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THE FUTUREOF CONTRACTING

“As global power balances and international trade patterns shift, the role and purpose of contracts increasingly comes into question. There are growing confl icts between relational and transactional cultures, between the forces of law and economics, and over the way that risks are allocated and managed. There is an urgent need to re-think our approach to trading relationships and the results they achieve.”

www.iaccm.com

©2012 IACCM

THE FUTURE OF CONTRACTING

1

The Future of Contracting

About IACCM ............................................................. 2

About this report ...................................................... 2

The Future of Contracting: Introduction .............. 3

The Current State of Contracting .......................... 4

Contracts & Relationships ...................................... 6

The Experts Say ............................................ 6

The IACCM Summary .................................... 8

Terms & Negotiation ................................................ 10

The Experts Say ............................................ 10


Automation & Technology ...................................... 13

The Experts Say ............................................ 13


Global Infl uences ..................................................... 15

The Experts Say ............................................ 15


Skills, Organization & Process ............................... 17

The Experts Say ............................................ 17


Performance Management ..................................... 20

The Experts Say ............................................ 20


Conclusion: The Future of Contracts ................... 22

Table of contents


2

About IACCMThe International Association for Contract & Commercial Management (IACCM) is a non-profi t association dedicated to raising the quality and performance of trading relationships. Its work includes extensive research, training and benchmark assessments that assist organizations worldwide to improve their contract and commercial capabilities. It attracts members from contract management, procurement and legal functions; the current membership represents more than 6,000 organizations in over 140 countries. More information is available at www.iaccm.com.

About this reportThis report is based upon research undertaken by IACCM during 2011/2012, through a number of dedicated surveys and interviews that in total gathered opinions from more than 2,000 practitioners and executives. The views of contract and commercial managers, lawyers, procurement and supply chain executives were supplemented by those of academics, consultants and business executives from across industry and within multiple countries. The report consolidates those views, including selective quotes, and also refl ects the broader trends and experiences encountered by the IACCM leadership team in daily interactions with its worldwide cross-industry membership.

IACCM thanks Ariba for its generous support in funding this study (which did not include any editorial direction) and also Roy Anderson, Vice-President at Metasync, who gave his time to conduct more than 40 in-depth interviews with senior managers and executives, academics and CEOs.


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The Future of Contracting: Introduction“Today, CEOs are telling us that the complexity of operating in an increasingly volatile and uncertain world is their primary challenge.”

That was the conclusion of the IBM CEO Study in 2010, following more than 1500 face-to-face interviews. The issues underlying that complexity are setting the agenda for contract and commercial management in the years ahead. At their heart lie the twin challenges of ‘global interconnections and interdependencies’, which create the need to manage a fast-moving and unpredictable environment of risks, rules and relationships through an enhanced discipline of ‘commitment management’.

Sam Palmisano, Chairman of IBM Corporation, identifi es three key factors:

If Sam Palmisano is correct in his vision of 21st century leadership, then this is the environment in which contracting mustdetermine its contribution and, most importantly “It must move from being seen as a source of complexity to a processthat overcomes complexity”. Those responsible for its future recognize that change will be extensive and is overdue:

• Improving the integration between contract management and relationship management, to provide tools and methods that prioritize value, while maintaining control.

• Ensuring alignment of trading partner management with the strategic goals and decision making of the business.

• Transforming negotiation, to enable improved partner selection through alignment of goals.

• Shifting the focus of terms and conditions, to achieve a relationship framework that delivers improved governance of outcomes and reduces the redundancy in repetitive, low value review and negotiation.

• Mastering technology, to support transaction and portfolio analysis and pro-active management of risk.

Underlying this change is the need for contract management to become ‘a strategic discipline that supports the shifting needs and goals of the business’. Contracts must provide a framework for success – ‘offering a combination of fl exibility and stability on which all relationships depend’1 and ‘becoming living instruments delivering on the requirements through a shared-risk scenario’2.

1) The world’s private and public sector leaders believe that a rapid escalation of ‘complexity’ is the biggest challenge confronting them. They expect it to accelerate in the coming years.

2) Their enterprises today are not equipped to cope effectively with this complexity in the global environment.

3) ‘Creativity’ is the single most important leadership competency for enterprises seeking a path through this complexity.

