and the favored institute is usually predetermined in the arbitration clause of the contract (but can also be agreed on at a later point in time). Many arbitration institutes exist worldwide.  Almost every country's chamber of commerce includes one. Some of the more popular are the London International Court of Arbitration (LICA), the International Chamber of Commerce (ICC), Singapore International Arbitration Centre (SIAC), Vienna International Arbitration Centre (VIAC), the American Arbitration Association (AAA), International Centre for Dispute Resolution (ICDR), and the Chartered Institute of Arbitrators (CIArb). They all provide administrative supports and a set of rules for the conduct of the proceedings (usually not permissible in ad-hoc arbitrations).

The fees for involving an arbitration institute are twofold, apart from a party's legal attorney fees: the administrative fee (usually calculated on the amount in dispute) and fees for the arbitrators. While the appointment of such institute will definitely add to the budget, the main advantage seems to be a faster finalization of the proceedings based on the power of the institute to resolve procedural disputes, such as arbitrator's appointment and jurisdictional issues.

Involvement of courts, highly complex

Involvement of the courts during international arbitration proceedings is highly complex. Sometimes more than one court from different jurisdictions claim supervisory jurisdiction. In general, there are two types of courts: those having primary (supervisory) jurisdiction and those with secondary jurisdiction. While both courts can stay litigation in favor of arbitration proceedings, courts with primary jurisdiction have the power to assure that the arbitration proceedings comply with the applicable laws and they can set aside an award. Courts with secondary jurisdiction do not have that power. They can only enforce, or refuse to enforce, an arbitral award and they can be called for conservatory matters within their jurisdiction.

The UNCITRAL Model Law is clearly in favor of keeping the courts out of arbitration proceedings. Depending on national adoptions, areas where courts might get involved are limited to:

  • appointment, challenge and termination of the arbitration tribunal;
  • jurisdiction of the arbitration tribunal;
  • setting aside and enforcement of arbitral awards; and
  • the taking of evidence.

Note: The courts are not appointing - they only assist in the appointment. Courts are not challenging the arbitrator - they assist during a challenge.

When 'less expensive' may cost more

As stated, two different arbitration styles exist: ad-hoc arbitration and administered arbitration. Theoretically, ad-hoc arbitration is less expensive simply because no institute is involved and therefore no administration fees are applicable other than fees for the tribunal and the attorneys. But this is only a theoretical value, because ad-hoc arbitration usually takes longer and therefore accumulates more legal fees than an administered arbitration. In general, it takes between 12 to 36 months until the award is published depending on the complexity of the dispute and the delaying tactics deployed by the parties.

In administered arbitration, fees for the institute are usually calculated based on the amount in dispute and the applicable arbitrator fees. To get an overview about these costs, consider using the International Chamber of Commerce (ICC) cost calculator available on their website.7

These examples put the typical costs into perspective:

  • An average ICC administered arbitration for a $1 million USD dispute and three arbitrators will cost roughly $140,000 consisting of $22,000 administration fees and £118,000 arbitrator fees. The cost of legal representation and expert reports for both parties can add up to $400,000 or 40% of the value in dispute depending on the complexity of the case.
  • In contrast, a $10 million dispute of the same complexity might be settled with roughly double that cost or 8% of the value in dispute ($60,000 administration fees, $340,000 arbitrator fees plus experts and attorneys). If the contemplated costs are too high the parties can always agree to a tribunal consisting of a sole arbitrator to lower the cost considerably.

END NOTES

  1. Housing Grants, Construction and Regeneration Act (HGCRA) of 1996
  2. The Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011
  3. Standard form contracts – definitions:
  4. UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006 
  5. UNCITRAL Arbitration Rules   See also International Arbitration definition and commentary 
  6. New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 
  7. International Chamber of Commerce cost calculatorSee also ICC website

ABOUT THE AUTHOR

Known for his entrepreneurial spirit and wide experience in the oil and gas industry, Thomas Pfeller is a seasoned contract and project management expert. His past expertise spans industries of automation, IT, software, and satellite communication. Thomas is also a member of the Chartered Institute of Arbitrators.

 
 

Relational approaches are more critical than ever on extreme oil-gas projects

 
Extreme and highly volatile operating conditions in the remote oil and gas producing regions of the world are challenging traditional approaches to contract and supply chain management. A report based on insights of senior oil and gas procurement executives reveals what works and what doesn't on Large International Engineering and Construction Projects (LIECPs) - and finds that relational contracting approaches are more important now than ever.
 
 

Most oil exploration projects are located in regions that are difficult to access and dangerous to supply, adding to the “many unquantifiable sources of instability” that large oil and gas exploration and production projects must contend with. Heading that list:

  • Over 50% of the world's production occurs in regions that are highly corrupt; and
  • Oil price volatility can bring projects to a sudden halt if prices drop suddenly.

With multiple stakeholders and large investments at stake, it is perhaps no surprise that relational approaches are seen as increasingly critical to the success of oil and gas upstream projects.

Traditional approaches are not effective

Published recently in IACCM's Journal of Strategic Contracting and Negotiation (JSCAN), The Role of Effective Relationship Management In Successful Large Oil & Gas Projects: Insights from Procurement Executives1, concludes that in such highly challenging and fragmented conditions, traditional approaches to contract and supply chain management are not effective. More collaborative approaches are needed to create long-term preferred relationships with suppliers and share the risks and rewards of doing business.

The report reviews a number of studies that suggest the oil and gas construction industry supply chain is beginning to encourage collaborative working arrangements, however actually achieving this is still challenging.

Regional conflict, theft and corruption

With so much of the world's oil production in regions that are highly corrupt, this difficult issue has a major impact on project outcomes, particularly when it comes to procurement and regulatory negotiations with local governments. The report includes a table listing the top oil producing countries and public perceptions of public corruption in those countries.

Further “unquantifiable” sources of instability in producing areas include regional conflict and theft. Uncertainties around nationalization of oil companies can also lead to or cause major disruptions in both investment cycles and short-term availability.2

Other significant challenges include:

  • Political instability;
  • Shifting investment cycles associated with the oil and gas environment;
  • Oil price volatility impacting the hedging and assessment of projects whose cash flows are influenced by the expected price of oil; and
  • Long term future oil price uncertainty changing incentives to develop new fields in producing countries.3

Mobilizing equipment to remote, dangerous locations adds a further dimension to project risk. One executive noted, “When we ship equipment to Western Africa, we assume we will never be shipping it back due to the conditions in those regions.”

