Monthly Archives: October 2011

Should Your Contracts Be Based on Alternate Dispute Resolution?

The dispute resolution solution of choice in most large contracts is litigation — you reserve the right to tell the other party that I’ll Sue Ya if anything goes wrong. Given the large judgements that have been awarded in some of the more famous legal battles, it seems like it should be the dispute resolution of choice when millions of dollars are on the line. But should it really? The reality is that court is time consuming, costly, and, as all court cases are public domain, damaging to your reputation and irreparably harmful to your business relationship. All it does it take a bad situation and make it much, much worse.

There are other options, and, as described in this recent CPO agenda article on taking the alternate route, they include:

  • mediation,
  • arbitration, and
  • adjudication.

And your procurement organization should be acutely aware of them, because each and every contract signed needs a dispute resolution procedure — as it cannot be predicted when something will go (horribly) wrong and when the organization will have to deal with it quickly, and effectively. And as the article notes, if you do have a dispute and you don’t have adequate dispute resolution provision, it can make the resolution of the dispute significantly disadvantageous for one party or another, depending on the circumstances. And you don’t want to risk the resolution being disadvantageous to your organization, considering it is Supply Management’s job to be leaders in contract creation and negotiation.

So why consider ADR? As the author notes: the overriding advantage of using ADR is that it enables both parties to preserve the commercial relationship while maintaining control of resolving the dispute. So which ADR option do you choose? It depends on what you need.

  • Mediation
    is a method that may allow parties to reach an amicable agreement and maintain on-going relations. The focus of the process is on the interests of the parties, rather than on their legal rights alone, which allows other factors such as commercial pressures to be taken into account. If the goal is to reach a mutual settlement, this is often the best bet.
  • Arbitration
    is particularly valuable with international contracts where parties are based in different countries, since court judgments accepted in one country are difficult to enforce internationally. Arbitration awards are easily enforced all over the world under the New York Convention. If the goal is to reach an enforceable settlement, this is often the best bet.
  • Adjucation
    is hugely popular because it provides a quick answer and the resolver is likely to be a subject matter expert from the industry. And the answer, while not always the one sought, is usually one the parties can live with. This allows the parties to deal with the problem and move on. If the goal is to get a quick resolution, this is often the best bet.

And while the best option may not always be clear cut, chances are it won’t always be litigation. Keep this in mind when determining your dispute resolution methodology of choice.

Change, Unchained

Change, nothin’ stays the same
Unchained, and ya hit the ground runnin’
Change, ain’t nothin’ stays the same
Unchained, yeah ya hit the ground runnin’

    Unchained, Van Halen, 1981

Change. The age old * on organizations everywhere. Conjuring up images of the bottomless black pit, nothing causes more job stress for the average employee. And as noted in this recent SIG article in The Art of the Change, “Change” is now ever present. So how should you go about implementing change to minimize the stress and fear and maximize success?

The author starts by quoting Stanislao and Stanislao who defined four criteria to consider before implementing a change:

  1. What Should Be Changed?
  2. What Type of Change Needs to Be Made?
  3. Who Will Be Affected By The Change?
  4. Who Will Be The Change Agents?

These are good criteria, but what about
0. Why Do We Need A Change?
5. What Is The Goal Of The Change?
6. What Are The Expected Results?

Let’s face it, if something ain’t broke, you shouldn’t fix it. If there is no why, there is no what. If there is no end goal, then how do you know if the change is appropriate? And if you can’t define the expected results, it’s probably not the right change.

The author then notes that workers who have no real input into a change repel it for several reasons, including surprise, unknown workload, unknown job security (if a task is being automated), etc. As a result, the author recommends that you should:

  • Give Employees Advance Notice.
  • Give Employees Information About the Change.
  • Give Employees Training to Cope With the Change.

And these are musts. But the author misses the most important thing you should do if you want a change to be successful. That is:

  • Explain The Rewards (To The Employee) Associated With the Change.

Let’s face it, the first thing an employee wants to know is what’s in it for them if you expect them to work hard to prepare for and implement a change — especially when they believe the same ol’, same ol’ is good enough. Will it make their jobs easier? Will it improve profitability and their potential bonus? Will it, in hard times, simply ensure that the corporation will be operating lean enough to allow them to keep their jobs? Enquiring minds want to know!

In addition, as the author notes, you should be aware of the very fundamental reasons that humans resist change, which, according to Gilley, Godek, and Gilley include:

  1. Fear of losing one’s position in the hierarchy.
  2. Not being aware of the company’s vision and/or purpose.
  3. Fear of losing one’s job entirely.
  4. Growing apprehensions about taking on additional roles and responsibilities.
  5. Working longer hours so that personal life becomes severely affected.

And make sure that the information and training communicated to the employees addresses each of these concerns. If you do that, engage your employees, and make them part of, and, when possible, leaders of, the process, you are much more likely to be on your way to a successful change initiative.

Non-Traditional Opportunities Abound in Legal Process Outsourcing

A recent article over on SIG on sourcing legal process outsourcing services did a great job of pointing out that sourcing legal services is not the same as sourcing other types of services if the goal is cost reduction or value generation. Traditionally, an outsourcing project looks for savings by way of:

  • Headcount Reduction
    by outsourcing FTE roles to resources who can do the same job at a lower cost
  • External Spend Reduction
    by moving spend to those firms that can perform a set of functions at an overall lower cost

Headcount reduction works fine for accounting, where there are rows and rows of AP/AR people reviewing invoices, collecting payments, and making payments, or marketing, where advertising, print media, video, and radio are best outsourced on a project by project basis than staffed in house. This doesn’t work that great for legal where, given the size of an average legal department, the scope of an LPO engagement may be 10 FTEs. Given that average in-house legal spend is 40% of total legal spend, that, on average, only 25% of these roles can be outsourced, and that the maximum savings is 50%, the maximum savings achievable is 5% of total legal spend. Average is probably about 3%. No outsourcing effort is worth it if only 3% can be saved.