1 Prof Thomas Barton, California Western School of Law2 Roy Anderson, Vice President, Metasync and lead interviewer for this research


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The Current State of ContractingRecent IACCM research3 suggests that, on average, corporations are losing the equivalent of 9.2% of annual revenue through weaknesses in their contracting process. These losses arise from a combination of missed savings and cost reduction on the one hand, and lost revenue opportunities on the other. They demand a shift from today’s transactional, control-driven focus, to a more strategic view based on market risk analysis and relational contract structures.

Many of the world’s most profi table companies have chosen to operate with business systems and in markets where fl exibility of commercial terms and offerings is not required, or can be managed by non-contractual means. This results in a low level of investment in their contracting process, but it does not necessarily mean they lack a contracting strategy.

IBM in the 1980s, Microsoft in the 1990s, Apple today; each is an example of a company where market demand for world-beating products trumped the need for negotiation and commercial fl exibility. Until recently, the pharmaceutical industry maintained high margins through product leadership and market controls that made rigor in contract negotiation appear of little importance. In all these cases, investments in contract management focused primarily on the administration of contracts and the imposition of rules and procedures to prevent deviation from standard terms and conditions. However, a common challenge for many has been that their rigid contract practices failed to adapt to changing risks and shifts in market competition.

At the other end of the spectrum, consumer based industries such as retail may also view contracts as largely non-negotiable instruments. The inability of the consumer to dictate terms and conditions means that fl exibility is needed only in the context of special promotions or deals; and in general, such industries are dealing with suppliers who also lack power to negotiate. Therefore contracts, to the extent they exist, are mostly standard forms and employees have little empowerment to agree variations to terms. For these companies, ‘contracting strategy’ means having the ability to operate off standard terms of their choosing and avoiding the costs and risks inherent to negotiation and the management of non-standard agreements.

Between these two environments, the bulk of businesses need a more nuanced approach to the way they do business. However, the challenge for many is that they do not in fact have a contracting strategy, or the strategy they have is no longer aligned with business conditions and needs. This may be because they are still trying to impose standard terms in a market where competitive pressures demand a revised approach; or it may be that they are trying to operate with high levels of deal-based fl exibility at a time when technology, regulation and cost pressures have combined to make such an

According to one Fortune 50 CEO, ‘contracts lie at the heart of ease of doing business’

For these organizations, ‘contracting strategy’

means operating off standard terms

3 IACCM study ‘ROI of Contract Management’, February 2012.


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approach unaffordable and vulnerable to unacceptable levels of performance risk. The fi nancial services industry provides an extreme example of a business sector that failed to understand or to manage its contracts.

Misalignments of this sort result in ‘the contracting process’ being viewed by many as a source of complexity, frustration and delay. It becomes an inhibitor because, as

business and market conditions change, contracts and the contracting process typically lag behind. And it is that lagging which results in a burden of excess costs and missed revenue, together with the potential for severe competitive exposure, resulting in the missed opportunities highlighted in the introduction to this section.

Weaknesses in contract management cost theaverage company 9.2%of annual revenue

What aspects of contracting will change over the next few years?

It is within this context that this reports advocates the need for a fresh approach to contracting, including the need to reconsider the purpose of the contract itself, and to develop a clear strategy that is capable of rapid adjustment to shifts in business and market conditions.

“The majority of what I see today is it’s a prenuptial agreement and it’s done really with the negative in mind.” (Margaret Smith, Executive Director, Contract Management, Accenture)

“In the future, the focus is on a contract, not so much as a legal document, but as a framework, as a tool, as a business ena-

bler, to conduct business in a more effi cient and effective process.”(Colin Davies, European Head of Procurement, Sony)

There will be greater use of visual techniques (i.e. pictures, graphs, fl owcharts etc)

Common law will maintain its dominance as the framework for international contracts

There will be a focus on plain language

There will be more international standards

62%

69%

78%

86%

Source: IACCM Survey The Future of Contracting 2020


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Contracts & Relationships: The experts say...“Contracting is often seen as a truck driver might see a weigh-scale station ….as somewhere they have to stop, but they are hoping it is closed as they drive past” (Doug Hudgeon, Head of Procure-to-Pay, Macquarie Group)

“There is a lot of wasted energy and a lot of wasted resources resulting from a very ineffi cient way of approaching contracting. Value-add comes from developing a sustainable commercial relationship and delivering your commitments – and that’s what contract management should be doing” (Craig Guarente, Worldwide VP Contract Management, Oracle)

