Author Archives: John Davies

About John Davies

John is a recognised authority in collaborative contracts, relational contracts, and novel procurement options. John has conducted extensive research into alliance contracts and governance frameworks from both the buy side and sell side. John has authored collaborative contract better practice guides, performance-based contract evaluation guides, and tender evaluation guidelines for major programs. You can find his CV at LinkedIn.

How To Manipulate Business Cases

Introduction

There is a very old story about an accounting student who, before graduation, must sit an examination in front of the board of accountants.  The student has performed brilliantly in their exam so far and is asked a final question by the chief examiner, “what is two plus two?” The accounting student immediately responds with the correct answer, “what do you want it to be?”. 

The architects of business cases and cost benefit analyses (or benefit cost analyses) often apply the same philosophy.  That is, they will provide an answer to their customer, sponsor, or supervisor that is a fantasy, simply so that they can give their customer what they want. This phenomenon is rife in the public sector where businesses cases regularly overstate benefits, ignore key risks and dis-benefits, disregard credible competing options, cherry pick data, and adopt creative discounting methods to get the desirable answer as opposed the correct answer. In this blog, we explore techniques to manipulate business cases and economic analyses to get the answer we want.

Framing

When presenting options to customers, management consultants around the world are familiar with the strategy of providing only three options. The first option is the cheap and nasty alternative that provides negligible value (sometimes labelled the ‘do nothing’ scenario). This option is immediately rejected. The second option is hideously expensive and has an implementation timeframe of decades. This option will also face immediate rejection.  The third option, of course, is the option that the customer or sponsors want selected.  This is why framing the business case is so important.  For example, if the public sector outcome is to improve traffic congestion, cater for urban sprawl, or improve access to amenities for citizens then there is a plethora of potential solutions, not just one megaproject.  Nonetheless, the solution space is often constrained to a single popularist option, or more cynically, the option that creates jobs in marginal electorates. If the sponsor or responsible minister has a specific solution in mind for political or ideological grounds, then we need to accept that the answer has already been selected. This answer may be very far away from the best answer, nonetheless we can craft business cases to justify this answer by simply framing the business case to a subset of solutions that exclude all other credible options. This is especially important if those other options have higher benefit cost ratios or higher net present values.  This is relatively easy to achieve by simply not mentioning the other competing options, claim that these other options are inconsistent with government policy, or any other contrived excuse.  This will allow you to justify the selection of almost any course of action you want.

Cherry Picking

In some circumstances you may be forced to explore competing options that could jeopardise the selection of your preferred solution. This is where cherry picking provides opportunities to manipulate the process.  Every business case incorporates assumptions about future states, risks, issues, and opportunities. The key is to select information from datasets that increase the benefit cost ratio for your desired option and decrease it for all competing options.  For example, if your preferred option creates substantial future benefits with reduced carbon pollution then it is imperative that you select a social cost of carbon at the upper extreme using the Intergovernmental Panel on Climate Change (IPCC) price of $1,472 per tonne of Carbon as illustrated in Table 1 below. Conversely, if your preferred option is carbon emissions intensive, then you should select the lowest figure, such as the current market price of carbon.[1]

Table 1 Carbon Values under IPCC Calculations (2010 prices).[2]

‘When manipulating business cases, it is vital to cherry pick data to bolster your preferred option.’

Opportunities exist to cherry pick data in many other areas of your economic analysis such as travel time savings, cost of lives saved, construction disruption costs etc.  This provides almost limitless opportunities to get the answer you want. 

Discount Rate Manipulation

If you are fortunate enough to be in a jurisdiction where treasury does not specify a discount rate to be used in your economic analysis, then opportunities abound to exploit the numbers to get the answer you want. To illustrate, consider a project that will generate economic benefits of $100 million per annum over a thirty year period. The following two discount rates yield very different present values:

Option 1.  3% discount rate – Present Value = $1.96 Billion

Option 2.  7% discount rate – Present Value = $1.24 Billion

If your desired project has benefits that span decades, then you should aim to use the lowest discount rate that is plausible.  Conversely, if you have costs or disbenefits that eventuate into the far future, then you should select the highest discount rate you can get away with.  If you are forced to use a discount rate provided by treasury, then there is always an option to use nominal prices and ‘accidently’ use a real discount rate. This will overstate the benefits of your economic analysis considerably. With luck, such errors will not be detected until after your project is approved and considerable costs have been expended.

