Are Complex Contracts Doomed To Fail?

Adrian Ringrose recently called on the UK government to outsource more public services (Financial Times, October 19th 2009). Adrian chairs the Confederation of British Industry’s public sector strategy board and he believes that government should set ‘the rules of the game, the standards of acceptability’, but does not need to be in charge of service delivery. Interestingly, he cites the US military as an example of the potential scope for outsourcing.

Mr. Ringrose does imply one dependency – he admits that such relationships ‘must be properly structured’.

And it is here that we find the core of a problem. The structuring of relationships that deliver successful outcomes is proving extremely difficult. Organizations – both client and provider – appear to lack the necessary structures to handle complex, long-term relationships. Traditional management and measurement systems frequently get in the way. For example, it seems extremely hard to build consensus over the goals of a relationship; then it is hard to reconcile the differing views of risk; and of course different internal groups may have diametrically opposed views of the desirability of reaching agreement – some may be welcoming, others threatened.

The Economist recently highlighted this issue in an article that reported on insourcing and the return of ‘big business’. Oliver Williamson, this year’s winner of the Nobel prize for Economics, also recognizes the issue in his work on transaction cost. At the core is the challenge of building consensus that an external relationship is desirable, then finding a good and compatible partner, and then maintaining that partnership over time. These dependencies are not readily enabled by current organizational models and skill sets. And this is the reason why the US government – especially in defense - is reported to be wary of future ourtsourcing and considering reversal of some existing contracts.

One way that organizations often seek to safeguard their more complex and strategic relationships is by the creation of specialist internal groups – ranging from the traditional empowered ‘account team’, through to specialists in areas like outsourcing or alliances. Today we see the growth of ‘commissioning managers’ and Supplier Relationship Managers.  These groups may offer special skills, but often they are also powerful and well-connected advocates charged with overcoming internal resistance. Results show this is often a thankless task.

Another approach – consistently highlighted as a key dependency in surveys – is to appoint a powerful executive sponsor, whose sustained involvement is needed if key relationships are to succeed.Yet of course executives cannot be involved on a daily basis in every important relationship and creating specialist teams is both inefficient and contentious. And that is why – if complex contracts are to succeed – the total contracting process must be overhauled and the management of complexity must become a core organizational capability. We need to understand that investments in standardization and compliance were not end points, but that they represent a firm base from which uncertainty, change and variation can be measured and managed. We must not become constrained by the standards we have created; we made that investment so that we can free resources to manage exceptions in an intelligent and standardized way.

The reason that contracting is so important (according to Professor Leslie Willcocks, it is one of the three core competencies required by any successful 21st century business) is that it has become an instrument of relationship segmentation and quality control. It is also the basis for the management of change in a controlled and harmonious way. Neither party to a contract has an innate interest in disputes, yet without the right instruments for on-going dialogue, without the right balance of risk, without the mechanisms to manage the inevitability of change, then dissatisfaction is almost inevitable.

Key to success is on-going communication. But of course not just any communication. Because these are business, not personal, relationships, communication must have structure. Much of it may be virtual, through inter-connected systems (especially with the advent of cloud computing). One thing that is certain is the need for the right skills and people with the right incentives and measurements – and the right governance tools, established and maintained through the contract.

Mr. Ringrose is absolutely right to call for more outsourcing because, in principle, it can deliver far better service at lower cost to the taxpayer. But unfortunately, when it comes to ‘proper sstructure’, we are struggling. As a result, there are some dependencies that must first be met because failed contracts cost money and damage reputations. Failure is not inevitable; but consistent success requires new thinking about the way that contracts and relationships are inter-connected and inter-dependent. And that, of course, takes us back to the core mission and agenda of IACCM …..

 

Contracts & The Cloud

Recent reports suggest there is rapid growth in ‘cloud computing’ and all the indicators are that it will indeed become a massive business very quickly.

But as so often, we seem to be learning about many of the business implications only as problems arise during negotiations or implementations – and it is of course these business issues that drive contractual terms and considerations.

A short blog by Chris Cummings highlights some of these concerns. He rightly points out that the elements that make up the ‘cloud’ come from a variety of sources. The reliability of individual elements is likely to be varied. To the extent that inter-operability matters, it most likely will not be there. And of course, as happened in the early days of every past technology innovation, no one will accept responsibility for failures – it will always be a matter of pointing fingers elesewhere.