“We can no longer afford to be contracting transaction by transaction … we have to go towards relational contracting and away from transactional contracting” (Ian Mack, Director General, Major Project Delivery, Canadian Department of National Defence)

“The big shift in focus will be away from price and compliance and towards how organizations address innovation and change through their agreements. (Those agreements) must offer a roadmap to support transformation over time … they must provide transparency and visibility so that they can stay with the same partner and build a long-term relationship and innovate without losing leverage” (Bill Huber, Partner, Information Services Group)

“As you begin to use intelligence to better segment your agreements and agreement types, you need fewer people with focused skills of contracting and more with integrated understanding of contracts and relationships. The objective is no longer negotiating a contract; the objective is optimising the relationship” (Tim Minahan, Chief Marketing Offi cer, Ariba)

“The end point is not a contract. The end point is a mutually valued relationship where both parties are exchanging value. By focusing on the contract, we miss the end point” (Dalip Raheja, CEO, The MPower Group)

According to 97% of survey participants from around the world, contracts will remain a norm in business transactions. Yet practitioners from all functions acknowledge the pressures for change – in particular, towards ‘more relational forms of contracting’.


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“In a complex and highly unpredictable world, it is hard for people to think very far ahead and to plan for all the various contingencies that may arise. Even if individual plans can be made, it is hard for the parties to negotiate about the future, it may be very diffi cult for them to write their plans down in such a way that, in the event of a dispute an outside authority....can fi gure out what these plans mean and enforce them” (Oliver Hart, Professor of Economics, Harvard University)

“There will be more focus on performance based contracting with balanced incentives and penalties. There will be more leaning towards this model from today, where it’s more focused on fi xed fee and a known-commodity based approach” (Gabriel Buigas, Deputy General Counsel, Hewlett-Packard)

“Latin America and Asia operate on the basis of business relationships (and ambiguity). At these regions gain in prominence and the balance in contracting and trading relationships change, U.S. commercial contracting practices must adapt with less emphasis on legal terms; more on business relationship terms and conditions” (VP, Contract Management, Global Aerospace & Defense)


8

Contracts & Relationships: The IACCM SummaryThere is wide consensus that contracts of the future must become far more effective at managing uncertainty and change. This means that the process –and the balance of terms - will shift from a focus on the consequences of failure, to provisions that assist in reducing the probability of failure. The parties to a contract must agree on the governance principles that enable on-going interaction and shared insight to the status of performance. While technology may be the vehicle for delivering much of this benefi t, the contract itself must provide “a single point of truth, so the parties can stop arguing about the data and address the issues and solutions to the problems that come up”. (Bill Huber, Information Services Group)

In addition, more complex business conditions demand simpler, more easily understood contracts – and this requires better use of language and increased focus on usability. “Contracts must become a strategic tool, communicating what people want to know, when they need to know it. They won’t only be text on paper; they must be user-aware, helping

all users to fi nd information quickly and easily” (Helena Haapio, CEO, Lexpert, leader in the Pro-active Approach to Contracting)

Technology has in many ways been the driver of the growth in complexity – and it will be a major element in facilitating and simplifying the contracts and relationships of the future. “Just think of everything that is now on your iPad and iPhone and the access you have to information. Dealing with complexity demands a simplifi ed contract, taking complex issues and presenting them in a simpler and more instantly accessible fashion.” (MC McBain, Vice President of Global Business Offering Development, IBM Corporation)

One perspective could be that a more relational basis for trading will reduce the role of the contract and favor the ‘informality’ of traditional sales and business development.

However, this seems unlikely due to the pressures for regulatory compliance on one hand, and the demands for better management of risk and delivery of fi nancial returns on the other. This leads to an overwhelming view that the result of growing complexity will be a different form of contract, adjusted to the needs of the market. Ways that this will be achieved include a growth in industry standards, including in some cases increased use of ‘private law’. There will also be a continued drive towards international standards that can enable agreement through reference, rather than requiring case by case negotiation.