Senior procurement executives share their experiences

Thirteen senior, experienced oil and gas procurement executives representing the major Fortune 500 oil and gas companies were interviewed for the report, all with significant experience in working on large complex projects in the oil and gas sector. They included seven (current or past) chief procurement officers, five contract directors, and one chief legal counsel for the organization.

Based on their insights, and tested more widely through a general survey of oil and gas executives using IACCM's survey tool, the report identifies five essential requirements of project outcomes that are successful beyond basic measures of cost and timeliness.

Exploring the role and impact of each, the report's authors1 find the common thread of stakeholder and relationship management playing a fundamental underpinning role in the successful management of risk and value.  This role is therefore critical to the outcomes that are associated with oil and gas project success. In particular they find that:

  • Procurement relationship management practices affect the extent to which the needs of project stakeholders outside the contract are met (e.g. users, suppliers and communities affected by the project), as well as the way project relationships are managed inside and outside project teams.
  • Contracting and inter-firm relationships in LIECPs, supply chain and procurement strategies impact on project value and on the way project risks are managed.

Their results also seem to support a growing belief in the project management community that robust contract management is a significant factor in maintaining alignment and achieving relative success for complex projects.

Looking at the background to the issues, the report makes the point that LIECPs (construction) supply chains and management practices differ from those in manufacturing in important ways. With transient locations they are highly fragmented and may need to be recreated several times between trades.4 In addition:

  • Frequency and volume of demand makes it difficult to establish the necessary long-term commitment to suppliers.5
  • Many companies lack the internal resources to ensure the continuously high levels of operational and commercial collaboration needed.

Critical issues need further research

The report calls for further research on critical issues such as talent management and up-skilling of those working in major project contracting roles with longer-term studies on both the conditions needed for collaborative relationships to take place and organizational barriers to partnering. Further research is also needed on the role of procurement and supply chain executives who, in order to manage value and risk in large projects, need to spend more time in the early phases of contract negotiation engaging and involving a larger pool of stakeholders.

The framework proposed also needs to be further refined and developed to account for conditions in specific LEICPs, so that it can be used as a tool to leverage procurement and supply chain decisions in large projects.

END NOTES

  1. The Role of Effective Relationship Management In Successful Large Oil & Gas Projects: Insights from Procurement Executives, Robert B. Handfield, Marcos A. M. Primo and Marcos Paulo Valadares de Oliveira, JSCAN, March 2015.  (Note: End Notes 2-5 below also appear as references in this JSCAN document.)
  2. Ebrahim Z et al: Macroeconomic impacts of oil price volatility: Mitigation and resilience, Frontiers in Energy, 2014. 
  3. Matar W et al: An introduction to oil market volatility analysis. OPEC Energy Review, 37, 247–269, 2013.
  4. Azambuja M & O`Brien WJ: Construction Supply Chain Modelling: Issues and Perspectives (2009)
  5. Cox A and Ireland P: Managing construction supply chains: the common sense approach (2002)

IACCM's newly launched academic journal JSCAN, The Journal of Strategic Contracting and Negotiation, can be accessed at http://jsc.sagepub.com/ or http://jscan.sagepub.com/.

 
 

Best efforts clauses - what buyers expect versus how suppliers respond

 
Rare is the commercial agreement without some type of "efforts" clause, resulting in prolonged and often contentious negotiations. But what does "best efforts" actually mean? And when may they not be good enough? Understanding the shortcomings of efforts clauses - and how to get the result you want - may seem impossible. We've found an answer.
 
 

Efforts clauses are many and varied. They may call for best effortsreasonable best effortscommercially reasonable efforts, diligent efforts or good faith efforts - to name but a few. But what they actually mean is often a matter of huge contention and much time and cost wasted in trying to pin down the meaning. That's understandable – buyers want the high road and suppliers prefer the lower, more “reasonable” road. And you as a negotiator want to keep your sanity? You can - even if you might not think so. This article takes a practical look at what's involved and reviews case law.

Legal interpretations may vary across jurisdictions – and even within jurisdictions – but these issues are familiar to us all. Typically, we use an efforts clause to bridge the gap between an unqualified, firm commitment (e.g. supplier will deliver X units of item Y to buyer on Z date) and no commitment at all. In negotiations, the buyer in our example will press for the seemingly higher standard (best efforts), while the supplier will push for an ostensibly lower standard (reasonable best efforts or commercially reasonable efforts).

This, of course, begs two key questions:

  • First, what does the buyer get, and what is the supplier obligated to do (and not do), under a best efforts clause?
  • Second, does the adjective “best” preceding the word “efforts” make a tangible difference, justifying prolonged negotiations?

A quick review of the relevant U.S. case law will shed light on both questions.  It's important to note that, although this article focuses on efforts clauses under U.S. law, contract law, under which efforts clauses would be construed, is a matter of state law. Thus, a practitioner would begin his or her inquiry with the state law governing the contract at issue. This article does not attempt to identify themes relating to the construction of efforts clauses under non-U.S. laws.

Different jurisdictions – but same themes emerge

Although case law on efforts clauses is not uniform, even within jurisdictions, several consistent themes emerge. First, consider what a best efforts clause does not do. It does not create a fiduciary relationship. Thus, the promisor is not expected to “act primarily for the benefit of another in matters connected with his undertaking.”Similarly, “best efforts” does not require the promisor to make every possible effort.2 The promisor is not expected to bankrupt itself or to incur substantial losses in discharging its obligations under a best efforts clause.3 Rather, if the contract does not define best efforts, “the promisor must use the diligence of a reasonable person under comparable circumstances.”4 “Best efforts is implicitly qualified by a reasonableness test – it cannot mean everything possible under the sun.”5

The test of “reasonableness”

The element of reasonableness in best efforts clauses is especially noteworthy. Among other things, reasonableness seems to remove any practical difference between a best efforts clause, reasonable best efforts clause, and a commercially reasonable efforts clause. Beyond this, a meaningful distinction between these clauses assumes that for a party to discharge its obligation to use best efforts, it would need to use commercially unreasonable efforts. Similarly, reasonable best efforts imply the possibility of unreasonable best efforts.