The compelling value proposition for cloud computing is the ability to scrap traditional equipment and facilities and to move towards a true pay-for-what-you use model. However, there will be real advantages in having someone accountable for the overall quality and reliability of service, as well as ensuring the provision is at low cost (which means drawing on the service at cost-efficient times and volumes). Hence the emergence of managed service providers / integrators. But the real question related to those service providers is the extent of the liability they will acept.

I highlighted an example of this recently in a link to a blog by Larry Walsh, ‘Penalties For Cloud Computing Breaches’. The continued interest by the US Government over standards of software assurance is also likely to impact the liability of software developers for the integrity and security of their product. However, ‘clouds’ are by their nature intangible and forever changing their shape.  Threfore the question of who really has responsibility for the conenections within and between clouds and for the standards of relaibility and performance is likely to be a key battleground for contract developers and negotiators over the next few years.

And for those who wish to offer integrated services, the secrets of competitive advantage could well be locked into their contracting capabilities. For example, they need to develop superior commitment capabilities that promise their customers greater reliability and continuous innovation. And they will only be able to make those commitments if they have successfully negotiated back-to-back arrangements with the underlying application providers and if they continue to oversee and upgrade their relationships with those providers.

Contract Management, Lawyers & A Story Of Change

At IACCM’s recent meeting in Boston, Colleen Gallagher of the Huron Consulting Group outlined eight reasons why contract management is becoming a ‘top of mind’ issue for many in-house law departments.

Colleen attended the Association of Corporate Counsel (ACC) conference, also held in Boston earlier in the week. Her comments – based on extensive conversation with delegates – confirmed that there is growing pressure on in-house groups to increase their efficiency. She observed widespread interest in actions that would help reduce costs and empower the organization.

“Law departments understand that they need to get better alignment of resources and to get them involved at the right time. At the moment, they appear more driven by the need for efficiency than they do by concerns over risk,” said Colleen.

As law groups study their workload, the amount of time spent on contracting is one area for urgent review. IACCM research has found that in many organizations, bid and contract support can account for more than 40% of the legal budget. The more sophisticated groups – according to Colleen – have recognized that a problem with bringing contract management under control is its distributed nature. It is ‘owned’ by many different functions with in the business and the overall budget for its support is therefore fragmented; indeed, few organizations have any consolidated understanding of the costs associated with the development and management of their contracts.

As the law department explores this area, there are eight topics that are increasingly on their agenda:

1. Consistency of operations: the need for improved definition of workflows and better understanding of what is needed and what is agreed.
2. Development of ‘self service’: the need for better standards and greater empowerment of negotiators.
3. Understanding of contract value: the need to apply resources where they are making the greatest difference.
4. Bundling of work: the need to better analyze where time and cost are being incurred; make more effective use of outsourcing.
5. Defining end to end process: the need to recognize contract lifecycles (pre and post award) and to ensure approval activities involve the right people at the right time.
6. Using technology: the need for greater use of technology to provide compliance oversight, especially post-award.
7. Alignment with business objectives: the need for contract terms and related legal and contract metrics to reflect current business objectives.
8. Addressing global requirements: the need support shifting business and market models with appropriate contract terms and structures, legal knowledge, language and regulatory variations.

“The key question for in-house lawyers is how to deliver value and enable good business”, concluded Colleen.

These  observations follow on from the interesting debate by academics that I reported last week (see ‘Should Lawyers Become Contract Managers?‘) and reflect the pressure on traditional business functions to become more integrated and collaborative in supporting business goals. As trading relationships become more complex and more outcome-focused, the contract and contracting process has assumed a new significance. Law departments must adjust – and in many cases, the most successful are leading that adjustment through the types of thinking and reengineering that Colleen’s list reflects.

Should Lawyers Become Contract Managers?

Today I attended the 1st European Proactive Law Symposium, organized by the IACCM Proactive Think Tank in partnership with the ICN Business School in Nancy, France.