Contract management and relationship management will become more integrated. On the buy-side, this will be easier to achieve than on the sell-side because there is no pre-existing organizational model to re-align. The reason for this integration is that many aspects of complexity can be handled only through a deeper understanding of the commercial relationship to which both parties are committed. Many aspects of this – for example, the level of resource allocation, the extent of integration between reporting and management systems – cannot be agreed

7 out of 10 expect ‘therelationship’ will integrate more

closely with ‘the contract’


9

effi ciently during a negotiation. Therefore the framework within which a contract will be formed and managed will increasingly have been established as part of a relational commitment. “In the end, it’s about security – that is something that must be important to both parties. They have to work together because there is a feeling of trust … without confi dence, there will be tension in the relationship, so openness in your practices and how you do things internally will be important”. (Head of Outsourcing, global software and services company).

A more relational approach also suggests that the tendency to always blame the other side will reduce, implying increased maturity and understanding in the way relationships are formed and managed. “If we don’t trust our partner, we should recognize that the problem lies in our selection process”. (Srini Krishna, Director of Global Supplier Management, Microsoft). Globalization is one factor that is

driving these developments – because of the need it creates to address the issue of cross-cultural, cross-language, cross- jurisdictional understanding. “Contracting in every culture is being impacted by its experiences picked up from doing business with different cultures. The tradition of each geography is changing based upon those experiences and the need to manage the unknown, the unexpected.” (KB Iyappa, EVP - Legal, GMR Group)

All of these fi ndings indicate a need for much closer alignment between the contracting process and the identifi cation and management of business requirements and opportunities. Too often these activities lack integration – there is ‘the vision’ of an outcome, and then there is ‘the contract and its negotiation’. “When you are guessing the value proposition, you are unlikely to be getting anywhere near the dartboard.” (Ian Mack, Director General, Major Projects Delivery, Department of National Defence, Canada)

Source: IACCM Top Terms Survey2011

During the post-award phase of contract performance which terms are the most frequent source of a claim or dispute?

41.2%37.5%

31.7%29.7%

26.8%26.7%

25.1%22.2%21.6%

Delivery / Acceptance

Price / Charge / Price Changes

Change Management

Invoices / Late Payment

Performance / Guarantees

Service Levels and Warranties

Payment

Responsibilities of the Parties

Liquidated Damages

Scope and Goals 21.4%


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Terms & Negotiation: The Experts Say

“There is such a lot of wasted time and energy on trying to agree terms and conditions between the parties. And a lot of the time, common sense and judgment don’t come into it. We need a total cost approach that links effort with risk likelihood.” (Colin Davies, European Head of Procurement, Sony)

“There will be a standardized library of approved terms and conditions, but for the critical relationships the focus will be oriented towards encouraging shared risks and shared rewards – getting away from win-lose propositions.” (Tim Minahan, Ariba)

“Once you have a well-thought out document assembly framework, there’s a better chance that negotiations won’t dissolve into people fi ghting over urban myths regarding waivers, disclaimers etc., where discussions end up with people trading ill-conceived notions of value.” (Ken Adams, CEO, Koncision, and author of ‘A Manual of Contracting Style’)

“There will be more attention paid to achieving results. Let’s focus on what the outcome is. How do we know if we have achieved success? How will we work together, how will we manage the relationship? How will we share information? With risk allocation – liabilities, indemnities – this will change as we experience new markets, new issues that we haven’t seen or tackled before. And with jurisdictions, global business will force us to look at new ways to resolve issues and resolve them quickly.” (MC McBain, IBM Corporation)

The terms and negotiation must inspire “confi dence in the parties that they believe they are getting what they are contracting for in terms of the goals as well as the process, the ethics, the speed and effi ciency with which it is done and in which contracts are administered.” (KB Iyappa, GMR Group)


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The terms that are negotiated with greatest frequency

Terms which would be more productive in supporting successful relationships

1 Limitation of Liability Scope and Goals

2 Indemnifi cation Responsibilities of the Parties

3 Price / Charge / Price Changes Entirety of Agreement

4 Scope and Goals Change Management

5 Liquidated Damages Communications and Reporting

6 Intellectual Property Price / Charge / Price Changes

7 Payment Delivery / Acceptance

8 Service Levels and Warranties Limitation of Liability

9 Warranty Performance / Guarantees / Undertakings

10 Insurance Indemnifi cation

Source; IACCM Top Terms Survey 2012

Terms & Negotiation: The IACCM SummaryEffi ciency, speed, simplifi cation. These are seen as critical ingredients of the future process and in order to achieve them, negotiations must become far more focused on the things that really matter. In order to fulfi l a more strategic role in the business, there is broad consensus that greater segmentation of contract and relationship types will lead to an improved catalog of approved terms, a growth of commonly accepted standards and (in consequence) a shift in the focus on negotiations. In part, this shift will be to ensure the time and effort of negotiators is more closely aligned with the delivery of value. Also, it will therefore concentrate on more complex situations and terms that assist in delivering successful outcomes. This suggests that the desire by negotiators to spend time on negotiating topics such as scope and goals, change management terms, performance criteria and reporting will steadily be realized.