So, why the fuss?

Perception, at least in part. “Best efforts” intuitively implies a higher standard than, for example, “commercially reasonable efforts.” Substantively, however, analyses of best efforts clauses are highly fact-intensive.6 The same principle would apply to other efforts clauses as well. “Best efforts cannot be defined in terms of a fixed formula … [but] varies with the facts and the field of law involved.”7

In Gilmore, for example, the defendant lessors were obligated to use “their best efforts to see that there is sufficient water to irrigate” property leased by the plaintiffs.8 The court examined the various attempts of the lessors to fix the pumping plant, including, ultimately, drilling a new well, and thus restoring irrigation to the land. The court concluded that the defendants could have discharged their obligations to use best efforts by drilling the new well when the problem was first reported to them, rather than pursuing unsuccessful, intermediate steps.9

On the same facts judges may differ

This focus (on the facts) means that if judges, even within the same jurisdiction, reviewed the same set of facts, under the same rules, some may conclude that a party did enough to accomplish the object of the best efforts clause, while others may not. Put another way, the application of a best efforts clause is inherently unpredictable, especially if the standard for measuring performance is not clearly stated in the contract. For this reason, the promisor may prefer an ostensibly lower standard, under the false belief that a court will require less of it to discharge its obligations under that lower standard. On the other hand, the promisee may prefer best efforts to further motivate the promisor to achieve the desired goal (e.g. delivery of an item on-time), although practically, as noted above, the effect is more qualitative than anything.

So what's the answer?

  1. Where possible use unqualified, firm commitments
    If a party cannot make a firm commitment, understand what it can do (without qualification) and the reasons (if not readily apparent) why it cannot agree to perform a certain activity unconditionally.
  1. Understand the shortcomings…
    of an efforts clause. As noted earlier, best efforts does not mean every possible effort. As a corollary, even if a contract expressly required the promisor to use every possible effort to accomplish a stated goal, a court would likely read into the contract a reasonableness requirement. Accordingly, if it is critical for a promisee that the promisor achieve a certain goal (e.g. meet forecasted demand), it may be wise to negotiate an unqualified, firm commitment for that goal, and agree to a “lesser” standard or to no express contractual commitment for another.
  1. Avoid efforts clauses if…
    it is virtually impossible to determine whether the promisor has actually met its obligations under that clause. A court could find that provision impermissibly vague or indefinite. Even if the provision is enforceable, it may have little practical value, due to inability to measure compliance. If the parties decide to use an efforts clause (because they cannot agree on an unqualified firm commitment), the parties should try to contractually define “best efforts” or “commercially reasonable efforts” (or any other agreed level of effort).
  1. List exemplary activities
    that would help the promisor meet its obligations under the efforts clause. For example, a contract could provide that a supplier will use its “commercially reasonable efforts” to achieve a certain product specification by, without limitation, dedicating top resources to any required development efforts, executing to the activities specified on the project plan, and so on. Of course, while this helps avoid misunderstandings, for flexibility purposes, the parties may prefer ambiguity.
  1. Use efforts clauses consistently
    within a contract, unless the parties intend a higher or lower standard to apply to the performance of certain activities. For example, if a supplier was obligated to use best efforts to discharge certain obligations and commercially reasonable efforts to discharge others, a court would conclude, based on the general principle that each word should have its own meaning, the supplier will need to do more to satisfy those obligations that required it to use its best efforts. Similarly, unless otherwise intended, be careful about using different standards in related agreements. For example, if the supplier and buyer are parties to a software license agreement and a related software implementation agreement, use of a “best efforts” clause in one agreement and a “commercially reasonable efforts” clause in the other agreement will suggest that the parties contemplated different levels of effort.
  1. Last, but not least, for a promisee, an efforts clause is better than nothing
    Certainly, an efforts clause will require the promisor to use some modicum of effort to achieve the goal desired by the promisee. Put another way, even under a commercial reasonableness standard, the promisor cannot simply decide to do nothing without breaching its obligations under the clause. On the other hand, the promisor could decide, after a thorough internal review, and perhaps some limited activities, that the goal qualified by the efforts clause is infeasible, and further efforts are unwarranted. If others, similarly situated, would have objectively reached the same decision, there could be no liability.

Conclusion

We spend much time negotiating the specific levels of “effort” for endeavors without, perhaps, appreciating the differences or assuming there are differences where none may actually exist (depending on the judge). Appreciating these differences, or the lack of differences, should help contract negotiators attach appropriate value to these clauses and, as a result, streamline negotiations.

END NOTES

  1. Farnsworth on Contracts (3d ed. 2004) §7.17c., p. 405
  2. See Triple-A Baseball Club v. Northeastern Baseball, 832 F.2d 214, 228 (1st Cir. 1987).
  3. See Bloor v. Falstaff, 601 F.2d 609, 613 (2nd Cir. 1979).
  4. California Pines Property Owners Association v. Pedotti (206 Cal.App.4th 384, 395 (2012)).
  5. Coady Corp. v. Toyota Motor Distributors, Inc., 361 F.3d 50, 59 (1st Cir. 2004).
  6. See Gilmore v. Hoffman, 123 Cal.App.2nd 313, 320 (1954).
  7. Triple-A Baseball Club, 832 F.2d at 225.
  8. Gilmore, 123 Cal.App.2nd at 315.
  9. See id. at 319.

‚ÄčABOUT THE AUTHOR

John Pavolotsky is Senior Attorney at Intel Corporation, supporting its Technology and Manufacturing Group.  Prior to joining Intel, John was Of Counsel in the Intellectual Property and Technology Group of Greenberg Traurig LLP. John is Co-Vice Chair of the Licensing Interest Group of the IP Section of the State Bar of California. He is a graduate of the U.C. Davis School of Law and Haas (U.C. Berkeley) School of Business.

 

 
 

Think ahead on risk management in the cloud before it's too late!