Among a host of interesting topics and papers, there was a panel discussion featuring academics from several Law schools that addressed “Proactive Contract Management as an Evolving Academic Discipline”. Based on wide agreement that contract management is an important business discipline, in need of a common language and established techniques, the panel discussed whether contract managers should be lawyers and / or whether contract management should be incorporated into legal training.

There was agreement that lawyers would benefit from the inclusion of contract management content in law school programs. It was felt that holistic case studies would assist the development of wider skills. “Today’s programs are rule-based and testing is based on those rules. It is a deductive discipline and the belief is that wisdom and judgment will come from on-the-job experience,” observed Tom Barton, a professor at California Western School of Law. He went on to explain that case studies from the world of contract management could assist in developing wisdom and also teach lawyers in areas such as gathering and analyzing information, coordinating ‘teamed’ resources, active listenting skills and greater behavioral understanding.

There was wide consensus that contract management will increasingly be an attractive path for some lawyers, but that it is not necesssary to be a lawyer. Indeed, the cross-disciplinary nature of contract management was emphasized as one of the reasons why it is so difficult to build academic programs for this community. However, all the academics present believe that it is important to develop contract management as a discipline in its own right, as well as making it an element of other programs – for example in law, finance or marketing.

In responding to this enthusiasm from the academic community, I commented that we must work together to build executive understanding of the importance of this role. While dedicated undergraduate and business school programs will be welcomed, uptake will be limited unless students are confident that the discipline offers a career path. However, we already have initiatives under way with several universities and business schools to offer internationally applicable programs for the contracts community.

We also discussed how content would be developed and I suggested that we should utilize the existing, practitioner- developed body of knowledge that is managed through IACCM as a base, and then have academics build from that syllabus to include more refined techniques and methodologies that would bring greater consistency and value to the contract manager’s output. One critical aspect of this is that everyone involved in contracting must have improved understanding of the economic outcomes of decisions. Many contract issues are resolved by functional owners who have little understanding of the potential market impacts. Many decisions have interdependencies with other terms and conditions; contracting must become more holistic and disciplined so that it can offer increased value and innovation.

Negotiation

Last year, IACCM undertook a study of the companies most admired for their post-award contract management. It resulted in a detailed report that set out the steps needed to achieve this recognition. Over recent months, they have repeated the exercise to establish which companies are most admired for their negotiation capabilities. Today those results are published. They will doubtless cause heated debate.

IACCM points out that their purpose in undertaking the study was not so much about applauding winners, but rather to encourage debate about the characteristics that represent excellence – and to aid discovery of the steps needed to improve.

Most companies believe that negotiation is an important competency. Yet few are clear about the steps needed to create organizational capability, rather than individual experts.

While personal expertise is important, longer term results are driven by a robust negotation process. The results of the survey emphasize the importance of planning and teamwork. Good negotiators are not simply wheeler-dealers; they must have underlying knowledge of capabilities and boundaries. Creativity and imagination are valuable qualities - but only if those on the other side are confident that promises will be fulfilled.

Other recent research (the IACCM study of the state of the global economy) has shown  diminishing confidence in the ethical behavior of negotiators, both buy-side and sell-side. Trading relationships ultimately rely on trust – and the companies at the top of our chart are generally trusted. They may not be especially liked – indeed, some of them are viewed as inflexible and at times unresponsive. But people believe they will do what they say and at a time of tough economic conditions, that is an important characteristic.

In general, sell-side negotiation appears to be better developed than buy-side. 64 of the top 100 companies were nominated for their sell-side capabilities. In part this is because executives invest more in winning business than in placing business. They understand the need to be more flexible when they are selling. Big companies in particular often believe that when they are buyers, they can impose their standard terms; they frequently do not empower procurement teams to negotiate on substantive issues and do not recruit people with the necessary skills to be good negotiators. This is often a mistake, because it prevents the realization of value and frequently results in poor relationships.

You can read the report at http://www.iaccm.com/loggedin/library/nonphp/Top Companies in Negotiation 2009.pdf – and once you are finished, please share your thoughts and comments.

Global Economy Report – The View Of Contract Negotiators

According to a study by IACCM, top negotiators and contract experts confirm that the world economy has stabilized – and more than half believe that conditions for their business will improve in the next 3 – 6 months.