This means that, over the next 10 years, there will be growing consensus on standards at both an industry level and between major trading partners. Some of these standards will be driven by the growth of regulation – for example, the need for fi nancial services, food industry, oil and gas, pharmaceutical companies to demonstrate effective control over their supply chain can only be achieved through common principles and methods that will steadily become embedded in industry practices and audited compliance, rather than by individually established terms and conditions.


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Finally, contract terms must stop undermining business purpose. This story from one of our interviewees illustrates the dilemma perfectly. “How can you ask a supplier to invest in people, talent and innovative thinking, to put money into the development of your relationship, and then insert an escape clause, where we can leave the relationship in 30 days when we feel like it?”


Jurisdiction,nature ofrecourse

Risk allocations (liabilities,indemnities)

Penaltiesor rewards

PerformanceUndertakings,Measurements

Governance,informationsharing, audit

36%42%

55%

71% 72%

Will there be signifi cant changes to terms and conditions?

YES

Effi ciency will also be achieved by establishing and maintaining terms and conditions as a much more integrated element of the product or service development and management process. Market research and needs analysis will include improved understanding of the commercial terms that are needed to meet specifi c segment needs.


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Automation & Technology: The Experts Say

“Ten years from now, contracting will be driven by quality and innovation. Predictive modelling will become important. Now, a lot of information is based on probability, in 10 years it will be on innovation. Tools will be able to tell you the right contract for each industry and type of contracting. They will help to refi ne key information. They will browse a history.” (Gabriel Buigas, HP)

“Can we use more pictures, more diagrams, can we use movies, can we use videos, can we use YouTube, can we describe what we want through these visual means rather than trying to describe in traditional word-based language which refl ects in very lengthy contracts?” (Colin Davies, Sony)

“Through technology and business analytics, we will learn better how to gauge the characteristics needed for a good relationship and at a transactional level, how to understand client preferences, business needs and the terms they value over the form of contracting.” (MC McBain, IBM)

“A lot of decisions will be made based on benchmarking. There will be international standards. Incentives and penalties will be based on benchmarking data. This will make organizations the best in class.” (General Counsel, major international fi nancial services company)

“Tools will have a more strategic vs. a tactical or operational focus.” (Head of Outsourcing, major service provider)


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Automation & Technology: The IACCM SummaryToday, much of the investment in contract management technology has focused on control and compliance. There has been limited attention to the possibilities of data extraction and value analysis, using contracts as a source of business intelligence or to predict probable outcomes. In particular, existing technologies tend to operate at a transactional level and yield few insights to the portfolio of contracts or contract types.

Technology delivers data – but increasingly, over the next few years, the focus will be on analysis of that data. It will support improved estimations of risk and opportunity, better understanding of the consequences of particular terms or relationship models and when they should be applied. This will include increased infl uence over business unit decisions and also over supplier selection. For example, the increased transparency that results from networking and that has already led to ‘comparison sites’ such as TripAdvisor, will continue to spread to the business-to-business environment. Credit ratings will be supplemented by broader measures of reputation and reliability, including fundamental issues such as contract compliance, operational performance and business ethics.

“We will continue to see the equivalent of ERP-type functionality that extends beyond the single enterprise and integrates among connected networks of companies.” (Bill Huber, Information Services Group).

This vision of inter-organizational transparency will shift the burden of responsibility and increase levels of trust and confi dence, in many ways simplifying contracts. It leads to an environment where the parties have an agreed and single ‘point of truth’, meaning that they can focus efforts less on arguing about the data and more onto identifying solutions to the problem. Social networking, crowdsourcing, on-demand support and inter-organizational collaboration will have fundamental impact on the way that contracts and relationships are formed and managed, as well as the underlying research, selection process, benchmarks and performance oversight are undertaken. These new capabilities will be the source of a fresh dynamism in contract management as it develops the ability to deliver a pro-active source of market and business intelligence.