 
If you're thinking of investing in any cloud service, be smart and make sure you do your homework first. Two seasoned practitioners - Bernhard Kainrath and Dr. Dierk Schindler - discuss the importance of knowing the risks before making any commitments, so you can get the top benefits from a cloud service without any unpleasant surprises.
 
 

Today, most of the technical and commercial barriers for companies to move to a cloud infrastructure have been removed, and exciting new business opportunities are possible. But beware - cloud computing isn't for everyone. Decision makers very often don't know the many risks that could lie ahead or, if they do, they don't know how to handle them. This article offers potential cloud customers an insight into questions to ask if they're thinking of moving their data to the cloud - and future trends to consider that could change everything. 

Confidentiality, integrity and availability – the big cloud risks

Few can disagree - cloud computing technology offers many opportunities. It improves operational efficiency of the company, strengthening its competitiveness. It also helps improve flexibility, reduce capital costs and spend on technology infrastructure, providing adaptable “work from anywhere” environments, automation, a reduced carbon footprint and much more. 

Medium-sized companies, as well as start-ups, can now take advantage of high-performance cloud IT solutions, previously reserved only for large organizations. Upper management and chief information officers (CIOs) know that innovation and modern technology are the foundations for growth, and are aware of all the opportunities the cloud is offering to them. Therefore they have a big appetite to move their in-house services to the cloud, but they should consider obvious risks before making that decision.

Depending on one cloud service provider only may create operational and commercial risk. Increasing dependence may shift the balance in contract negotiations in favor of the supplier.  The customer may have to accept higher prices, or face a supply shortage that could quickly lead to business continuity risks.

While these risks may seem obvious, the consequences for data security and data protection are often less prominent. The so-called “vendor lock-in” can create a severe data security and data privacy problem, for example. First CIOs should consider their legal and corporate guidelines, and which systems and services are critical to the company before they outsource any of their services to the cloud. Then they might decide to have different types of cloud solutions or to keep certain data or applications “in-house.”

Know what questions to ask

Security in the cloud

The basic principles of IT security revolve around confidentiality, integrity and availability, known as the “CIA triad.” Everything that needs to be done to secure an IT infrastructure links to at least one aspect of the triad. These requirements do not change in the cloud. The advantages of the cloud may sound good but ultimately, with less direct control, customers have to rely on a high degree of trust – making it vital to address the following questions with the cloud provider:

  • How does the cloud provider protect data integrity?  Integrity is only guaranteed when it is not possible to manipulate data unnoticeably. Therefore it's not just the cloud service that needs to meet that protective goal, but also all of the various components that make up the cloud, the software and its configuration. It's important therefore to ask how patches and updates are managed.
  • How does the cloud provider manage availability?  Data loss can be a real threat to the existence of a company, especially in online infrastructures, and there are many possible causes of data loss, including disaster, a hacker attack as well as human error. Data loss can be especially problematic if there's a legal obligation to store particular data. To ensure availability of data in the event of a security breach, ask how the cloud provider defends itself against Denial of Service attacks.
  • How does the cloud provider ensure secure access to data? Cloud storage moves data to remotely-located data centers - over which customers have no control. So ask: where will our data be stored, including copies? Security breaches are very often caused by internal employees. Therefore, it's good to know exactly who will personally manage and access the equipment that holds corporate data. Weak interfaces and application programming interfaces (APIs) are also a potential risk. Potential customers should therefore ask what interfaces and APIs are used – and what the security implications are.

Vendor lock-in

Vendor lock-in means it is not easy to transfer a product or service to a competitor - or bring it back in-house again. An example of this could be a customer wanting to transfer their email activities from cloud one email provider to another.

The best way of avoiding vendor lock-in and cross-sector dependence on only one cloud provider is interoperability. Any contract between cloud provider and cloud customer must guarantee to support data relocation at both the beginning and the end of their business relationship. It should state clearly which data format and interfaces are used, when data will be imported or exported, and what the costs are, if any. It must also stipulate deletion of data after termination.

Open cloud standards and open source are keys to achieving true interoperability. Standardization efforts in cloud computing are evolving, but unfortunately there are still many construction sites. Many new standards that are explicitly designed for the cloud are not 100% mature, and there are no standards available for specific cloud business models.

Data privacy

When intrusions lead to leaks of personal data, the damage to a company's brand, customer relationships and intellectual property can be substantial. According to Kaspersky Lab's Global IT Risks Report,1 a global survey of attitudes and opinions of IT security, 94% of companies surveyed had experienced some form of external security threat and only 46% of businesses thought their conventional security solutions provided adequate protection. These figures are alarming, and take on greater significance given that an organization will need to engage the services of a cloud provider to process personal data on its behalf which could, in some circumstances, bear no responsibility for data privacy compliance.

A common misconception is that giving up control of data passes data privacy liability on to the cloud provider. The Data Protection Directive of the European Union (EU)2 requires Data Controllers to observe a number of principles when processing personal data. Data Controllers are bodies or people who collect and manage personal data and they must comply with the EU law when handling the data. If a company selects a cloud provider for storage and processing of data, the cloud provider will usually act as the Data Processor for them. This means that the Data Controller remains responsible for how data is processed and for compliance with data protection. In this scenario, if a cloud provider stores data outside the European Union, cloud customers must ensure that the data remains protected.

One response to this risk is to implement a hybrid cloud strategy. As a first step, Data Controllers must compare the risk levels in a private and a public cloud scenario. After that assessment they should think about which personal data can be moved into the cloud and which should never move. It's also recommended to create data categories for this purpose. Another important step is to obtain consent from individuals before collecting, processing, storing or transferring personal data. This can vary from country to country if data is processed in a multinational environment.

When you choose, take your time

Finally, we recommend spending some time in selecting the right cloud provider. Today, various cloud providers specialize in distinct markets, with niche cloud providers emerging that tailor their services for those markets. Seen from this angle, it's better to choose a cloud provider whose services are designed for your specific requirements, if not this can cause an additional set of risks.

Insolvency protection

If a cloud provider files for bankruptcy protection, the only thing that matters is how quickly you can access and repatriate your data. What precautions can you take in advance to minimize the drawbacks of a cloud provider bankruptcy?