And external spend reduction works great for marketing which has outsourced an entire project, including brand building, message generation, and print production to a single firm when brand building should have been outsourced to brand specialists, messaging to advertising specialists, and print production direct to a printing shop that can offer steep discounts for high volume. Bur for legal, where you are simply shifting cookie-cutter legal tasks (such as fixed-form document review, property titles, etc.) from a legal firm to an LPO, savings are minimal given that outsourced spend is typically 60%, less than 50% of the tasks will typically be transferrable, and savings will probably only be 20% as they are still skilled tasks, for a maximum savings of 6%, with an average savings of 3% to 4%. Again, not worth it.

Outsourcing legal is all about value identification and generation. First, as the article points out, the supply management team needs to figure out what legal services can be “unbundled”, which of these could be outsourced, and whether the savings opportunity is there. Then, when they have identified those opportunities that could generate enough savings to be worthwhile, supply management needs to determine how to maximize the non-financial value-generation opportunities that are quite real and more valuable than any cost savings that may be achieved. Specifically,

  • Resource Re-Allocation
    Existing legal staff needs to be focussed on high-value work as there are very limited resources. Legal staff should be focussed on risk-management, not document review. On forth-coming compliance requirements, not process improvement. And on supply management contract simplification, not one-time contract generation.
  • Acquisition of New, Previously Unavailable, Services
    There are only so many legal resources in-house, and their knowledge is limited. They will not be able to provide guidance on every potential market that the business might want to enter, or be aware of all of the impending regulations in the US, EU, and China that might affect the business, or provide detailed due diligence on every contract presented to the business by a potential customer.

In many legal departments, counsel spends 90% of their time reviewing every routine change requested by a counter-party in a legal negotiation instead of focussing on what the real risks are and how to negate them. They spend a lot of their time reviewing existing processes with respect to current compliance regulations to insure reasonable efforts are taken to ensure compliance instead of focussing on what is coming down the pipe and what significant organizational shifts will be required. And on generating a custom contract for each major supplier instead of optimizing a contract generation and management system that will allow negotiators to generate a customized starting contract with all relevant clauses and terms at the press of a button. That’s why in-house resources need to be focussed on high-value tasks.

And with global market penetration becoming more and more important as first-world economic growth declines by the year, the ability to access more expertise than can be found in house is becoming more and more critical.

Thus, a sourcing team that adopts a value-based approach to legal services can provide the organization with value that goes well beyond what any cost savings could possibly achieve.

Did “The Gambler” Teach Us Everything We Need To Know About supply Management Operational Success?

You Got to know when to hold ’em, know when to fold ’em,
Know when to walk away and know when to run.

Thirty three years ago, Kenny Rogers unleashed upon the world this country classic, written by Don Schlitz, which was the inspiration for a movie that came out two years later. And it seems, thirty three years later, that this is the message that SAP is unleashing upon the supply management world as the foundation of their advice for achieving operational excellence in any economic climate.

In the aforementioned article, the author provides four (4) tactics that are employed by best-in-class performers to elevate procurement proficiencies. Simply put, the author is recommending that you hold ’em, fold ’em, walk away, and run.

  • Hold ’em: Hold On To Your Suppliers through a Supplier Connectivity Strategy
    Integrate suppliers into key points in the supply management process. This will reduce mutual overheads and costs through better insights into your process.
  • Fold ’em: Fold Your Employees Into Your Organizational Procurement Process through a Compelling End-User Purchasing Experience
    Utilize the fact that your employees are web-savvy online shoppers with expertise in navigating online purchasing sites in such a way that allows them to slice and dice their options and get the best deal. Provide them with the right enterprise supply management portals and they will get the best value available to them.
  • Walk Away: from Non-Existent Savings and Unprofitable Efforts by Prioritizing Spend Categories with Significant Cost Reduction Opportunities
    Start with categories that will deliver a high return with minimal effort (usually by way of standardization) and then progress to categories that will deliver reasonable savings with reasonable effort, staying far away from those categories that yield only minimum returns for maximum effort. Remember the 80/20 rule – 80% of savings will typically come from 20% of categories. Focus there.
  • Run: Away from Unnecessary Processes by Moving towards a “Zero-Touch” Procurement Process
    Leading organizations use procurement solutions to do the “heavy lifting” on approvals, order delivery, and invoice management that streamline approvals and automate approvals for low-value, low-risk purchases where manual review would often cost more than could be saved through a detailed analysis.

And it’s all great advice. Now if only they had remember that you:

    Never Count Your Money While You’re At The Table: because Failure is Imminent without Constant Innovation
    Simply put, what is leading-edge today, is average tomorrow, and yesterday’s technology the next day. You can never rest on your laurels — you have to keep improving your processes. The minute you stop to count your money, you stop innovating, you stop identifying new cost reduction or value generation opportunities, you stop saving or generating value, and you begin the slow decline from leader to laggard. Today’s corporate world has evolved to a high-stakes winner-take-all poker game and there’s no time to pause and count your savings until the supply management game is won.

It would be a great starting recipe for supply management organizational success.