“Traditionally, business information has either been lost during the negotiation and contract management process, or locked within individual contracts. Automation will steadily ensure that we capture and share experience, knowledge, techniques, trends ….” (Craig Guarente, Oracle)

9 out of 10 expect rapid growth in the impact of technology

4/5 see need for greater

collaboration and that negotiation will be more of a

‘continuum’

4/5 see need for greater

collaboration andthat negotiation will be more of a

‘continuum’


15

Global Infl uences: The Experts Say

“Emerging markets will be not only a source of signifi cant revenue growth for companies but also a source of talent, true innovation and ground-breaking approaches to business, which they will leverage on a global scale” (Emmanuelle Roman, Global Consumer Products Markets Leader, Ernst & Young)

“There will be growing transparency of data and performance. Organizations worldwide – buyers and sellers – will have on-demand access to information about the integrity and honesty of their potential trading partners. This reputational threat will cut litigation and drive performance” (Richard Cellini, CEO, Briefcase Analytics)

“Since emerging markets are less technology based, their infl uence on relationship based contracting will be immense” (Senior Director, Oil & Gas)

“More content and controls required for localized government compliance and regulations” (CPO, major banking group)

“More segmented and diversifi ed contract strategy...Move away from the “one size fi ts all” concept” (MC McBain, IBM)

“We will be looking for suppliers who can help us innovate the ways in which we go to market and sell our products, especially in emerging markets where traditional sales models don’t scale” (Donald Ferguson, AstraZeneca)


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Global Infl uences: The IACCM SummaryContracts must adapt to the challenges of a global business environment – including the growth of economic power and infl uence from today’s emerging markets. Therefore, whilst many assume that the Common Law contracting model will continue to dominate international trade, our belief is that a new amalgam will emerge, taking elements from hybrid sys-tems and adding new features that address the increased risks of global contracting.


Among the key features of this emerging model are growing use of arbitration and mediation; increased focus on clear, plain language; potential emergence of more graphics (fl ow charts, graphs etc.) to aid user understanding; translation tools embedded into corporate systems and a growth in international industry standards to deal with the complexity of jurisdictional management. Those standards will assist in streamlining negotiation (eliminating repetitive and low-value issues); in addressing national and regional regulation; and in focusing discussion on areas of value and performance.

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How will approaches to contracting will change?


17

Skills, Organization & Process: The Experts Say

“Commercial skills will be a key differentiator and value-source in the global marketplace” (Erik Nordling, Head of Contract Management, Ericsson)

“Managing contracts must stop being a journey of discovery, in which those charged with their management have a toolbox of hammers and the only thing they know how to do is to take out one of the hammers and beat the guy on the other side of the table” (Ian Mack, Canadian Department of Defence)

“I think you will certainly see more senior level interest in contracts. More and more people will be drawn into the contracting process in government, because more and more services will be delivered by somebody else and not necessarily by the state. Even if they are delivered by the state, then that requires skills and tools similar to the formal contracting process. You’ll see Boards and senior involvement in the contracting process, either helping to shape the contracting strategy or tracking whether the contract is delivering its value” (Executive Director, Government Procurement Policy & Strategy)

“The folks who are going to make a difference in a contracts role are those that recognize that a critical component of what they do is to enable and drive change. Their focus on communication skills, on leadership, on driving strategic impact within the organization, on getting people to look up from the trenches and see what is around them. Those are going to be the key differentiators of people who will rise. A lot of the compliance focused work can be offshored and automated. It doesn’t mean that it’s not important – it just means that those elements of the work are not going to be the track to a successful career” (Bill Huber, Information Services Group)

“We need to cut down on the amount of game-playing posturing that we do through the negotiation process and develop a reputation that, when we put the deal on the table, that is our position, not the fi rst in ten moves to end up somewhere in the middle. We waste so much time in that chess-playing and when you play chess, you end up with a sub-optimal contract” (Commercial Director, QinetiQ)


18

“A lot of decisions will be made based on benchmarking. There will be international standards. Incentives and penalties will be based on benchmarking data. This will make organizations best in class” (Gabriel Buigas, HP)

