I am pleased to announce the results of our annual study of 'The Most Frequently Negotiated Terms and Conditions'. This year, our global analysis is accompanied by reports for each major geographic region and legal system.
The way that we negotiate, manage and control our contracts and trading relationships is a potential source of competitive advantage - or a source of major business risk. It falls on people like you to reconcile executive demands for innovation and growth with their concerns over ethics and compliance. And, as IACCM's annual survey of the 'most frequently negotiated terms and conditions' (see report below) shows , most organizations are struggling with that reconciliation.
Contract Negotiations: A Framework for Understanding or a Battle for Power?
Even as corporate leaders promote a message of trust and value, most trading relationships continue to be negotiated in an atmosphere of fear and confrontation. That is among the key findings in the newly-released results of IACCM's survey of the Top Ten Negotiated Terms, which reveals that business negotiations remain dominated by battles over short-term costs, risk allocation and self-protection. This approach undermines the concept of 'collaborative innovation' that featured as the theme of this year's World Economic Forum.
“As corporations become increasingly dependent on the quality of their trading relationships, I had hoped to see some evidence of change in how they are formed and managed,” commented Tim Cummins, IACCM’s CEO. “Of course companies need to protect their interests – but that means enabling opportunities as well as protecting against changed requirements or failure to perform. The list shows no sign of rebalancing, it essentially remains focused on negative assumptions and behavior. Whatever the CEO may be saying in public is not flowing through to the actions of those setting policy or leading negotiations.”
One major reason for this, in Cummins’ view, is that most companies lack the capabilities to fully define what they hope a relationship will achieve or then to oversee performance – either their own, or that of their trading partners. This leads those charged with contracting policy and negotiation to show caution over the nature of the commitments that are sought and provided. Ultimately, a spirit of protection prevails – and this inhibits potential value and frequently contributes to termination of the relationship. "Negotiators talk about outcomes and a focus on outcomes is good. But most of their time is spent on documenting the terms that relate to negative outcomes, rather than structuring for success. Liabilities, indemnities, termination clauses, liquidated damages - how can anyone see those as 'positive' discussions? Yet these are the terms that dominate the list. We lose focus on the goals and aspirations that got us talking in the first place, or in establishing a management and motivation system that is likely to ensure they are achieved.'"
Fear Not Only Of The Other Side
“Negotiations set a framework – their tone and content contributes to the atmosphere between the parties. But more than that, where negotiating time is spent determines the clarity and understanding of fundamental issues like transition, goals or outcomes, the way the relationship will be measured and managed. In my experience – and that of many contracts and legal professionals – it is often hard to gain sustained attention from management or the business unit, to really define their goals and aspirations, or to set an effective performance management system in place. And behind the scenes, there are many who just want the deal signed – “we’ll work out the details later”, they claim. So the people ‘papering the deal’ are often forced to take a conservative – and uncreative – position,” explains Katherine Kawamoto, IACCM's Vice President of Research.
This perspective suggests that companies are often as distrustful of their own internal capabilities and competencies as they are of the other side – and therefore reluctance to establish a truly collaborative relationship is mutual, since neither party is confident in its ability to perform.
Trust And Collaboration Are Victims Of The Process
But does it matter? Cummins thinks it does. “A growing band of CEOs has highlighted the importance of trust as a key underpin to the development of the global networked economy,” he points out. “And surveys from top analysts and consultants have emphasized the critical role played by collaboration and ‘excellence in execution’ in determining business outcomes. Yet these positive outcomes are frustrated when buyers spend their time imposing onerous liability, indemnity and cost-reduction clauses on their supply base; or when suppliers battle to resist meaningful commitments and performance obligations. If we cannot change the conversation, I don’t know how we will change the results.”
The table of top terms confirms that most negotiations remain a battle of power and imposition rather than an exploration of value and compatibility.
Control And Compliance Key To Today's Environment
Many might argue that this atmosphere is inevitable because of today’s environment of ‘corporate governance’ and regulatory compliance; that time spent on ‘burdensome terms’ reflects good risk management. This school of thought is driven by an assumption that the other party will endeavor to gain advantage or de-commit in some way. Therefore, protecting assets and allocating responsibility for failure is core to company interests.
Certainly the atmosphere in business has played into the hands of those who see doom and potential catastrophe – and may have shifted the balance too far against the voices of economic value and success. However, those voices are often either absent, or lack the data or persistence to ensure they are heard. Complaining about too many controls, or too much focus on compliance, or bureaucratic decision-making is not enough. If senior management wants meaningful change, they must pay attention to the way that trading relationships are formed and managed. They must invest in the systems that create and distribute knowledge and information, rather than just those which oversee compliance to existing rules.
And communities like Legal, contract management and procurement also need to push for change, otherwise they remain part of the problem. Either they need to expand their role and take a broader accountability for relationship outcomes, or they need to press management to ensure that others do so. Whichever route they take, they will need data to describe the problem and the benefits that might be achieved. The Top Ten Terms represent a good starting point for that conversation, illustrating as they do the lack of a constructive framework for so many trading relationships.
Achieving A Balance: Outcomes Matter
The real point about successful relationships is that they need to reflect a balance of aspiration and realism. The contract - and its negotiation – should offer a framework that builds understanding, sets expectations and creates a formula for their continued evolution and management. If instead specific interest groups (no matter which function they are from) with relatively narrow or short-term objectives dominate the process, much of the potential value is lost or destroyed.
“It doesn’t take a psychiatrist to tell you that relationships based on incomplete information, or dictated through lop-sided impositions of power, or molded through wars of attrition, regularly fail to satisfy the parties or to achieve their potential,” comments Tim Cummins. He cites findings from research in areas such as outsourcing or strategic alliances, where failure tends to be marked by a lack of clear goals and, quite often, an atmosphere of avoidance or retribution. “A sense of unfairness and lack of balance emerges from a very high proportion of today’s negotiations,” he observes. “This inevitably leads one party to a position of self-defense – they need to take measures that either improve their position, or ensure that the negative consequences are avoided. It is quite obvious that today’s practices carry a real cost – and as integrated enterprises increasingly transform into contracted supply networks, it is about time that executive management paid attention to fundamental change. Contracting and negotiation are in desperate need of a new governance system that recognizes they are critical competencies in the global networked economy.”
Having read this year's report on "The Most Frequently Negotiated Terms", you may agree that it's time to change. Research and benchmarks increasingly offer compelling evidence of the benefits to be achieved from sophisticated contracting and negotiation techniques - and that our community (lawyers, contract managers, procurement professionals) is fundamental to making those new approaches happen.
While being part of IACCM's global research and learning community is a great first step, you can get ahead on the latest thinking and methods by attending one of our many events. If you are interested in discovering how you can learn from others, or benchmark current performance, or simply become part of IACCM's worldwide campaign for greater integrity and value in negotiations, please contact firstname.lastname@example.org, or visit our website at www.iaccm.com.
"In today's networked economy, interdependence has become a strategic goal. IACCM's concepts of 'commitment management' offer the ideas and programs that are critical to success - shared language, agendas, methods and outcomes." (Tim Cowen, General Counsel, BT Global Services)
The Survey was conducted in November / December 2007 and drew input from almost 800 organizations, representing many thousands of negotiators in over 80 countries.
See the detailed results at www.iaccm.com/articles/2008top10
© IACCM 2008. All rights reserved.
Last edited by Gregg Barrett : 02-06-2008 at 09:06 AM.
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