Now comes the question of how you choose to operate
If the last three years have taught us anything when it comes to contracts, it may be that what we thought we knew doesn’t always end up happening in the end. A corollary to this is that perhaps what we thought was important in contracting and on our contractual relationships isn’t as important to how a business really runs. Perhaps, just perhaps, negotiating a good set of clauses and mechanisms around supply chain resiliency would have been more useful than fighting over net 30 or net 45 days payment terms. Spoiler alert: the world is complicated and doesn’t seem to be getting less so. Now making contracts simpler and more easily handled by “the business” is great and getting a uniting process and set of tools around how you manage contracts, their management and ever increasingly the data held within is also great. These “transformational” activities are must-haves and not projects to kick down the road to some distant future for “when things calm down.”
Now, I know there are real world examples, but for many companies these issues have been identified years ago but left there in the low priority pile. The odd thing is that many of the same companies went through some undue organisational stress and cost to address things around global finance changes, pandemics and new geopolitical realities. Now – those things effected and are affecting us all, but it’s a matter of degree. If you don’t even know where your contracts are, or who is responsible to “own” the contractual relationship, then the disruption (and cost) was and is only compounded. But enough about why companies need to transform. I think that message is out, and most are on that journey, which now leads me to what I really want to talk about, and that is what comes AFTER transformation. After the army of PMOs, consultants and IT vendors go back to their worlds, what does a company do then with its brand new, beautifully crafted contracts function? Unlike the age-old questions of, “should I tell my partner that I will be out late,” or “should I eat sushi from a truck stop at 3AM,” there is no one, absolute right answer. But – that doesn’t mean there aren’t options and aspects to consider. Even in my latter stage, long-form drafting approach, I can’t address them all here. However, I will be talking more about this over the coming months, so consider this an overly simplified amuse-bouche.
So, you have new tools, processes and simplified documents. This is the option where you take the team you have and just go into the match with better kit and training. Benefits exist for sure, but there is a need to think about what everyone on the team is doing. Often the business case behind any tool or broader transformation is to “get the lawyers/commercial team focused on high-value work.” But that doesn’t mean that the low-end or high-value work disappears. Much like the Law of Conservation of Mass (first theorized by the Jain philosopher Mahavira and later popularized by the French chemist Antoine Lavoisier), contract busy work can neither be created nor destroyed, but just transformed.
What do you do? Where does the admin work go? Where does the lower-level work go? Good transformation will tell you that some of this can be eliminated completely and depending upon the type of tooling you have purchased, some of this can be automated as well. Additionally, if you pushed it hard, self-service is real and the procurement, sales and other teams are doing some of the work for you now. But that doesn’t mean they won’t have questions or escalations that are beyond the norm. How a company balances this is key to the overall value of the transformation. There is value for sure, but to paraphrase Mahavira, contract work is permanent, let’s just see who does it. I suspect that Mahavira was a big fan of templating.
Transform the team
This is the next option up and quite a popular one. Many companies are looking at creating a GCO or “Global Contracting Office” to address the business as usual (BAU) contracting activities. Often times this is a mix of legal and procurement, but can be a commercial function too. Too often this only focuses on pre-signature work, which has a business case revolving around speed to contract/speed to revenue. However, this can miss the giant opportunity of looking at contracts after they signed and what that means for the vendor and the company together. Questions around scope, discount, what is already in scope and what is truly extra can be handled at the project level and not cause noise in the system if companies extend their GCOs. But more often than not, companies get distracted by the creation of a contract versus the life of a contract. I can tell you first-hand that the problems, challenges and risks of the last three years have very little to do with creating new contracts and almost exclusively have to do with how you manage the performance of a contract (e.g., how is it actually delivered). But very few want to talk about that. Maybe negotiation is just too cool and has better publicity. I can tell you that when it comes to revenue leakage around contract value, reality shows that about 90% of that is AFTER the contract is signed.
The other issue here is what I call the breakfast issue. I make breakfast for my boys (almost) every day. They love it or are incredibly polite. Therefore, I believe that I am “good” at breakfast. But I am also self-aware to realize that Gordon Ramsay eggs are beyond me, as are a myriad of breakfast foods. And this is not an individual item, but a volume around creating the same thing, at same quality repeatedly. What legal teams often do is forget the breakfast fallacy and say something like, “X made a good contract” and therefore take the jump that that more X doing that is all you need. I can tell you that after doing shared services for over 20 years on a variety of levels that the idea that X can do volume Y never works. No offense to X.
The key takeaway here is that transforming the team is a good step and unlocks more value retention and creation. In practice this is more than just creating a centre of excellence or pleasantly locating an off-shore/near-shore centre. Unless you are getting real expertise in how these are setup and run or have this talent in-house then you are only getting labour arbitrage. A centre of excellence needs uniformity and predictability and not just suboptimal processes put in a more exotic location (which is often the default). And please don’t listen to IT or Finance who may tell you they have a centre in X and it is awesome. ITO has been around for 50 years, and FA BPO has been around for 20+. Also, these are purely rule based activities. There is really one way to reconcile accounts payable, whereas there is a myriad of ways to address scope-creep. This means that the setup of a centre of excellence needs a different touch. This is not to say that there are not massive benefits in doing this and doing this right. But please – listen to someone/anyone who as done this before. Old school LPO/document review is not contract playbook review and it certainly is not accounts payable.
Very few companies are setup to be indirect procurement contracting companies. Most are financial services, healthcare/pharmaceutical, energy or consumer companies. And yet – many companies commit substantial resources to how they purchase generic, standard, easily categorized services and goods. Moreover, they debate, fight, escalate how they handle small deviations around how they procure such services and goods. Riddle me this – if you had finite resources, would you rather try and dedicate them to the global sanction and supply chain problems or how you address the online form for vendor onboarding or yet again, net 30 vs net 45 payment terms? BAU contracting is important, but perhaps not as important as other things. What is important around BAU contracting is consistency; ease and user experience around escalation/closure.
The long and short of this, is that many companies are addressing the questions above by saying, “no, we are not a contracting company” and “let’s use our legal resources for their highest and best purpose.” These are things that are simple to write but hard to accept. Let me help us all take the first step. Please repeat after me, “procurement contracting is not magic and we tend to do the same thing over and over again.” Hopefully that felt better. If you really think that your BAU procurement contracting is “special” then that is great. But if you, perhaps, just perhaps, see that there are patterns to what you sign up for, then maybe this is a process that can be outsourced. Sorry to use the “O” word, but let’s not get tied up in definitions.
I worked in BPO for way too many years, so I know that is not the whole list of considerations. However, I want to put this on the radar of companies out there. After you have put in the tool, run the programme or shifted the paradigm, that is not the end of the story at all. Rather – it is just the beginning and its good to think about what comes next.