“There are not many people who understand the (contracting) process from end-to-end. Because they focus on the overall impacts to the business, people who really know how all the elements work are in very high demand. They operate above the specialist silos and make sure all that knowledge connects and how they relate to each other. When I look at that know-how and the importance of being able to coordinate and aggregate across all the different groups involved in a complex contract, I see this as an area of continuing importance” (MC McBain, IBM)

“There must be people who understand the business and add value from a contracting perspective. They must identify the issues – problems on customer service, leakage around change management, regular missing of SLA commitments – and contribute to fi xing them. So contracting skills will be about operational understanding, project management, technology application, innovation. (It is about) merging a world of contracting processes, technology and innovation” (Craig Guarente, Oracle)

“The real need is not the master negotiator, but the person who can visualize where the play will be centered in the future and makes sure we have anticipated that” (Chief Procurement Offi cer, Henkel)

“The process will include more service review boards, with joint problem solving, rather than blaming the other side. The contract will specify the need for a charter or shared objectives as a deliverable. For example, senior representatives will be identifi ed for review boards; the contract will provide the structure for a fl exible and dynamic relationship” (Group Commercial Director, QinetiQ)


19

Skills, Organization & Process: The IACCM Summary

There is wide belief that contracting and commercial competence will be critical differentiators in the delivery of business results. As already described, today’s market forces demand that organizations must constantly improve their capabilities to commit, and the quality of the relationships they form (with suppliers, customers and through alliances and partnerships). Many organizations already recognize that they must focus on the skills and process that will support these needs. In particular, they are focusing on:

• cross-cultural awareness, competency and process management• end-to-end process (need / opportunity inception to close-out)• outcome-based measurement and management• ability to manage change, apply judgment, understand value and

consequences of non-compliance

There is wide consensus that there is a need for improved relationship skills, greater fi nancial acumen, infl uencing and broad business awareness – seeing connections, anticipating change.

But while there will be major investments in skills and in process, it is far from clear how this will translate in terms of organization. Contracting is a cross-functional activity and its coordination could be undertaken by a variety of different groups. While some Contracts and Commercial functions are rising to the challenge, many are not. Yet their natural rivals for this role – Procurement, Project Management, Legal, perhaps Finance – are mostly also failing to grasp the implications of market trends. They mostly remain fi xated on the development of standards, the monitoring of compliance or the negotiation of one-off exceptions.

The probability seems to be that different models will evolve, but that a core of contracts and commercial experts will develop to support the strategic needs of business and to oversee required capabilities. In some instances, the capability will be delivered through dedicated contracting professionals; in others, it will be through other functions equipped with the necessary skills or tools.

3/4 recognize that

commercial skills

must improve

2/3 expect growing focus on

fi nancial and economic

impact


20

Performance Management: The Experts Say

“We must form agreements that provide a roadmap to transform the agreement over time – for example, handling fundamental changes to the scope of work, defi ning how the business case is going to be updated and accomplished, how will the parties collaborate in designing and then accepting the innovation” (Partner in Business Advisory Service)

“If you look at where we are today and where we will go in the next ten years, I believe that we will have more advanced, more risky, and more KPI-based relations …. But they will be very diverse, very much tailored to the situation of the individual customer” (Erik Nordling, Ericsson)

“Already, when we look at contract performance, we make it absolutely clear that blaming the other side is not acceptable. If they made mistakes, it is because we allowed it” (Group Commercial Director, Defense Industry)

“We must address the question of performance management from a value-add standpoint. We will measure and quantify in an objective manner the holistic value-add that we deliver to our respective organizations” (Dan Mahlebashian, Chief Contracting Offi cer and Global Director Purchasing, IT, General Motors)

71% of experts believe there will be signifi cant changes to

performance undertakings and measurement.


21

Performance Management: The IACCM Summary

Ultimately, contracting is all about performance. Trading relationships are formed in order to enhance results. It is based upon those contracts that organizations claim savings, revenue or enhanced capabilities. Yet often they do not deliver against forecast or expectations – and it is this under-performance that will gain increased management attention. There will be growing focus on the causes of failure and contract risk analysis will be expanded to better understand why things go wrong and how they can be remedied. The evidence suggests that in part this is during the selection and negotiation process – the development of the wrong partnerships, driven by incomplete or inappropriate selection criteria. Much of this is a result of functional performance measures that undermine good judgment and decision making – for example, sales compensation paid on deal closure; Procurement measured by claimed savings at the point of contract signature.