Artificial Credibility

Large, complex projects involve high risks and significant uncertainty. Business cases for such projects will be fuzzy to say the least.  Despite these limitations, we should aim to create the impression that the business case is highly credible, robust, and precise.  Augustine’s, 35th law embodies this approach:  

“The weaker the data available upon which to base one’s conclusion, the greater the precision which should be quoted in order to give the data authenticity.”[3]

Consequently, we should present data to as many significant figures as possible and avoid any reference to confidence levels.  Large complex projects typically have cost and schedule probability distributions that resemble beta distributions with very long tails (large positive skewness). This means that the 90th percentile cost and schedule estimates will be substantially greater than the expected 50th percentile values. Such figures will terrify those accountable for funding such projects and therefore the worst case estimates should be omitted from our business case. 

Wider Economic Effects

Wider economic effects are very difficult to estimate and should not normally be included in benefit cost ratios.  Nonetheless, some jurisdictions do allow the inclusion of wider economic effects as part of an ‘adjusted benefit cost ratio.’[4] This allows us to manipulate our business cases further. Make sure your wider economic impact assessment overstates the benefits and ensure that no wider economic dis-benefits are included. Broadening the scope for the economic analysis also provides opportunities to bolster your business case, especially when it comes to jobs creation opportunities. Where an economy is operating at full employment, job creation claims in business cases are often bogus.  A project that engages thousands of employees means that those resources cannot be used elsewhere. [5] In other words, your project is merely moving jobs from one area to another with no net benefit.  Do not be dissuaded from such logic; however, as politicians salivate at the prospect of spruiking their economic credentials and their perceived ability to create jobs. Make sure your business case has job creation front and centre even though such claims are spurious.

Bundling

If your best efforts to ‘cook the books’ and manipulate the numbers to get a benefit cost ratio greater than one does not eventuate, then all is not lost.  Simply add the costs and benefits of your project to a related project which has a high benefit cost ratio. By blending multiple project costs and benefits within a portfolio, you can manipulate the numbers so that in aggregate a programme or portfolio of several projects has a combined benefit cost ratio greater than one. Whilst this appears to be an outrageous approach that no sensible person would pursue, this is precisely what the Australian Capital Territory Government did in their Stage 2A light rail business case.[6]  Despite this individual project having a benefit cost ratio of only 0.6, the project was blended with the previously completed stage to create the illusion of a positive net present value. Audaciously, the government presented the benefit cost ratio (BCR) of this single project as 1.2.  As observed in a subsequent audit report for this business case, such an approach is misleading:

‘blended BCR is novel; no example of blending the result of a past investment with a future investment is known’ ‘[this approach] has no relevance to the [Light Rail Stage 2a] investment decision because the Stage 1 costs are ‘sunk’, i.e. cannot be recovered.’[7]

With luck, your business case may not be scrutinised by auditors and blending your benefit cost ratio with another project may go unnoticed. 

Transparency, Scrutiny and How to Avoid It

Flyvbjerg and Bester advocate for independent auditing of cost benefit forecasts.[8] Some jurisdictions recommend business cases be made publicly available.[9] Having your business case critiqued could undo all the hard work you put into fudging the numbers and you should therefore do everything imaginable to avoid such scrutiny.  This can be achieved by contaminating your business case with as much commercially sensitive material as possible (ideally in every figure and paragraph). This will mean that any redacted version of your business case is meaningless and cannot be effectively verified if it is made publicly available.  This may not thwart independent auditors but will hopefully slow down the review process until it is too late.

Conclusions

The techniques available to manipulate business cases are many and varied.  We can cherry pick data, include serious errors of omission, and make many assumptions that allow us to justify almost any course of action. Those readers with a moral compass would not stoop to such skulduggery, rather you will use the strategies identified in this blog to recognise where business cases are being manipulated and hopefully put an end to such activities.  Bogus business cases result in billions of taxpayers’ dollars wasted and lost opportunities. This situation should not be tolerated

Though we have focussed on public sector business cases, there is also ample opportunity to cook the books in the private sector, especially with taxation treatment. This brings us back to Hitchhikers Guide to the Galaxy canon, wherein Disaster Area’s chief research accountant’s thesis, General and Special Theories of Tax Returns, it is shown that, “the whole fabric of the space-time continuum is not merely curved, it is in fact totally bent.[10]


[1] https://tradingeconomics.com/commodity/carbon

[2] Adapted from IPCC (2018) figure 2.26 – Dominique Bureau,  Alain Quinet,  and Katheline Schubert “Benefit-Cost Analysis for Climate Action” Journal of Benefit-Cost Analysis Vol 12 issue 3,  26 November 2021.

[3] N. Augustine Augustine’s Laws (1986).

[4] See e.g UK Department of Transport ‘TAG UNIT A2.1 Wider Economic Impacts Appraisal’ (2019)

[5] Queensland Government “Cost Benefit Analysis Guide – Business Case Development Framework” (2021) p 17.