A unique global survey of members of the International Association For Contract & Commercial Management (IACCM) confirms that overall trading conditions have moved to a balanced position, with 32% reporting a continued decline in business over the last 60 days against 29% indicating an upturn.

  The focus of business negotiations is also changing and while 50% remain under strong pressure to renegotiate prices on existing agreements, an equal number are now actively negotiating new opportunities.

 However, the results suggest that much of this growth in new opportunities may come from switching sources of supply. Researching alternative suppliers is currently a major activity for 44% of buyers – but only 19% of their customers appear to be aware of this.

Regional and industry variations indicate a patchy recovery. Optimism is strongest in Asia-Pacific, where 64% of respondents expect growth in the next 3 – 6 months, against 52% in the Americas and just 45% in Europe / Middle East and Africa. Different industries also show stark contrasts, with less than a quarter of those in Services and Oil and Gas reporting a continued decline in business over the last 60 days (and a third saying conditions have already improved), versus nearly 40% in Technology and Software indicating decline and just 27% recording some improvement.

For those who ask whether the business world has improved its ethical values as a result of the financial meltdown, the answer appears to be negative. 34% feel that current economic conditions have been accompanied by a decline in the ethical standards of business practices and negotiations, versus just 4% who feel they have improved. Supply-side negotiators in particular feel that ethical standards have fallen – 44% report negative experiences, against just 33% of buyers. The issues cited most frequently are unilateral extensions of payment terms; unreasonable pressure to cut prices on existing agreements; and a tendency by sales people to promise whatever it takes to win business.

 The IACCM study was undertaken in the period 16^th – 24^th September and invited responses from 13,000 business negotiators and contract management specialists located in more than 100 countries and from more than 2,000 international companies. The full report can be viewed at www.iaccm.com

 

The Global Economy

IACCM today issued the results of its first survey on the state of the global economy.

With so many experts and pundits weighing in on whether the recession has reached the bottom, whether recovery has yet started, the IACCM team decided it was time to ask the experts. With the dramatic growth in IACCM membership – now past the 13,000 mark – together with its global and cross-industry presence, it is a unique community. And here, we felt, was a golden opportunity to get it noticed!

IACCM members are at the heart of negotiating and managing contract relationships. They have a direct finger on the pulse when it comes to the level and nature of business activity. And intriguingly, unlike other surveys, they offer views from both sides of the negotiating table – buyers and sellers.

The membership showed a high level of interest, with strong participation in this inaugural survey (next time we are sure it will be more). It offered a robust insight to variations between geography and industry. We know that many members will communicate the results to top management, raising the understanding that internal contracts and negotiation groups possess some areas of key knowledge.

More generally, this study is part of a concerted effort by IACCM to raise the profile and visibility of contracts and negotiations experts. With growing focus on contracting by major governments, as well as by many corporate executives, the community has a unique opportunity to be noticed and to gain increased investment in its professional development.

(For those who missed it, the survey confirmed that most feel the economy has stablised and a majority expect growth over the next 3 – 6 months. However, Europe is significantly less optimistic than other regions and the picture varies substantially between different industries.)

Coping With Uncertainty

Yesterday I moderated a discussion among a senior group of contract and commercial experts from IACCM’s Alliances & Teaming community of interest.  Our core topic was to discuss what might be learnt from alliance forms of contract and whether such approaches should be used more generally in contracting today.

Overall, the group recognized the tendency in most corporations for specialist groups to form silos and how these become an obstacle to shared knowledge and experience. “Visibility and transparency in contracts is not good,” commented one participant.

This failure to share and discuss contracting options and lessons learned is a source of weakness and has negative consequences. Among these, participants identified the inability of most contracts or commercial groups to demonstrate value or describe the merits of different contract types. “” We are trying to overcome this by mapping contracts to the financial budget,” explained one Commercial Director, who went on to describe how this meant a need for much more transparency and the ability to evaluate relative performance of different contract types.

However, the issue that most felt should be the biggest driver for sharing of experience is the challenge of managing uncertainty. “It’s the propensity of the business climate to change. It is increasingly rapid and unpredictable; we have to have the ability and flexibility in our contracts and organizations to change targets and goals. We must learn from what works and what doesn’t work.”