  • Due diligence: Use a well-known and financially strong provider. Examine the strengths of the chain of all participants involved in the cloud services provided (for example host and data center).
  • Ownership of data: To avoid to becoming disadvantaged by an insolvency procedure, ensure the agreement with the cloud provider stipulates that you own all data in the cloud.
  • Backup data: Require the cloud provider to provide a copy of a backup on an appropriate medium at frequent intervals. If all fails you may at least still have the most current data to work with.
  • Time: Think about how quickly you will be able to recover your data in terms of the amount of data and bandwidth available.
  • Stay in touch with the cloud market: Keep a record (list) of possible service suppliers that could help at short notice.

What are the trends in cloud computing?

In the near future ownership of data will take on greater significance. The Internet of Things has the potential to disrupt everything. According to Cisco Systems3, the number of devices connected via the Internet is expected to reach fifty billion by 2020. These smart connected things, meanwhile, are available in all areas of our life, capturing, transferring, analyzing and acting on data. Everyday items such as white goods are collecting information, wearable items are monitoring our sport activities and cars can monitor the behavior of drivers. But where does all that data end up? For example, it could be sent directly to the cloud.

There is no doubt that all of the current developments in the Internet of Things can make our lives easier, but we need to be aware that data is hugely valuable. Who owns this data? Does the owner of a smart washing machine own the data about how they use it?

Conclusion

The biggest risk of all is that no one knows what is up ahead. Potential cloud customers should consider that cloud computing is not for everyone and weigh what level of risk they would be taking take if they decide to move data into the cloud. If organizations do finally decide in favor of the cloud, they should be as well-prepared as possible, in every way.

Clearly one of the biggest lessons you don't want to learn the hard way is that using cloud services requires a clear contractual understanding.

  • Before starting contract negotiations, as a first step both contractual parties need to be clear and candid on how the provided cloud service will look, and identify possible risks.
  • As a second step, to minimize such risks and ensure a fair distribution of risks between the parties you need a comprehensive contractual agreement that regulates clearly and understandably the rights and obligations of the parties. This will avoid mock battles and the risk of negotiating against each other.

END NOTES

  1. The Kaspersky Lab Global IT Risk Report – a survey of attitudes and opinions on IT security (April 2013 to May 2014), titled Ready or Not – Balancing Future Opportunities with Future Risks.
  2. The Data Protection Directive regulates the processing of personal data within the European Union. It is an important component of EU privacy and human rights law. 
  3. See Cisco blog.

ABOUT THE AUTHORS

Bernhard Kainrath – Sr. Manager Legal Field & Deal Management, Northern EMEA

Currently, Bernhard Kainrath is member of the EMEA Legal Management Team at NetApp and leads a team of legal professionals and pre-sales project managers to support NetApp's "Big Deals" business in the Northern EMEA Area (Nordics, UK & Ireland, Benelux). His team works closely together with the sales teams and leads, negotiates and operationalizes complex deals. He gained many years of management experience at BMC Software and Hitachi Data Systems, amongst others. In addition to his international management responsibilities, he has been lecturing and authoring in his field since the beginning of his professional career.

Dr. Dierk Schindler, Member of the Board of NetApp Deutschland GmbH, Head of EMEA Legal Field Operations & WW Contract Administration, Attorney at Law

Dr. Schindler has studied Law at Augsburg University, where he also completed his doctorate thesis in European Law. In 2012, Dr. Schindler became Head of Legal Field Operations in EMEA and a member of the senior staff of NetApp's new General Counsel, Matthew Fawcett. In 2014 he assumed additionally the responsibility to lead the worldwide Contract Management & Services Team for the Global Legal Department. Dr. Schindler regularly presents at both, business and peer groups as well as at various universities in- and outside Germany. He also serves as a sworn member of the Board of Examiners of the Chamber of Commerce.

 

 

 

 

 

 

 

 
 

Benchmarking - if you want 'go-to' commercial judgment, here's how

 
Contract and commercial managers are increasingly on the front line when it comes to the need for quick decision-making, commercial awareness and judgment. How can we ensure we get it right - and produce the best commercial outcomes? This article reveals a simple but powerful way to enhance your commercial skills by learning from the "business savvy!"
 
 

With the growing importance of “commercial excellence,” contract and commercial professionals are increasingly challenged to make decisions that impact both the top and bottom lines - often without the luxury of time and most likely without a complete picture. So what can we do to grow our judgment and decision-making skills, and increase our personal effectiveness?

Their judgment goes straight to the weakest point

Stop for a moment and think about someone you consider a role model in your business, someone whose business judgment you value.  It's possible you've presented proposals to them, perhaps looking for approval to bid. 

You know the scenario: you've been working on an opportunity and you take it to them for review. You explain the opportunity to them, and then, without fail their first question zeroes in on a specific area: the pricing; the risk; and the scope. Whichever it is, they will have hit on the weakest point in even the most robust of solutions.

How do they do it?

Those with a reputation for good business judgment can quickly take a given scenario, understand and assess its strengths and weaknesses and build it out to predict the most likely outcomes. It may seem as if they make those decisions intuitively but to inform their assessment they'll be drawing on their own considerable library of experience, benchmarks, and comparators.1 And where they don't have a direct comparator they're adept at making linkages and translating from other independent points of reference. So it pays to create our own “library of comparators,” solid information we can use when we need to make a quick judgment call.

Preparation key when time is tight

We are well used to the concept of benchmarking as a resourced task at project or organization level.1 Over time companies and sectors build up their own banks of “should cost” and other data to support project estimating and negotiation strategies, though these are not normally published. These typically support analysis of what a product should cost based on materials, labor, overhead, and profit margin. But unlike the project level process, where there's usually time to identify and use our benchmarks and comparators, in situations where we need to draw on our commercial awareness we often have to make our decisions or judgment calls much more quickly. Even with incomplete information, with preparation and practice, our own personal library of comparators and experience will enable us to demonstrate early insight, predict a likely outcome, make a judgment and take action.