The future contract process will not only be driven by a better integration of internal management and measurement systems; it will also use more objective external data to assist in partner selection. The importance of cultural alignment and underlying trust will become of greater infl uence and therefore external benchmark and performance data will become key to the process.

85% agree that the

process must become more

holistic


22

Conclusion: The Future of ContractsIn the future, contracts will be designed to meet the needs of those who commission and use them. They will be designed, produced and written in a form that makes them ‘fi t for purpose’. The process through which they are constructed will be fl exible, responsive and seen as giving ‘value for money’. The terms will be focused on supporting a relationship that is appropriate to the depth and signifi cance of the transaction and designed to maximize the probability of a mutually successful outcome.

Contracts of the future will be seen as instruments to describe and safeguard the delivery of economic value and will achieve this through an apportionment of risk and responsibilities that is appropriate to the capabilities of the contracting parties and the nature of the transaction.

Contracts of the future will be an expression of capability, commitment and relational value, thereby representing a source of competitive differentiation.

Contracting is one of ‘the next big things’ in the world of business. That is because it is a critical contributor to the management of complexity. Economic conditions are pushing organizations towards new sources of savings, revenue and project funding; into new and emerging markets; to dealing with unfamiliar cultures and business practices; growth in Asia is shifting the power of businesses to impose their way of working; companies are dealing with increasingly complex, interdependent systems. CEOs are struggling with how to understand, make sense of, and manage ‘interconnections and interdependencies’. In this environment, the analytical and disciplined approaches that a high-performing contracting process brings are fundamental to business management and controls, plus they then provide a fi rm platform for the management of change (which today is inevitable during the lifetime of every relationship).


23


Relative to today, how important will these issues be?

(on a scale 1-5, 1 = less impact, 5 = more impact)

4.30

4.20

4.10

4.00

3.90

3.80

3.70

3.60

3.50

3.40

RATING AVERAGE

3.723.78

3.933.97

4.01

4.084.11 4.13

4.22

Cost

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ting

Repu

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n ris

k

Coping

with

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ket

volatil

ity

Simplifi

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Inno

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n

Man

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ta

Build

ing co

llabo

rativ

e

netw

orks

Autom

ation /

new te

chno

logies

Man

aging ch

ange


24

Our world is undergoing dramatic change. Far from being immune to those changes, contracts and commercial practices will increasingly move to the forefront as enablers of the new world of commerce. Among the key drivers for change are:

• A steady shift of negotiating and fi nancial power from West to East.• A need to reconcile contrasting cultural views of the purpose of contracts, the way that relationships are formed and

managed, the attitude to litigation and management of risk.• The frequency and speed of change driving a need for more fl exible relationship structures.• The ongoing advances of networked technology continuing to challenge boundaries and expand interconnections and

interdependencies.• A continuation of the ‘do it yourself’ revolution driving increased empowerment and commoditization of core products

and services, pushing business to differentiate through adopting greater responsibility for outcomes.• The inability of current contracting and legal principles to respond to the demands of global business.

Together, these forces challenge many of today’s core assumptions. For example, contracts of the future will...

• Be designed with the user in mind. There will be increased use of graphics and visual techniques to support the text and enhance communication.

• Focus on capturing the scope and requirements of the transaction or project and providing a robust governance process for their oversight and update.

• Be based upon a convergence of contract terms and structures, drawing the best elements from each cultural tradition and with a focus on successful business outcomes rather than specifi c legal rights and obligations.

• Use arbitration and mediation, rather than litigation. This will become the norm in contracting and the focus of dispute resolution will be on intent, rather than specifi c wording.

• Benefi t from new arbitration and mediation mechanisms, sponsored by both global and regional governmental institutions and sitting outside traditional country jurisdictions.

• Place responsibilities on both parties to reduce the probability of risk and to mitigate its consequence, through increased collaborative terms and forums.

• Focus on relational principles that support interaction and required fl exibility throughout the term of the transaction or relationship.

• Make extensive use of networked communication that crosses organizational boundaries, allowing common insights and early warning systems, on-demand performance tracking and more rapid management of change.

IACCM is dedicated to raising individual, organizational and institutional capabilities in contracting and commercial management. It provides research, learning, certifi cation and benchmarking to a worldwide, cross-industry audience of practitioners and executives.

(US) + 1 203 431 8741(UK) +44 1202 553 [email protected]

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