The group felt that factors like these are driving new thinking about the priorities within contracting and negotiation; they agreed with the findings of the 2009 IACCM study of ‘most frequently negotiated terms’ and the shift this anticuipates towards ‘governance’ terms, rather than the traditional risk areas. As one participant put it: “Negotiation focus has been on eliminating uncertainty in litigation; today it must shift to ensuring a shared understanding of what the parties want.”

This shift in focus was felt to favor the types of provisions and principles that underlie alliance agreements – although it is unclear whether there are good models to follow. “Often the term alliance seems to be used to describe rather vague arrangements, covered by long and wordy contracts that lack any real substance,” observed one lawyer. A Procurement Director explained that in his company a start has been made by categorizing suppliers into Strategic, Core, Managed and Transactional relationship ‘buckets’. These are reflected by variations in contract type and negotiation approach – although he admitted there was probably some way to go in refining these models.

The issue of ensuring mutual understanding is perhaps key. Many ‘collaborative’ agreements today still fail to reflect the perspectives of both sides. Frequently, the contract model and the negotiation are driven by one side’s view of value and the relationship, paying little attention to how they are in fact perceived by the other side. “The key (to improved relationships) is that they must be founded on aligned strategies,” observed a senior manager from a major technology company. “We need to spend time on creating framework agreements that then enable transactions and we need to build relationships that understand alignments and misalignments between the organizations.”

The challenge of achieving collaboration was highlighted when Jason Anderman, of WhichDraft.com, observed the failure in many organizations to build internal trust. “Is there benefit in cooperating?” he asked. In a comparison to Game Theory, Jason commented that many internal groups understand that in theory they (and the business) would benefit from cooperation, but each is entrenched in its negative views of the ways that the other behaves. In order to make a break-through in external partnering, internal barriers have to be addressed. Incentives and disincentives must be changed.

The discussion concluded with overall agreement that collaborative structures such as those used in alliances would benefit business outcomes and in particular assist in managing the uncertainties that are intrinsic to today’s more complex and more volatile trading environment. However, if we are to move from occasional successes to a more embedded approach to collaboration, changes will be needed in several areas:

• Measurements and incentives must be aligned internally and externally to encourage  collaborative, outcome-based relationships
• Internal responsibilities must be clearer and there must be a planned development of the competencies needed for collaborative contracting
• People with the required skills must be developed and placed in positions to enable collaborative agreements
• Model agreements, ‘best practice’ terms should be developed and promoted

Work on these items will continue. As a first step, IACCM will approach members of the Alliances / Teaming Community of Interest to seek examples of contracts or of specific terms and conditions that represent good practice and encourage positive and collaborative relationships.

Building Trust In A Networked World

Organizational performance increasingly depends on the ability to coordinate scattered resources and relationships, and to motivate their contribution towards common goals. As highlighted in my previous article, the forces of technology and globalization have combined to destroy many traditional trading relationships and the hard-won trust that accompanied them. This article will explore the factors that are important in establishing and retaining trust and discuss the contribution made by contracts, contract management and negotiation. It will also examine some of the ways that contracts experts – from procurement, legal or commercial groups – may need to adjust their approach and behavior.

Executives are realizing that driving lowest price acquisitions through global competition is not the competitive panacaea that they imagined. It has revealed a new set of risks and associated management costs that they are struggling to contain. In addition, they have discovered that innovation and value-add have a strong correlation with collaborative relationships – and collaboration simply does not happen when there is no underlying trust between the parties (see Collaborating To Innovate).

Simply returning to old supply relationships and trading patterns is no longer an option, even if it were desirable. Companies must instead discover how to develop partnering and collaboration in the networked world. It is clear that their approaches to supplier selection, bid management, contract standards, negotiation and post-award relationship management are each key to achieving improvements.

Fortunately we do not have to find all the answers for ourselves. A growing number of business functions have grasped the need for change, often because of the failure in establishing effective internal virtual teams, especially when these are multi-cultural. Therefore we are able to turn to a range of research that is directly relevant to the challenge for procurement, legal and contract management groups.

One excellent article was produced by Violina Ratcheva, a lecturer at the University of Sheffield Management School. In a study of multidisciplinary project teams, she sought to understand how team inclusiveness was established and the role of trust in enabling positive outcomes. She concluded that ‘the extra ingredient which turns a group of professionals from different disciplines into an effective team’ is the result of the team establishing ‘ a new way of working’ which can only emerge through intense interactions.

