SCRC Executive Panel Discussion: “Relational Contracting in an Uncertain Ecosystem”

A panel of industry practitioners offered their views on how market trends and technologies are impacting contract management and relational contracting at the latest SCRC meeting on April 19.  Thank you to our guest writer, Kirsten Gallagher, from the Global Sourcing Research Network for capturing these views!

Below are some summarized excerpts.

How is contract management done today and what trends are on the horizon?

Lynn Digirolamo – AVP of Procurement Contracts, MetLife: We need to focus on the value of the relationship with the suppliers. We don’t help them manage the relationship. If we know a lot about the market, why can’t we help them deliver something better? And 2., as Tim said, we are too often focusing on the wrong things.

Ted Botzum, Executive-in-Residence, Global SRN: Buyers need to focus on maintaining the value; but after the “high” of getting a deal done, resources often disappear. In addition, we need to make sure there is balanced risk allocation to help ensure value realization on both sides of the table.

We also have too many accidental contract managers. On Friday, you’re a dev manager, and Monday a contract manager! During a transition, we need to ensure a qualified transition manager is in place, not just someone who is available at the time.  Buyers need to invest more to get the right people on the deal, to make this more of a career path.

Tim Cummins, President IACCM: The most significant thing I see happening is the growth of questions coming from executive offices: delays in contracting, a sense that the process is too adversarial. One of the fundamental things they do is correlate the contracting process to corporate goals and objectives which is often detached from driving forces within the business. Executives have said they don’t know what commercial teams (procurement, sales and legal) are doing. The focus now is more on being flexible and collaborative. Over the last four years, Nobel Prize winners in economics have been in the contracts field.

Bill Knittle, CSCO, Cheniere: Everyone needs to be more proactively involved upfront. What is the priority of the businesses? How does the contract align with business models? Where is the maturity of the business models? What should be the return on investment?

You can’t jump to collaboration, you have to mature the relationship with the supplier. Once you get in collaborative relationships, the returns are endless. You just need to determine the returns of Investment for both parties. Without that understanding, nothing will change with new technologies.

Raj Goyle, Bodhala: No lawyer, and no general counsel, would really understand a word that was said today because of the spend category of law. Lawyers are mitigating a risk, but they are still a spend category. There are no criteria on how much you should pay a lawyer. In our company, we are using tools to provide data around legal pricing and quality and putting legal in the spend category.

Fred Vitale, Principal Director, Accenture: The big thing with relational contracting is that you should bring it in early. It’s trying to get the procurement team, businesses, all those partners to talk. Procurement has to be at the table. Relational contracting, without a doubt, is a game changer. But it takes a lot of challenge sessions. You need to talk to legal and ask why we need that particular clause. Need to challenge business. Need to challenge supplier, e.g. what if we don’t pay you for one or two years. You need to bring new minds in and say, ‘why are we doing this?’

What are the technological breakthroughs we’re seeing in contract management?

Lynn, Metlife: AI and other technologies are important. But every legal department thinks differently. How do we get contracts out there to meet market demands? We haggle over the same things. We could use that time for relational contracting, and we could then use AI to support the relational piece, for example to determine what’s in the SOW and to compare old contracts.

 

Fred, Accenture: All technologies are really good based on a clear process. What I’m suggesting is, yes, technologies are coming, but it’s the foundational stuff we need to work on now to produce the results. Also, with technologies, we need to question the results a second time. Just because a formula spits something out, doesn’t mean it’s the right thing for my contract. It’s understanding what the results are and then doing the checking.

 

Raj, Bodhala: We often tell clients AI will suggest things for you, but you have the expertise to review and assess them. Human instinct plus data. I’m probably more skeptical than others about how quickly the technology revolution will happen.

Bill, Cheniere: Converting data to knowledge – that needs to come from somewhere. We need time and energy to get the data and the right analytics and to then apply that.  The first thing we need to prove is that contracts are not science, it’s an art, it’s human. For example, we now have three lenders involved in one project.  And this makes contracting a very complicated, human process.

Tim, IACCM: Do not let lawyers hijack the technology. They are important stakeholders, but they don’t own it. And what do we mean by the contracting process? Much discussion has been around the transaction. What types of relationships are we trying to support? If you haven’t identified that, you haven’t developed the right relationship framework. Where is that responsibility? Until you don’t understand the process, then technology will be a complete failure.

Think big, act small, and move fast. There are 250 contract management products out there, they’re not all the same, and we are evaluating them. Take a category, a relationship type, and do a proof of concept. You don’t have to do all of it in one go.

Ted, SRN We are starting to see different types of technology used today, like IBM’s Watson in the contract management space space. That frees up resources, and it frees up staff to focus on higher value components. Based on an IACCM study, most of the deal value goes to the supplier. The unrealized value in a contract is 42 percent, so most of the value is wasted. So hopefully the implementation of new technology allows for greater value realization to both parties.

 

Have you witnessed any successful implementations of relational contracting?

Lynn, Metlife Not yet. We’re still struggling with the evolution to get to that space. We’re trying to manage communication with suppliers regarding risk management.

Ted, SRN I haven’t seen it yet in any sustainable sense based on a sample size of “hundreds” of contracts. Supplier near-term profit motivation can hinder this, and buyers need to invest more in contract management and associated planning.  I think the implementation of new technologies could help facilitate this over time.

Tim, IACCM We can look at the anecdotal evidence. Organizations have difficulty with replicating. Collaborative forms of contracting typically have to break the mold. We need to scrap review and approve models, we have to be led by senior executives and build peer relationships with counterparts.

So the challenge is, how do we build something that’s replicable? Good example is the Australian defense department, which is seen as a preferred buyer. In oil and gas, we’ve seen big successes in capital projects, some aerospace and defense, construction and engineering. A little in telecoms. The industry that most needs this is technology.

Bill, Cheniere When I was at BP, 5 or 6 years ago had a relational contract covering three areas in retail. We had boundaries on how to work with each other, KPIs and KPI in innovation. We had a new revenue stream of 35 billion dollars that we shared with the supplier, and they came back to us and helped us drive cost reductions of $25 million annually on that volume. We redefined the category strategy we had with the supplier. But it’s hard to sustain that more than five years.

Raj Goyal, Bodhala In my world, relational contracting, hasn’t worked. It has been a boondoggle for the legal profession, and the outcomes are not optimal.

Fred, Accenture Success for me is ensuring the contract is dynamic and transferrable, and the person in charge actually understands the issues and the business case and then anticipates what will happen tomorrow – what we have to do reeducate workforce, etc. Contracting success is actually the people managing and working the contract.