[6]  ACT Government- Major Projects Canberra ‘City to Woden Light Rail: Stage 2a City to Commonwealth Park Business Case’  (2019) p 123 https://www.transport.act.gov.au/__data/assets/pdf_file/0003/1412634/Stage-2A-Light-Rail-Business-Case-redacted.pdf

[7] Auditor General’s Report CANBERRA LIGHT RAIL STAGE 2A: ECONOMIC ANALYSIS REPORT NO. 8 /2021, p37 https://www.audit.act.gov.au/__data/assets/pdf_file/0005/1859630/Report-No.8-of-2021-Canberra-Light-Rail-Stage-2A-Economic-Analysis.pdf

[8] Flyvbjerg, Bent and Dirk W. Bester, “The Cost-Benefit Fallacy: Why Cost-Benefit Analysis Is Broken and How to Fix It,” Journal of Benefit-Cost Analysis, October 2021, pp. 1-25.

[9] Infrastructure Australia ‘Delivering Outcomes – A roadmap to improve infrastructure industry productivity and innovation’ (May 2022) [Recommendation 4.1.1.] p14  https://www.infrastructureaustralia.gov.au/sites/default/files/2022-03/IA%20Delivering%20Outcomes%20March%202022%20Final_1.pdf

[10] Douglas Adams, The Restaurant at the End of the Universe (1980).

Project Management Biases – How Do We Manage Them?

We know why projects fail; we know how to prevent their failure – so why do they still fail?” – Cobb’s Paradox

Bent Flyvbjerg “Top Ten Behavioral Biases in Project Management: An Overview” (2021)

Introduction

The causes of project failures are legion.  Failures can stem from bad luck, poor management, lack of technical skills, political interference, and many other sources. One cause of failure that is often discussed in the literature is the role of behavioural biases.  Building upon his prior research into project management, Bent Flyvbjerg’s most recent study identifies the top 10 behavioural biases in project management, reproduced in the table 1 above.[1]

Seasoned project managers would be aware of many of these biases, but what can we do to prevent them jeopardising our projects? One strategy is to dilute the influence of such biases through collaborating, encouraging input from multiple perspectives, and reducing the likelihood of groupthink. Continuing on our theme of collaboration, this blog explores how we can mitigate the effects of each of these biases.

Strategic Misrepresentation

Strategic misrepresentation (a charitable name for lying) arises where projects have champions or sponsors that are mainly motivated by monument building[2], creating a legacy, rent seeking, or to pork barrel the electorate.  Credible cost benefit analyses are subordinate to the goal of getting the project approved.  We see this phenomenon occur regularly in Public Private Partnerships where stakeholders are awarded ‘success fees’ for getting projects approved and traffic forecasters are motivated to be exceptionally cavalier in the their traffic estimates. The solution to such manipulation is to ensure business cases are independently verified, benefits realisation plans are developed, and business cases are continually evaluated throughout the project lifecycle.  This risk can also be reduced by ensuring all relevant stakeholders have skin in the game. The designers, traffic forecasters, engineers, operators, and maintenance organisations that derived the cost estimates and establish the benefits baseline need to be held accountable if their estimates are awry.  Likewise, sponsors need to be held accountable.

Optimism Bias and the Planning Fallacy

Unlike Murphy’s law, optimism bias and the planning fallacy are based on the assumption that Everything Goes According to Plan (the EGAP principle).[3]  This will result in overoptimistic estimates of cost, schedule, and project performance.  This bias can be mitigated by gaining input from relevant stakeholders who have the battle-scars from previous projects. Other strategies include early industry engagement to validate key assumptions; or evolutionary acquisition, agile approaches, and prototype/Fast Inexpensive Restrained Elegant (FIRE) methodologies to retire key risks early.[4] Overestimation can also be curtailed by ensuring there are tangible consequences for planners who adopt unrealistic expectations. This may mean liabilities arise for poor planning, performance fees are abated, or follow on work is not provided.

Uniqueness Bias

By definition, projects are unique, but this does not mean that each project will do things completely different to every other project.  as Flyvbjerg states, “uniqueness bias tends to impede managers’ learning, because they think they have little to learn from other projects as their own project is unique.”[5] Uniqueness bias can be dealt with by ensuring we capitalise on lessons learned registers, engage with subject matter experts who have performed similar tasks, and exploit open architectures or Commercial Off the Shelf Technology.  High risk or custom solutions should only be pursued where absolutely necessary.

Over Confidence Bias, Hindsight Bias, and Availability Bias

These three related biases arise from planners being unable to; account for uncertainty, effectively estimate risks, and latch on to readily available information (rather than information that is needed).  Similar to dealing with optimism biases, planning should be more diffuse with input from subject matter experts and selection of procurement models that are better able to deal with uncertainty. Big bang or waterfall development approaches will exacerbate these biases. Pursuit of joint risks and opportunities registers, and early risk identification is another useful approach to deal with these biases. The key is to ensure all relevant stakeholders are involved in the planning process.