The article contains some key messages for those in procurement, legal and contracts. For example, on the question of inclusiveness, Ratcheva found that trusted and valued team members are those who are prepared to allow their knowledge to be integrated with that of others in the group. This means not just demonstrating and imparting knowledge, but ensuring understanding by others . She also found that knowledge and advice must go beyond simple occupational expertise; it must also be sensitive to the context of the project.  Therefore, highly knowledgeable experts who simply state opinions or quote rules will not be viewed as core team members.

Another important finding relates to the perceived value of each individual’s occupational or professional credentials. Inclusion is made more likely if other team members can see that a particular occupational field brings consistency and conformity to the project (for example, is it based on proven methodologies and a broadly accepted set of practices?). They also look for individuals who have access to external bodies of knowledge and extended professional networks – they value facts much more than opinions. Ratcheva summarizes this with the expression “Impersonal trust is based on the appearance of everything (being) in proper order”. And to establish this trust in a multi-cultural team, there must be openly shared discussion and understanding of the expectations generated by each local organizational environment, industry practices and addressing role-based stereotypes.

Sir George Sayers Bain, a past President of London Business School, highlighted the problem that comes from traditional functional education and organization. He describes how many managers see things in the context of accounting problems, legal problems, marketing problems etc. Yet in reality, most things are business problems that require the involvement of several functional areas and the management of the interfaces between them. This, he believes, demands far more focus on path-breaking and implementation and far less on functional rules or positions. Valued skills become those such as negotiation (win-win, not confrontational) and team building. Once again, many from Procurement, Legal and Contracts groups tend to be seen as strongly positional and often adversarial in their style – so once more, not conducive to team inclusion.

Time and again, when I talk with other functional groups about the role of the contracts or procurement or legal function, they say ‘Oh no, they are  too negative’. If indeed we generate so little trust within our own organization, no wonder that our working practices often undermine trust in our trading partners. So how do we address this?

An excellent paper written by Michael Pirson and Deepak Malhotra of Harvard Business School identifies key ingredients – and reaches conclusions that may surprise many. In ‘Unconventional Insights For Managing Stakeholder Trust’, they observe “Customers who perceive a breach of trust are more likely to switch to a competitor. When trust is lacking in supplier relationships, more resources need to be devoted to contract enforcement and monitoring, the result of which is increased transaction costs.” So having highlighted the importance of trust, they are encouraged to find that executives generally understand the need to manage stakeholder trust -but their research then shows that “many of the trust-building initiatives and approaches that organizations invest in may be of questionable value. Others may actually destroy trust”.

In summarizing below the major ingredients for trusting relationships, I have also attempted to suggest ways these may apply to contracts and negotiation practices. However, these are simply illustrations and high-performing groups should consider these attributes as they undertake their service planning and contract design.

Transparency is increasingly seen as important to trust. Yet Pirson and Malhotra found that this was not true. In fact, enforced transparency has in many cases undermined trust. They offer excellent examples that should certainly cause regulators to pause; yet we must also think about the impact of enforced disclosure within contracts.  Do rights of audit or Most Favored Customer clauses lead to open and honest communications, or tend to suppress them? Can we rely on imposed metrics or obligations to reveal significant changes in business circumstances? Negotiators must think carefully about mechanisms that support honest disclosure and open discussion of critical risks, problems or changes during the life of a relationship.

Integrity is important to everyone, but the authors discovered that it is a reputational entry card. If you do not demonstrate integrity, you will not get in the door, but over time, trust and loyalty depend on visible care for the results of what you are doing. Operating to the contract or to the letter of the law will not win hearts and minds. “Being right and maintaining your integrity is not always enough …. you need to demonstrate concern for the wellbeing of (the affected parties)”. So while our contracts must be sensitive to issues of integrity, it is in fact through the quality and sensitivity of negotiation practices and our post-award contract management that we will win over time. An obvious example during negotiation is when Sales make one set of promises and the contract attempts to place limits or may even contradict the commitments on offer.

