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Contracts, courage and change: Procurement as a leader

Apr 15, 2011 9:39:00 AM

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Tim Cummins (TC), President, International Association for Contract and Commercial Management (IACCM) in a recent interview, discusses procurement’s role in proactively leading the charge towards the boardroom… and not waiting for a golden invitation.

CG: Now Tim, you are the president of the International Association for Contract and Commercial Management (IACCM); tell me more about your role and the IACCM?

TC: Well IACCM is a not for profit association and we’re looking at the challenges facing both buy-side and sell-side.  Our mission in life is to help organisations achieve better outcomes from their trading relationships, and we see the role of collaboration both internally and externally as a particularly important feature.

There’s so much change and complexity around us today. Our global members tell us about the complexities they face and how this means they need to have much more agility, much more flexibility in their relationships with suppliers and customers to manage in times of rapid change and uncertainly, such as those we currently face.

CG: And I guess the announcement of the lower than expected UK GDP over Q1 is an example of the uncertainty you are referring to?

TC: I think that there are just so many factors today, whether it’s the speed of technology change, the volatility of economic conditions, the uncertainties of political conditions. For example, if we look at the Middle East for a moment and the challenges that are being created around oil prices; or if you  look at the degree to which commodity prices are gyrating, there are just so many factors that create high levels of unpredictability.  Of course with that unpredictability comes much heightened levels of risk.

CG: I want to quickly discuss an article I read this morning (which you are quoted in) called: “Contracts: The 'pain point' for Finance Directors”. The top line quote in the article is “Gartner estimates that 60-80% of all business transactions are governed by contracts in one form or another, while according to PWC, large corporates typically have 20,000-40,000 contracts at any one time”.  How can a CFO or FD possibly remain in control and completely understand what makes up their cost base?

TC: Well, as you know from our past conversations, I think the interesting factor is that contracts are not used for the purposes that they should be used for.  Many businesses tend to perceive the contract as primarily a legal document, rather than an economic vehicle, and unfortunately that means that very often, it is not used effectively and is implemented as a standard form. It also represents a missed opportunity for many Procurement and Finance organisations.

A consequence of a proper risk analysis being undertaken is that we might devise appropriate terms and conditions to deal with today’s market situation. We’ve seen relatively little change in the framework or the model terms and conditions used in contracts for quite a number of years, yet of course the economic conditions in which they’re being used are dramatically different.  For example, many of them involve global sources of supply. Increasingly, even if the direct relationship with the supplier isn’t overseas, price pressures have forced that supplier to source overseas.  We’ve never really stepped back and said “Well, hold on a minute, are we using the right vehicles or instruments to form, communicate and build that relationship? And then what about the performance management characteristics, the type of KPIs, the type of SLAs we use?”  Many of these things are still being driven by very rigid and outdated views of the global economy – and that results in lost opportunities and missed economic benefits.

CG: Sounds like there needs to be some sort of change catalyst. But who’s responsible and who’s accountable for making the change?

TC: That’s exactly the dilemma, you’re absolutely right. This is in where unfortunately the traditional procurement measurements (PPV) typically fail. It takes a great deal of courage on the CFOs part (and other senior executives in the company) to make a fundamental change. Such a change needs to be made in a way that will impact performance measurement of the procurement function itself and the partnering between finance and procurement.  It’s a fundamentally different model, and its one that has to be based upon the economic success of a longer term outcome. 

Far too often today we’re still in a world where we’ve got these conceptual savings that are being claimed at the point of contract signature. We know from other research that many of the CFO community are extremely sceptical about whether or not those savings translate to the bottom line.  As I said, it takes a leap of courage to say this doesn’t really make sense any more.  Our old model is that we’ve got this arrangement whereby procurement will use the duration of contract and a committed volume or revenue or spend, as a source of driving the supplier to committing a level of supply at a particular price or a particular level of discount - but how can that work when we’ve got the volatility of today’s business and market and conditions? It really doesn’t make sense from a risk point of view.  For me to be committing to three year terms with specified volumes, I don’t know what I’m going to need over that three year period.  Everything today, even at commodity level is so dramatically more flexible, and of course suppliers are increasingly unable to make those types of commitments either when we’ve see the breakdown of many of the long-established commodity price-setting arrangements.

CG: This alignment between finance and procurement, they’re obviously both there to achieve the business objectives and they’re both very much involved in the companies bottom line in terms of cash, cash flow, sourcing.  Yet, there seems to be a commonly accepted mindset that finance and procurement don’t communicate enough within the same walls of many organisations. Do you think procurement is doing a good enough job at communicating the right information to the CFO?

