Twice in the last week I have had conversations with people who think that procurement functions today are ‘dumbing down’ contracts. If true, that’s a big mistake and will undercut the stated ambition of the function to raise its profile and value. It is also at variance with what we see happening in at least some IACCM member organisations.
Why are they saying it?
One of those who made the comment is a globally respected attorney, who has led multiple complex negotiations, typically working for the buyer. He observed growing difficulty in gaining the attention of procurement teams to discuss contract terms and options. In his view, ‘the talent pool in Procurement is shrinking. They just want the contract done quickly, without much caring what’s in it, and then ignore it’. This view was in many ways supported during a conversation with the co-founder of one of the top contract management lifecycle systems, who observes a growing tendency for Procurement groups to want a contract agreed prior to the RFx process, so that ‘it won’t cause delay’. The problem, of course, is that this often means a misfit between the contract terms and the business requirement, including the way that risks and responsibilities are allocated. ‘They end up with almost inevitable conflict or disagreement down the line.’
Why does it matter?
Contracts should be critical business instruments for establishing and delivering value. Contracts provide a business discipline, a structure for critical thinking. Far from being just a set of words, they represent a journey, a lifecycle that frames the commercial logic, the required actions and behaviors of the contracting parties and which specify a value outcome. Smart business people don’t view contracts as legal instruments; they use them to ensure the right conversations, to test understanding and each party’s true intentions and capabilities. Based on this, they agree responsibilities, performance mechanisms, change procedures. Depending on the nature and duration of the relationship, it is the time to decide what’s in the contract and what stays outside it – for example, the approach to innovation, supplier relationship management, governance and performance.
By failing to grasp and ‘own’ contracts, Procurement groups miss an opportunity to achieve one of their greatest aspirations – to be accepted and respected by other functions. Contracts are by their nature multi-disciplinary and integrationist. The function that leads on the contract has to interact across the business and build understanding of the viewpoint of other stakeholders. It also partners with the business not only in establishing agreements, but in ensuring their performance.
Transforming in the right direction
Many Procurement groups are under pressure to ‘transform’. Frequently, this is seen as increasing speed, ensuring compliance and expanding activities into supplier relationship management. Technology is playing a big role in achieving these goals, supplemented by a focus on ‘soft skills’ in areas such as communication, negotiation and relationship management. However, these may not be enough to measurably improve effectiveness, rather than just efficiency. There is a danger that Procurement’s traditional view of contracts as administrative templates will indeed lead to a further retreat from this aspect of business – with a negative impact not only for the function, but more generally for the value that is generated from its trading relationships.
So what is your experience? What are your views? Is it the case that Procurement is ‘dumbing down contracts’?
This article was originally published on IACCM