Hitachi ABB Power Grids
Author: Tim Cummins
Fact-based decision making is gaining the attention of business leaders worldwide. That is because they recognize it has critical importance to survival in today's volatile, competitive and complex markets.
Many of today's business decisions are based on opinions or flawed data. For example, there are people who believe all suppliers are intrinsically dishonest, or that all customers are unreasonable. There are those who believe that good performance is best achieved through consideration and encouragement, while others think that the threat of punishment is more effective.
Most of us have plenty of opinions and we find comfort in them. Sometimes these are based on facts. Often they are influenced by specific experiences or education, which may or may not be indicative of norms or reality.
When we look at how contracts are drafted, or how business relationships are conducted, we rapidly see evidence of very different opinions. Indeed, we need only to conduct an internal review and approval process to discover wide variations in the underlying attitudes of different functions or individuals. When challenged, we may often hear about specific incidents, or about 'someone who told me', but it is rare to find positions that are well supported by factual data. For example, what is the actual impact if commercial staff are involved late or whether or not a 'professional' contract manager or lawyer oversees performance? What is the actual impact of onerous liability clauses or liquidated damages? What is the actual effect of extended payment terms or more generous rights of return or of mandatory arbitration rather than litigation? And how do these answers vary according to the type of relationship, or the culture within which events are occurring?
Ask around and you will receive a multitude of different opinions. I challenge you to unearth many facts.
Effective management seeks to harmonize these viewpoints. It recognizes that diversity of opinion can be a creative force, but unless there is control and balance it will rapidly lead to destructive contention. We see plenty of evidence in the world today where strongly held beliefs, often lacking a factual basis, become a source of massive destruction.
Developing harmony in the way we construct and manage our trading relationships is surely the key to improved performance, but it is unlikely to be achieved while so many decisions and behaviors are based on individual opinions. That is why organizations are becoming so interested in data that can lead to fact-based decision-making. In a recent article, The Economist pointed to this development in the world of economics, where the long-ignored field of microeconomics is now surpassing macroeconomics in terms of interest and influence. That is because we live in a data-rich world with technologies that can now undertake meaningful analysis. The result? A mass of hitherto unknown facts, which increasingly drive business strategies and offerings. Take for example the recent collapse in the oil price. The 'macro' world should have been forecasting this – but it wasn't. So the 'micro' world now kicks in, helping management to decide what steps to take to address this situation.
The world of contracts has remained largely immune to the influence of data analytics. Even though there are millions of contracts available, a lack of clear structure and the diversity of wording has made data extraction difficult. But perhaps more important, we have a professional community that is resistant to change and which continues to place value on individual opinions, collective wisdom and the interpretation of precedent. That is perhaps the major reason why we now see a new field of 'Commercial Excellence' emerging. Organizations are determined to extract more value from their market relationships, especially on the supply-side (though it is my opinion(!) that this won't take long to flow through into procurement as well). To achieve this, they are focusing on new approaches to market segmentation, more adaptive market offerings, differentiated sources of value through commercial terms – and to get there, they need much more integrated data collection, tools and systems to perform analysis and skilled staff to oversee these activities and apply business judgment. Right now, those being recruited into these posts are not from traditional 'commercial' functions.
Where does this leave today's contracts and commercial staff, including lawyers? Perhaps rather like the macro-economists, we will find ourselves relegated to a subordinate role, still muttering our opinions even when no one is listening. Or, of course, we can ensure a very different future by grasping the need for change and becoming the owners and purveyors of facts.