TC: I think in some companies yes, probably not in the majority.  I think there has been this challenge that finance often has a somewhat unsympathetic view of the procurement function, and unfortunately the image of procurement in many companies is one of a rather administrative function. I think historically the finance community viewed procurement as useful watch dogs, if you like, ensuring that the business units didn’t lose control of their spend and to use procurement to terrorise the supply base and drive out some levels of input price.

As businesses are maturing, there are a couple of things that should be happening, but often are not. I don’t think that the head of procurement is really going forward and trying to transform the understanding (from a finance perspective) about the need for change and the nature of that change. I think there are areas, for example, to educate the finance community about supply chain risk, getting your CFO to understand that there is a cost associated with low prices, and that cost is often in terms of the trust, reliability, the flexibility and quality of the supply base.  So what is procurement doing to really put forward the economic argument for change? 

For my second point, I think with all of the things that are on their plate, too many CFO’s are not really demanding more of their procurement organisation, so perhaps there is a little bit of culpability on both sides here.  As I say, some are changing very effectively, at the moment it’s not in my opinion the majority that are doing so.

CG: Is it the responsibility of the CFO to come down and understand his procurement or what the procurement department are doing, or is it up to the CPO to go up to the CFO and say this is what were doing and this is how were impacting the business, I mean obviously it takes two, but who ultimately should kick that off?

TC: I think at the moment there is too often a disconnect.  For example, we see things like supply chain risk has become a board-level issue, so clearly there are some doors that could be pushed open there.  It takes a level of courage for the CPO to step forward and to seek to take on that bigger remit.  I think for many CPOs it’s a concern about whether they have the right tools and systems; do they have the right skill sets within their organisation to actually take on the challenge that sits in front of them today?  I do understand that hesitation, but on the other hand we never really get anywhere much if we don’t have courage. 

For many years the procurement community has been talking about how it’s about to make that big leap, how it’s about to get to the top table.  Well, that demands some shifts in behaviour.  Obviously, it’s very easy for me, sitting on the outside, to criticise organisations, and the reality is that internal politics and internal organisational dynamics can make that challenge very difficult.  People are generally overwhelmed by the amount of work they face today, in large part because of all the complexities and speed of change that we’ve already highlighted in this conversation.

So this isn’t a question of people being lazy, it’s not a question that they haven’t got a lot already to do, but it’s really a critical change management issue right now.  I was just talking with the leader of change at a fortune 50 global company.  He was commenting about the challenge of driving internal change, and the inertia of many organisations, particularly when so much is going on around them, people feel that any change somehow becomes risky.  There are many forces internally that of course resist that change.  So this isn’t a simple issue, but on the other hand, we see examples of companies which are really showing great courage in making that change.  We also need to recognise that we’ve got newly emerging competition from China and India and other places where they don’t have the same baggage as we do and they will be coming, and are coming, at these questions and problems in a very different way. 

I think it’s very, very important that we begin to have the sorts of dialogues that you’re encouraging here with this interview, and that organisations really do begin to combine across functions more effectively to look at fundamental questions like the management of supply chain risk, for instance, as an excellent way to perhaps understand that there is a need for much more fundamental shift. 

We’ve got procurement groups that are very constrained today - for example, by the investment that has been made in their IT systems.  I mean, spend management tools – wonderful, but of course tend to be very focused on the input price issue.  We don’t see many procurement organisations that really have visibility of the outcome of the relationships they create. Without the right tools and systems, it’s very difficult to make the business case.  We know that many people are interested in things like supplier relationship management, but once again a recent survey we ran told us that well over 60% of companies have struggled to make any headway with an SRM programme because they haven’t got the data to build any sort of return on investment case. 

CG: I’m going to take a step back for one minute before we go on further about the tools that procurement use; the inputs they are seeking; the outputs that are realised etc, and ask - what does procurement really mean?

TC: Probably I would look at it from the point of view of trying to describe both a tactical operational role and of course a more strategic role.  So I think at a more strategic level it is, in the end, an economic case.  It’s about make and buy.  It’s about a more holistic understanding of the different segments of the business, and the types of relationships that need to be engaged in and enabled for the business to have an effective supply portfolio.  It’s about making sure that we understand that those different relationship requirements demand very different approaches to the management and allocation of risk and the oversight of performance, and making sure that the business has infrastructure which: can make good selection; can engage and ensure that the negotiation is undertaken effectively, and that it maintains good oversight of performance and change management. Those are critical features today to any business operation. 

At the operational level it’s about impacting or executing on those strategies.  At the moment it seems to me that there is an overwhelming amount of procurement activity and resource in that operational aspect, and too little operating at the strategic, capability-creation level.  I think one of the reasons this is a problem is because many organisations have tried to hang on to the operational tasks which become quite overwhelming, and distract executive management’s time.  To my mind, certainly the leading organisations are very actively looking, not just to the tools and systems that they can use to automate a lot of this, but also proactively trying to empower the business units to be far more responsible for undertaking a lot of that transactional activity and are very open to outsourcing key aspects of this too.  It could be an offshore operation, but I think there are a lot of benefits in broader outsourcing and utilisation of external skills and resources with all sorts of consequent benefit.  Not least of them being really freeing up a lot more time to focus on these key strategic change issues.

