Relational Contracting in an Uncertain Ecosystem - Supply Chain ...

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will continue to impact workflow, decision-making, payment systems, contract execution and, of course, talent profiles.
Issue #4 | May 2018

The following is an excerpt from a newsletter that Global SRN produces for its Banking, Financial Services and Insurance Industry members.

Relational Contracting in an Uncertain Ecosystem — Trends, Insights, Takeaways “Relational Contracting in an Uncertain Ecosystem” was the theme of an April 19 meeting hosted by the Supply Chain Resource Cooperative, part of the Poole College of Management at North Carolina State University. Attendees included executives from companies such as MetLife, Accenture, Bayer, American Red Cross, Lenovo, and Caterpillar, as well as Joseph Martinez, Chief Procurement Officer of MUFG and our June Roundtable and presenter; and SRN’s Ted Botzum (who also served as a panelist) and Kirsten Gallagher. Here are select takeaways from some of the presentations:

Rob Handfield, Executive Director of SCRC, Bank of America University Distinguished Professor of Supply Chain Management While Westerners seem to believe it’s crucial for them to have direct, personal control, Asians seem to believe outcomes will be better for them if they are simply in the same boat with others.

At its heart is the need for lawyers to abandon classical legal theory and eliminate the battle of the forms. This means an acceptance that the key purpose of contracts should be to safeguard the likelihood of success, rather than focus on the consequences of failure.

In today’s rapidly changing ecosystem, the challenge is to clearly, and collaboratively, define stakeholder needs, milestones, and KCI’s. • Asians’ and Westerners’ divergent interests and cultural considerations require alignment for a contract to be mutually beneficial. By 2050, Asia will be the world’s most populous region, with India and China boasting the largest economies. • Technological changes – social media, cloud platforms, blockchain, distributed computing — ­ will continue to impact workflow, decision-making, payment systems, contract execution and, of course, talent profiles. • Timely supplier involvement ensures stronger outcomes. A recent study of 12 U.S. Air Force projects found that when suppliers were involved early in defining specs and system design, projects were completed on time, at a higher quality, and at a lower cost. Rethink the drafting process and contract content and minimize the number of RFPs. • A recent study by the International Association for Contract & Commercial Management (IACCM) found that 60 percent of procurement teams used the wrong template; staff believed that using the most extensive and complex version would reduce risk. Another project found that an organization used templates based on business requirements from 10 years ago, so over 50 percent of the contracts were deficient in the terms applied. • On the other hand, there are specific areas where standardization can create efficiencies, for example audit language for suppliers and risk assessment standards.

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• Contract renewals can be simplified to minimize stress and resource deployment for both suppliers and buyers. Many firms that put out bids to test the market, even when the relationship and the KPIs are solid, end up awarding the contract to the same supplier. Instead, firms could renegotiate with existing suppliers in line with both business objectives and market dynamics. Suppliers, in turn, could share margins, take out cost, and help the buyer with price. So before conducting an RFP, ask the following: • Have alternatives been explored with the current provider? • Who develops the scope of work? Are all stakeholders involved? • How is data integrity and completeness ensured in the SOW? • What are the conditions for not engaging in an RFP? Total cost of ownership — thinking beyond price to deliver total value — can bring sales and procurement together.

We have complexity, but every customer and supplier behaves differently, and different norms exist on the way we want to work. I have a specific way for invoicing, for payment, for delivery that is unique and different. This creates massive a complexity and risk in the system, because we refuse to standardize aspects of our relationship that have no economic value for being different.”

• Sales teams often feel procurement views them as commodities, while procurement feels bypassed when sales directly approaches the business. • Total cost of ownership — thinking beyond price to deliver total value — can bring sales and procurement together. Clearly define success, ideally through an evaluation scorecard based on performance metrics such as project completion time, asset utilization (this is where the real money is, and it is often not measured well), working capital, and cash flow. Preventing disruptions, problems, and performance lapses requires continuous contract management and monitoring based on clear metrics. And continuous communication is key. • Manage risks over the entire project, don’t wait until the end. • Communicate and manage issues as they arise, and delay decisions until all the requisite information has been gathered. • While the business should manage the contract, involve procurement staff early and consult them during the execution. • Address any disconnects between legal and procurement. Relational contracting can increase shareholder returns. • Someone can always drive down price, but continuous cost reduction over time is harder. Less adversarial relationships lead to lower costs, and performance can be sustained through well-crafted long-term agreements. • A recent analysis conducted by Dr. Handfield found that companies with more mature contracting skills were able to drive down costs at a rate that was more sustainable that companies using traditional “leveraging” techniques.

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IACCM research has shown that contracting and relationship types are becoming more sophisticated, shifting toward performance- and outcome-based, relational or collaborative, and agile models. IACCM has also seen more procurement functions stepping away from SLAs and SOWs, and that trend has been increasing as voume has increased. Between 1994 and 2015, the volume of services as a percentage of services and the value of business transactions rose by 300% — from 19% of spend to 56% of spend. Today, it is over 60%.

In today’s business environment of globalization and services, contracts based on classical legal theory undermine economic value. We need to focus on collaboration-based contract relationships. These will generate lower cost, increased mutual value, and the ability to manage supply ecosystems.

Tim Cummins, President, International Association for Contract & Commercial Management (IACCM) The next big thing: Transitioning from ERP — streamlining internal processes — to Relationship Resource Planning (RRP) focused on external processes that drive efficiency and virtual enterprises. Procurement can champion RRP by redesigning the way the business relates to the market. As part of that shift, contracts can become the scaffolding for-high performing relationships, i.e. a core business activity. IACCM’s view of the future: • Ongoing development of networked technologies will drive continued enterprise disaggregation and the importance of contracting. • Digital solutions will steadily address the challenge of managing across organizational boundaries and force standardization. • Roles need to shift from transactional oversight to new forms of global outsight and business enablement — where the real value is — in relation to: – Quality and cost of commercial operations; – On-demand knowledge; – Proactive problem resolution; – Design for users; – Standards and norms, not templates; and – Market intelligence and differentiation. The 9 principles of relational contracting are the difference between success and failure: 1. Communication 2. Risk awareness and allocation 3. Problem solving 4. No-blame culture 5. Joint working 6. Gain and pain sharing 7. Mutual objectives 8. Performance measurement 9. Continuous improvement And trust — it develops form the successful application of the 9 principles. A panel of industry practitioners offered their views on how market trends and technologies are impacting contract management and relational contracting. The panel included: • Lynn Digirolamo – AVP of Procurement Contracts, MetLife • Fred Vitale, Principal Director, Accenture • Ted Botzum, Executive-in-Residence, Global SRN • Bill Knittle, CSCO, Cheniere • Raj Goyle, CEO, Bodhala • Tim Cummins, President, IACCM Read the excerpts here.

The Global Sourcing Research Network (Global SRN), an independent non-profit* entity, is an exclusive, member-driven global network of financial services industry executives and scholars. We conduct industry research informed by our members and actively promote the exchange of market intelligence and expert insights. Our goal: to illuminate trends in the sourcing of business services and to drive best practices across the industry. Global SRN was originally founded by Duke University in 2004 under The Center for International Business Education and Research (CIBER).