Comparators that tell a different story

The smart use of performance metrics is increasingly being seen as a vital source of useful and telling insights to support individual commercial awareness and decision making. These comparators extend beyond the “standard” consideration of price/cost and reflect other key dimensions of commercial excellence such as timescales and risk, for example:

  • multiplier on an employee's salary to calculate the approximate true cost of employment;
  • market rate for a particular service or product; 
  • percent (%) contingency required on a particular risk profile or offering; and
  • how long it's likely to take a skilled person to perform a particular task at maturity versus at first attempt of a new task.

The types of indicators most useful to you will depend on your sector, however other productive sources include standards set by regulation such as working hours, or health and safety minimum standards - most of which are in the public domain. Also interesting are non-standard and individual level comparators drawn from formalized experience and "rules of thumb" which can also be useful, although informal and personal. The US Department of Labor and Commerce have made bureaus of statistics available to the public.  These are common sources for basic research.  Other countries have similar arrangements.2

Keep adding to your library and experience

In addition to more formal research methods and publically available sources of data - such as those that help us understand market dynamics - informal approaches are also available that can help us to develop our library of information and insights. For example, you could do any or all of the following:  

  • Leverage your role models and use them as mentors. Ask them how they identify any “rules of thumb” they use. Are these based on past experience, or are they drawing on some other wider understanding of potential impact?
  • Continuously test yourself and your assumptions. We live in a data rich world, surrounded by data and information graphics, yet how much just passes us by?
  • Consciously look for and capture comparators: create time and space to read, research, and investigate, whether on or offline, or through journals and newspapers.
  • Exploit your networks: professional associations are great sources of research, benchmarks and knowledge.  Do you know, for example, the average value leakage due to contract management issues that exists for your sector?

We are judged by our decisions

We often look to technology and automation as the panacea for many of the challenges we face in contract and commercial management, and yes these are important to help drive efficiency and support decision making. But increasingly, the C-suite is looking for us to support growth - both to the bottom line, by understanding and mitigating the causes of value leakage, and to the top line by being key enablers to new opportunities. Key to achieving both is to do as much as we can to enhance our contribution to commercial excellence, our decision-making skills and commercial judgment. So often our ability and performance is measured not on the quality of reports or presentations we produce, but on the quality of the decisions we make and our judgment. If we are truly going to excel as professionals we need to do all we can to develop and maintain our library of comparators, and learn to extrapolate and use them to fit the situations we face daily.

DEFINITION and END NOTE

  1. Benchmarking is the process of comparing one's business processes and performance metrics to industry bests or best practices from other companies. Comparators typically include quality, time and cost. To identify best practices management may use metrics to identify the best performing organizations in their industry, or another where similar processes exist.  They then compare results and processes of those studied (the "targets") to their own results and processes. Scientific measurement methods determine how well the targets perform and why certain practices perform well.
  2. Publicly available information includes for example: Bureau of Economic Analysis (US Department of Commerce)

ABOUT THE AUTHOR

Adrian Furner has over 25 years' experience in the area of complex commercial transactions through innovative business models. Having worked in a variety of sectors including defense and security, aviation, and technology, he is Founding Partner of Kommercialize, an organization focused on the architecting of new  business models.

 
 

Training in a remote area is worth all travel challenges, says one IACCM instructor

 
Martin Chalkley travels internationally as an IACCM trainer in contract management and supplier relationship management. But sometimes what's most important to Martin is not what he teaches - it's what he learns in the remote areas he visits, places we may know nothing about. Here's Martin's insight into one memorable journey he took recently...
 
 

In my job, traveling can be a bumpy, long ride but I'm always surprised at how rewarding it can be. One recent trip comes to mind…

It's Friday evening and I am on a plane flying from Luanda, Angola to Dubai. By 9pm Sunday night I will finish this journey in Aksai, Kazakhstan. But to get there I will first fly onwards to Moscow, another flight from Moscow drops me into Atyrau in Kazakhstan. Sunday lunchtime is a short 500km hop from Atyrau to Uralsk followed by a taxi for two or three hours to Aksai. Monday 8:30 a.m. - it's time to start the next training session. The beauty is that in the space of one month, I will have spent time with Europeans, Arabians, Africans and Asians delivering IACCM's Contract and Commercial Management, Commercial Leadership and Supplier Relationship Management courses.

So much is different, so much the same!

Differences in attitude and process abound; it is truly quite amazing how culture plays into the approach as to what should or should not be done, what is allowed in one country but not in another. How the commercially minded react to authority and opportunity depends very much upon regional politics and cultural drivers.  Importantly too, leadership differs in the way transformation of the commercial environment is undertaken.

Yet despite that, similarities in company politics, process and procedures are also very obvious. Pre-award contract managers always outnumber post-award attendees for the courses I deliver outside the UK. Contracts themselves are frequently not properly communicated across the organization, and often I hear the supplier relationship management community say they have never even seen the contract. It's more of a formality than how contractor and client ultimately choose to set up their working relationship.

But it's a joy to work with individuals who are always keen to learn and expand their knowledge while trying to align their organizations to the best practice methodologies that are at the heart of IACCM's learning materials. And even though there may be representation in the classroom from oil and gas, telecoms, nuclear power, construction, banking, airports, renewable energy or government, they often discover that their own company is not that unique, and that skills and knowledge are transferable across industries and geographies.

Oil downturn is hitting hard

So what did I learn in Luanda? The Angolans are some of the friendliest people I have met, but it's a difficult time for them: oil has plummeted in value yet the country's budget is 80% dependent on oil revenue. Now is a time for restraint and they need to tackle the many issues that have permeated society since the recent end of their long civil war.

The oil downturn is impacting the society. Five young boys (no older than 11 at most) would wait outside the office, hoping, for the princely sum of one dollar, to either shine your shoes or wash your moped, usually with rain water collected from a nearby gutter. Yet even that income stream is being eroded as their captive market - mainly the expat community - is being laid off and leaving the country.

Angola is not an easy place to do business either. Purchasing can be difficult: materials can take six months or more to be delivered as there is almost no local manufacturing industry, and local capability and skills are still recovering after the civil war. And it is expensive, one of the most expensive cities in the world - $50 - $60 U.S. minimum per person for a meal and drinks in a moderate restaurant. But the prices aren't much cheaper for locals. Infrastructure is also evolving too slowly and traffic is a major problem; if you have not left home by 5 a.m. you won't be in the office 10km (6.2 miles) away before 8:30 a.m.