CG: You broke that down strategically and tactically which if I asked any CPO they would do exactly the same.  If I asked a CFO that exact question what do you think he or she would say?

TC: Unfortunately I just wonder how many CFOs think about this very much at all, I think they obviously understand the input issue associated with their spend and they would like to translate savings into true bottom line performance and they’re frustrated that it isn’t translated.  I mean obviously the CFO has a pretty big portfolio of things they have to focus on.  While they certainly look to drive cost out of the input level, they’re also looking at other complex issues like their pricing out into the market and how they manage the broader costs of the operation etc.  So we have to understand that procurement is just one component and they do rely upon the quality of advice and leadership form the procurement leaders to understand how this could be better.  We see some CFOs are doing a really good job of teaming with their procurement head or with their supply chain head and are doing some excellent stuff in terms of being the sponsor of change within the organisation.  I’m not sure, however, that we see too many that are necessarily really driving the changes right now, perhaps as I say, because there is too much going on, and it just isn’t a practical focus to expect of them.

CG: It comes down to the CFOs agenda then doesn’t it - the CFO has so many other things to worry about. With procurement in the public sector being splashed all over the front pages of the UK press,  do you think it has started to creep up the agenda of CFOs in private companies too - what are the top 5 priorities of today;s CFO and how does procurement fit in with that?

TC: I think the public/private debate is a very interesting one, certainly one we’re very extensively engaged in.  I think we have to recall that firstly, when you look at the public sector, for a variety of reasons the quality, or lack thereof, of public sector procurement has become a real headline item.  At times of major cost cutting, where are the reductions going to come?  Public sector is not producing specific goods, it’s a services output, and of course much of that services output has very heavy reliance upon the quality of acquisitions and supplier management. Unfortunately, public sector groups in most part of the world, certainly somewhere like the UK, have received plenty of bad press for the lack of quality of procurement activity and skills.

We also know that there are tremendous opportunities in the public sector to do the consolidations that have tended to happen already within many private sector organisations,  either through their use of buying associations, or through their consolidation of spend across subsidiaries or business units.  If you take the equivalent in the public sector, it just hasn’t happened.  I think if you look at the quality of the training that’s been provided into the public sector, it’s woefully inadequate.  The levels of professionalism within procurement have just not received the focus, attention, and investment that is needed.  Public sector is also bedevilled by the challenge of public sector procurement rules, which also set it aside from the private sector in terms of just how you can engage with your supplier community.  So again there is a real agenda variation there that makes it very difficult to build the types of cooperation with key suppliers that are necessary.  One of the things we have observed, which has been a struggle for procurement in all fields, is the steady switch away from product acquisition into services and solutions acquisition. Many of the things that used to be acquired as products are today acquired as services, and as you move towards a world of service and solutions the input price becomes far less relevant than the output or outcome of that particular arrangement – and that is something you’ll only know over a sustained period of time. 

So I think we’ve got this very real challenge to procurement as success becomes judged over the longer rather than the shorter term. Ironically, the more they push to reduce prices, the more suppliers will seek to escape the trap of commoditisation and the more we will see transition to services and solutions. At the same time procurement is also facing this real challenge of market place volatility.  As I mentioned at the beginning, a lot of the old tools and mechanisms that we used with suppliers, such as commitment to long term, or commitment to particular volumes, or revenues, is becoming less and less appropriate.  Once you’ve lost those vehicles, you really have to enter into very different forms of relationship.  Failure to recognise this dilemma is causing greater confrontation - for example, on the one side procurement is still trying to drive suppliers to giving committed low prices in return for a volume and period commitment, but then also wanting to insert thing like the a termination for convenience clause which obviously then completely undermines the commitment. These sorts of things have a very dramatic effect on the way those relationships get formed and we’ve seen, and you may have seen in the UK press, there’s this feeling that the levels of adversarialism between buyer and supplier is increasing and that is very negative and definitely damages the levels of trust, but also the levels of co-operation. So these are among the key agenda items that these organisations have got to start addressing.

CG: You mention Adversarialism between buyer and supplier – which leads me onto SRM. Many businesses are now focusing on quick cash wins going into 2011, how will this short term mentality impact SRM strategies?