Competence is another critical attribute. For external stakeholders, the key issue is apparently less to do with managerial competence and more based on technical capabilities – the ability to produce goods and services of high quality and to deal effectively with the supply chain. But companies that lack either of these attributes will eventually fail. The article offers some great examples that ultimately undermined customer service and commitment. For many contracts professionals, it is clear that we often struggle to build positive internal perceptions of our competence, in part because we appear too narrow or too judgmental and not sufficiently concerned about eventual outcomes.

Trade-offs represent an area in which our community should excel. The article points to the importance of balancing stakeholder needs and perspectives. As an example, it recites the story of Mattel and its 2007 product recalls. Pointing fingers and allocating blame to others misfired disastrously. For those in the world of  contracts, this need to understand and reconcile stakeholder perspectives to ensure alignment is perhaps the greatest value we can bring to our role. It is certainly an area that IACCM emphasizes strongly within its Managed Learnign program and our research of the top performers in negotiation indicates that many of the leaders are very good at analyzing stakeholder perspectives and ensuring they have been addressed, not only during negotiation but also in the post-award phase. This quality becomes highly visible through metrics such as the frequency and resolution of claims and disputes.

Value congruence   is the final area – by which the authors mean the perception that values are common and shared. I believe this is an area which most negotiators fail to address. It has become more complicated – and more important – as we venture increasingly into global markets and cross-cultural relationships. Typical bid and negotiation processes often seek to build alignments that do not really exist and frequently fail to identify or explore misalignments. We do this to our cost, because many such relationships prove to be unprofitable and may fail. This is simply because our true values and approaches to business, as well as our real expectations, will become evident once the deal is struck. I believe that sophisticated (and profitable) companies will increasingly ensure that there is  ’cultural fit’ with their trading partners. How that is done – and the ways it will change the role of conracts professionals – will be the subject of a future blog.

This article has only been able to highlight a small number of the valuable research contributions that are relevant to our community and its continued evolution. I will continue with this periodic series in future blogs. Readers may also be interested to refer to the expert perspectives of  IACCM member D C Toedt, who has recently written on this issue of trust and offers an immediate tool for improved management of disputes.  

When Is Pricing Predatory?

Major corporations have to pay attention to policies on unfair competition and antitrust. Intel knows all about this, having received a fine of more than $1.4 billion in May this year as a result of an investigation by the European Union (Intel is planning an appeal).

Readers of Chris Anderson’s new book ‘ Free: The Future Of A Radical Price’ will be wise to think about the potential for innovative pricing to fall foul of competition authorities.

The theory behind regulation is that powerful players can use unfair pricing to drive out competition – and then exploit their dominance. But the problem is that the criteria for deciding what is fair are not consistent, and the effects of specific pricing actions are often hard to estimate. In addition, such schemes are often encouraged by the procurement specialists, as part of their effort to negotiate lower prices.

In the case of Intel, the accustation was that rebate schemes operated unfairly against rival chip manufacturer AMD. The rebates certainly appeared anti-competitive because they applied only if customers gave Intel 80 – 100% of their business.  And the EU has always been relatively hostile to rebate schemes or discounting mechanisms that created some sort of  ‘loyalty bonus’.  

At the heart of predatory pricing is the determination of whether the cost of production exceeds the price charged. But this introduces another area that is complex to determine. That is when providers of goods and services ’bundle’  - the aggregation of goods and / or services into a single price package.  When buying a bundle, the overall price is typically less than the component parts, so this may work against niche competitors, unable to offer similar bundles. The difficulties with this analysis arise when determining what elements of the package truly are distinct; and it is also hard to say which particular element of the package has been unfairly priced.

According to a recent article in The Economist, US anti-trust experts proposed a method that would apply the entire discount to a low-margin element  and then see whether that element failed the price / cost test. But this ignores the fact that the costs for a bundle may well be lower than the costs for their component parts (e.g. distribution, marketing etc may become cheaper).

The difficulty for competiton law is that an overly-protective regime may frustrate innovation, or undermine the benefits of increased efficiency, by preventing large companies from cutting or restructuring prices. And this, of course, would be contrary to their role of protecting consumer interests.

On one level, the fact that competition authorities appear to be acting with increased judgment (rather than applying rigid rules) is to be welcomed. But for companies wanting to establish sources of competitive difference, the unpredictability of such a system can represent significant risk.