A different experience each time…

But what of my next destination, Aksai, Kazakhstan? I've been there before.  For starters I will be 200km (124.3 miles) from the nearest city; it will be - 10ºC (14ºF), a mere 45 degrees cooler than this morning in Luanda, its flat scenery stretching out at least 300km (186.4 miles) in every direction; and I'll be staying in the workers' camp near the gas field. The training facility is a well-equipped but aging Soviet era office block that reminds me of my school, a big change from the bustling dockyard in Luanda, and quite different to the modern hotels that Middle Eastern companies prefer to use for training courses.

And I know that the make-up of the class will be very different because in Kazakhstan contract management is predominantly a female role (unlike the Middle East or Africa).  I haven't worked out yet why.  And culturally, they are focused, direct and attentive; they know what they want and how they want to receive it, which makes delivering the course an excellent challenge.  They will be asking many questions, making it an altogether very different experience.  My few sentences of Kazakh will surprise them and engender a great atmosphere from the outset, hopefully they will teach me a few more.

ABOUT THE AUTHOR

Martin Chalkley is an independent consultant specializing in contract management and supplier relationship management training, and public sector (UK) IT sourcing approaches.  A member of IACCM's delivery team for classroom training, he is the co-author of the IACCM Supplier Relationship Management learning program.  He'll likely be in a country near you sometime this year!

 

 

 
 

IACCM's first ever open contract management course attracting thousands in April - will run again in November

 
Over 16,000 business people from the global economy took part in the world's first-ever free online course on contract management - the result of IACCM's partnership with the UK government and Southampton University. We asked one participant about his experience. He, like many others, described it as an outstanding online event. First launched April 27, it will repeat again November 9, 2015.
 
 

Supporting IACCM's commercial leadership training work with the UK government, Contract Management: Building Relationships in Business was delivered as a “Massive Open Online Course” or MOOC1.  It offered a one-off learning opportunity, free-to-access and open to all via the web. Douglas Macbeth, Professor of Purchasing and Supply Chain Management at the University of Southampton, and IACCM's CEO Tim Cummins led the course.

Developed in collaboration with the UK Cabinet Office and Civil Service Learning, the course aimed to help build commercial capability in the UK Civil Service and raise contract and commercial awareness and appreciation for the value of good contracting. Many positive responses from participants garnered new ideas, including how public and private sectors can learn from one another and partner to deliver both social and financial value.2

Our correspondent and Certified IACCM member Piotr Powazka, Contract Specialist at Xerox Corporation, Poland, participated and provides this commentary...

“This MOOC was a real international gathering of professionals already involved in contracting as well as participants just starting their career in a contract management – a great way to share and receive knowledge and unique ideas, and get insights into the world of business and trading relationships.

Despite being one of IACCM's certified contract professionals for some time now, it was a very helpful and refreshing reminder of what's involved in commercial business relationships, something professionals like me can tend to forget on occasion! Judging by the number of people who took part in a survey during the second week and participants' comments on each section, this was an outstanding online event.

The main topics covered by the MOOC were:

  • Relationship fundamentals, outlining the basics of what can go right or wrong in commercial relationships;
  • Governing rules for public and private sector procurement;
  • Complexities of supply chains and networks that are an essential aspect of many contracts;
  • How to approach and manage interdependencies and ensure multiple stakeholders' needs are taken into account; and
  • Judgment and what data you need to inform it.

Most of the sections were supported by additional materials such as articles, real case studies, e.g., preparation for the London 2012 Olympics or the Apple supply chain, with materials that you could take away and share with your team or present to stakeholders to give them greater insight into how contracting and relationships work. Two of these, IACCM's Ten Pitfalls of Contract Management and Top Ten Attributes of Successful Contracts3 highlight crucial aspects when it comes to contracting and were greatly appreciated by participants.  I have used these personally at work to guide those I collaborate with."

“Questions triggered interesting responses and discussion almost like during real classes with international peers around you.”

What I liked about the course was the mix of content - reading, video and interactive. Questions triggered interesting responses and discussions almost like during real classes with international peers around you – some experienced and some complete newbies in the contracting area. Both groups gained: veterans could share what they know and guide or exchange thoughts with professionals from other industries, as well as those beginning their careers or thinking about starting and needing guidance and advice. All this thanks to the involvement and commitment of the people working behind the scenes as well as those who acted as role players in videos and also the technology platform used.

Although the traditional way of teaching is strong, in today's online world an opportunity like the MOOC is a way of providing people with knowledge and theory and interacting with others on a global scale that is also enjoyable and an entertainment. Arranging a course like this in a physical class would be a real challenge not only due to the number of participants (you would need a small stadium!) but also with participants living in different time zones.

In my opinion we need more initiatives like the MOOC, to spread the word faster about the importance of the contract management discipline and ensure it continues to develop and improve. Next time you see an invitation to a similar course, do not hesitate, do yourself a favor and sign up! It is convenient because you participate at a time suitable for you, challenging because you will be interacting with others globally, and it provides you with great content and knowledge. And you know what… this time it was free of charge! If you missed it on this occasion you must be part of it next time. Kudos again to those who prepared this course or supported it in any other way, thank you and I look forward to seeing more gatherings like this in the future!

Made globally available through Future Learn's4 “massive social learning platform,” the course was part of the UK's Open University, which provides interactive user forums shared by many of the best universities from the UK, Europe, Africa, Asia and the Middle East. There are one million learners worldwide.

Tim Cummins commented, “We have been asked by UK government to run the program again later this year. Overall, it has been a very positive experience and the structure of MOOCs is very suited to today's networked world. We have established that this is an approach we can use more broadly, including for delivery to individual corporations where raising commercial skills or understanding may be important.”

You can still take action! In case you missed this, MOOC will run again November 9.  So register now at https://www.iaccm.com/events/register/?id=2166.