TC: Again, I have a bit of a problem with SRM. What we’re seeing is the same thing we saw with outsourcing or with alliances, or any sort of fad or trend where it’s often high-jacked by a particular group within an organisation that sees this as great opportunity for their own glory.  So far too often we’re seeing this as an area which is being tackled with  “Lets grab the top 20 or 30 suppliers and let’s treat them differently from anybody else”.  To my mind, that is ultimately a crazy way to go, its just building again incremental overhead into the business for a very debatable value.  Do we need to build specialist groups?  Well, that’s certainly one of the tactics that you can follow, so long as you’re very clear that what you’re doing in executing that way is to try to create organisational learning over time.  So do I need specialists? Well, perhaps I’m going to create specialists.  But then I really want the learnings from SRM to flow back because is isn’t a question of “Well, there are 20 or 30 suppliers we’ll have nice collaborative, open relationships with and everybody else we’re going to treat like dirt”.  Life isn’t like that.  There’s a graduation here and many of the principles of better relationship management actually need to be thought through across the portfolios of suppliers.  Yes, at the top end you will have some that get particularly differentiated treatment because of their strategic importance to your company.  But that’s not going to be a static list.  You need to be able to graduate people up and down on this sort of flow chart, if you like, in a relatively seamless way, as their relative importance goes up and down. Of course many of those top suppliers are also supplying in multiple contexts, so some of what they supply may be of the very lowest commodity level and other things will be of the higher strategic level. 

CG: Another one of your blog posts, “loss of trust, carries a heavy price, but how heavy?” follows closely a methodology in which we have embedded in our very operations here at the Proxima, which is based around something called ‘client intimacy’.  Client Intimacy sees the customer and supplier collaborating to the point of almost becoming one. This model and the strategic collaboration has a bigger time scale, resource scale, and cash investment to make it work, but ultimately leads to a better outcome at the end of the day.

Do you think given these turbulent economic times, many organisations would even consider this or would they scoff at the thought? If the CFO came up to the CPO or if a supplier came up to the CPO and said we’ve got a 3 year plan that we’d like to talk with you about, do you think the CFO or CPO would just turn their nose up and focus on generating cash?

TC: In many cases, yes, I suspect they would. I think the ability to demonstrate short and medium term benefit is just too remote.  Handling it as an exception is also a problem because anything that’s exception handled tends to be more costly.  Which was my point that if you’re designing for a new world of greater volatility, of more regular change, of the need to re-look at the way that economic results are driven, then you cannot do that at a transactional, or case by case relationship level.  This is really a question of re-looking at the way to structure and build your supply relationships, just as many organisations have done or are doing for the way that they structure and build their customer relationships. Just because a customer is low value, does that mean you design to treat them badly?   When it comes to supplier relationships, is constant downward pressure on price, unilateral performance oversight and adversarial change activity really the way to go?  Anybody in their right mind will understand that adversarial relationships in the end cost you a whole lot more, not only in terms of the amount of time and resource that you have to apply to them, but of course through things like the cost of lost quality, the loss of innovation and collaboration, that comes as a result of them.  At the moment we’ve got this somewhat schizophrenic approach where procurement comes in and is seen in a rather adversarial context, and the business unit is sort of trying to make up for some of the relatively poorly defined governance procedures and performance management procedures that emerge as a result. 

A lot of what we call for, as you know, is a rethink that says actually, good contracting is around these principles of governance, it’s about making sure that we have clarity over what really is the scope of what we’re trying to achieve together, it’s around having better change management procedures. Our community of negotiators know that this is true, they know that the things they are focused on and are negotiating today are not right things to drive good economic outcomes, but the organisation at the moment is impeding real progress toward change.

CG: So we come back to the first question we asked, who is responsible for that change?

TC: I guess as an association we try and take a lot of responsibility here, Chris, in the sense that we devote a lot of our time and effort to research. As a not for profit we are very much trying to inspire and provide the messages and support that helps people with that change, equips them with the data and rationale to exert more influence.  I think it goes wider, I think it goes for example to organisations like Proxima, probably you grasped many of these points.  I think there is this wider aspect of change messaging that professional associations and others are very much responsible for trying to help their members understand - why change needs to occur and what it’s consequences are.

It’s always going to be tough, because not only is change difficult, but for many people change appears quite threatening.  The transition to that change is something that short term, people don’t feel skilled at, they’re not sure about where they’re going to find the funding for it.  So we know there are always going to be a lot of resistors to change.  I think it’s a responsibility of the various commentators to try and educate their communities and help them to see why the business case is there for it to happen.

I think it was Warren Buffet who said, “we will always have innovators, imitators, and idiots” and I guess the idiots won’t be in business in 10 years time.  What we’re really looking at and what we’re highlighting today are the groups who truly are becoming the innovators in this space, and there are innovators out there who are making these changes already.  I guess what we hope to do over the next few months and year or 2 is really to increase to volume of imitators, to make sure that we really do have healthy business environments, and flourishing companies that are ready for the global competition that they have to face today.

Proxima Group

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