END NOTES

  1. A MOOC (massive open online course) is an online course aimed at unlimited participation and open access via the web, and there are now a number of MOOC providers. First developed in 2008, MOOCs provide traditional course materials and often also interactive user forums.
  2. How a MOOC is helping to build commercial capability in the civil service by Sir Jeremy Heywood, Cabinet Secretary and Head of the Civil Service, UK Government.
  3. See also https://www.futurelearn.com/courses/contract-management/steps/29461?utm_campaign=Share+Links&utm_medium=futurelearn-open_step&utm_source=linkedin
  4. View the course website at https://www.futurelearn.com/courses/contract-management.

ABOUT Piotr Powazka, our correspondent

Piotr Powazka a certified member of IACCM, serves on the Contracting Excellence Editorial Board. He is the Contract Specialist at Xerox Corp. based in Poland. Piotr is responsible for engagement in the bid management process as well as pre-contract and post-award contract management, and deal negotiations mainly focusing on the financial and legal sides of a contract.

 
 

New classroom-based certification program puts teamwork on a fast track

 
IACCM's classroom-based associate level training program has proved a powerful learning experience for the 20 new graduates who successfully completed the course and are now IACCM certified.
 
 

The course - offered at a new independent school in Copenhagen, Denmark - was set up specially to deliver IACCM's contract and commercial management certification program.  The collaboration between IACCM, APMG, and the Nordic School of Contract and Commercial Management (NSCCM)1 that made the course possible reflects the same spirit of teamwork that characterizes the contract management profession itself. And the two person practitioner/academic team leading the effort has created an intensive, dynamic and high quality teaching environment.

New experiences – and a powerful future IACCM network

Students who completed their three-month certification program in May came from a wide range of professional backgrounds, greatly enhancing their learning experiences and providing each with a powerful future IACCM network. From private as well as public organizations, buy side and sell side backgrounds, these included IT services, procurement, construction, law firms, sourcing, engineering, consulting, accounting and energy.

Dr René Franz Henschel, Professor in Business Law, Aarhus University School of Business and Social Sciences, Aarhus, Denmark played a key role in realizing this successful new venture, together with partners from the consulting company Ramboll.

Huge credit should also go to the contract management community for creating the right team environment and their clear focus on minimizing value leakage from contracts and achieving the expected business benefits,” Rene said.

Seeing perspective of the 'other side'

“The 'offline' classroom setting gives a unique opportunity to support the learning process as participants can interact directly with teachers and discuss practical experiences. They can also be reassured about what they are doing in the right way and where they need to improve.

“The participants gained greatly from the time they spent in the classroom with their colleagues from other organizations - regardless of whether they were public or private sector, buy-side or sell-side.

“The material, exercises and cases used throughout the course sometimes resulted in heated but also very fruitful discussions, e.g. in relation to the pros and cons of engaging all relevant stakeholders in definition requirements, different negotiation strategies and tactics, the relevance of exit plans and contract close-out procedures, and lessons learned.

“Getting to know the drivers and experiences of the 'other side' in a neutral classroom setting proved very constructive, and some very firm positions previously taken were modified as a result. The participants were also able to exchange and develop many new ideas and tools, e.g. in relation to working with stakeholder analysis and 'selling' contract management within their own organization.”

One participant explained: “IACCM Contract and Commercial Management education has been an excellent experience in terms of the instructors' professionalism and teaching approach, learning materials and perspectives to reality. It has been of great support for me to realize that some of the challenges one meets are not unusual either in theory or in practice… The education equips you with a mindset of how to do best practice and gives you a toolbox of useful theory which you can refer to and lean on in the contract management process in your own organization.”

Rene added: “Students completing the learning program gain not only the highly sought-after and prestigious IACCM certification, they will also be in a much stronger position within their own organization in the future to make their views known and help organize the teamwork needed – ultimately improving business results for their organization and business partners.”

Nordic School of Contract and Commercial Management (www.nsccm.dk) has a strategic partnership with Ramboll, a Danish consulting company.2  NSCCMis an APMG and IACCM accredited training partner.

END NOTES

  1. NSCCM website is www.nsccm.dk
  2. Ramboll home page: www.ramboll.com

 

 
 

IACCM forums energize contracting evolution

 
A true turning point for those who have embraced the future of commercial excellence... this was the verdict of those who attended IACCM's three-day 2015 Europe forum in June. The energy and momentum will continue at our Americas Forum October 6-8 in Henderson, Nevada, so join us!
 
 

2015 Europe Forum in June - Over 200 cross-industry executives gathered from around the globe for three days of intense networking and learning and the “uplifting experience” of this year's IACCM's 2015 Europe Forum in June – the year of Commercial Excellence. With its twin themes of commercial excellence and change, they gained a wealth of insight into cross-industry challenges and opportunities to help shape the direction of the contracting role going forward.

Keynote Lord Rupert Redesdale, CEO of Energy Managers Association, London, explained how the energy sector has used innovative contracting to drive sustainable relationships and build trust. Similarly, in keeping with the themes of change and commercial excellence, SPIN Selling author Neil Rackham touched on technology changing the sales, procurement and contracting roles and the importance of evolving with these changes.

IACCM's CEO Tim Cummins observed, “The IACCM Europe conference felt to me like a true turning point for those who have embraced the future of commercial excellence… It is an exciting and energizing time – only too evident in the enthusiasm – indeed the passion – of those who attended. Watching professionals from both buy-side and sell-side embracing the need for a new collaborative spirit was uplifting. For these people, the next few years hold true challenge, but also great excitement.” (Commitment Matters, 19 June 2015)

Don't miss the Americas Forum 2015 coming up October 6-8 in Henderson, NV.  It will build on the excitement of the European Forum in this "Year of Commercial Excellence," providing an even more in-depth look at the important concepts to determine how to drive business transformation and shape the direction of the contracting role going forward. During three days of intense networking, learning and insight, hundreds of cross-industry contract management professionals  will learn how to:

  • Drive value by improving contract performance
  • Achieve a commercial balance between risk and opportunity
  • Elevate the role of contract management within their organization to ensure they have a seat at the table
  • Improve cross-function communication between business and legal to create better outcomes.

Learn more about the upcoming Americas Forum here: www.iaccm.com/amer15.

 
 

This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.

Based on a work by Revitas, Inc. at www.revitasinc.com/blog.