Base Rate Fallacy

The base rate fallacy often stems from planners focussing on the low likelihood, high consequence risks. Flyvbjerg describes a subset of the base rate fallacy as variance neglect. That is, planners do not apply the full range of applicable data or base rates to their projects, rather these planners cherry pick a subset of the data. This leads to a false base rate and poor estimates. The solution is to adopt an outside view (avoid group think), and forecast based on a suitable reference class.  This involves selecting a class of similar projects and exploring the distributions of costs, schedules, and benefits delivered by these projects.  The base rate fallacy can be exacerbated by uniqueness bias.  It would be alluring to claim that my project will only employ the ‘A-Team’ and therefore our likely outcome will be the P25 (25th percentile) outcome of a given reference class.  No doubt, all the preceding project managers who delivered the outcomes that went into that given reference class made similar bold assumptions. An example of reference classes for projects is available at page 3-4 at the British Department for Transport, Procedures for Dealing with Optimism Bias in Transport Planning Guidance Document.

Anchoring

Anchoring arises where we intuitively base our decisions on only the readily available information. This may arise based on competencies and experiences. For example, a Project Manager with an engineering background may anchor their plans and estimates based on the technical risks and their experiences on only the projects they have worked on.  Anchoring therefore requires planners to adopt a multi-disciplinary approach. Project managers need to cast their nets wide when looking for suitable reference classes and ensure a holistic view is adopted in decision making with suitable subject matter expert input.

Escalation of Commitment

Escalation of Commitment is akin to throwing good money after bad.  Once a project is afoot and significant resources have been expended, there is a great temptation to keep on going even is the costs blow out, the schedule extends, and the expected benefits will not materialise.  There must be an appetite to allow sunk costs if the planned benefits will not materialise.  This requires continuous review of the business case, benefits tracking, and the moral courage to say ‘stop’ when things are not going to plan. Escalation of commitment can be curtailed by building in robust gate review milestones into a project and ensure theses gate reviews are not too infrequent.  The procurement model also needs to be crafted to effectively deal with change and ensure termination for convenience clauses are fair and change management processes are effective.  Nonetheless, there may be significant motivations that can thwart decision makers from a political perspective. In the public sector, cancelling a project can be seen as an admission of failure.  Where a public sector project manager is contemplating cancelling of a project then it would be unwise to initiate such action immediately before an election.  

A summary of the mitigation techniques to deal with project management biases is included in Table 2 below.

Table 2- Strategies for Dealing with Project Management Biases

Conclusion

Several strategies have been discussed to help us deal with project management biases. These are not exhaustive.  We need to avoid groupthink and recognise that decision makers are not omnipotent. Effective decision makers must engage with the right people and encourage innovation.  Simply pursuing diffusion of decision making or initiating an internal task-group is not enough. As identified by Mueller et al, internal groups are ‘highly prone to groupthink – quick agreement around status quo solutions with little discussion or deliberation.’[6] Sunstein and Hastie go further to state that, ‘groups do not merely fail to correct the errors of their members; they amplify them’.[7] Decisions must therefore incorporate input from the right stakeholders including suppliers. This includes all project management disciplines, subject matter experts, and the people and organisations that will ultimately be accountable for delivering project outputs, outcomes and capabilities. In addition we need a procurement model that does not ‘paint us in a box’.  Flexibility and a means to effectively deal with emergence is essential. 


[1] Bent Flyvbjerg, “Top Ten Behavioral Biases in Project Management: An Overview” Project Management Journal Vol 52, Issue 6, 2021

[2] Flyvbjerg, Bruzelius, and RothenGatter “Megaprojects and Risk: An Anatomy of Ambition” (2003).

[3] Bent Flyvbjerg, “Top Ten Behavioral Biases in Project Management: An Overview” Project Management Journal Vol 52, Issue 6, 2021

[4] See esp. United States Government “Innovative Contracting Case Studies” (2014) https://obamawhitehouse.archives.gov/sites/default/files/microsites/ostp/innovative_contracting_case_studies_2014_-_august.pdf

[5] Bent Flyvbjerg, “Top Ten Behavioral Biases in Project Management: An Overview” Project Management Journal Vol 52, Issue 6, 2021

[6] Jennifer Mueller, Sarah Harvey, and Alec Levenson ‘How to Steer Clear of Groupthink’ Harvard business Review March 2022.

[7] Cass R. Sunstein and Reid Hastie ‘Making Dumb Groups Smarter’ Harvard Business Review December 2014.

Collaboration – Bringing Teams Together

“Soloist are inspiring in Opera and perhaps even in small entrepreneurial ventures, but there is no place for them in large corporations.”  – Norm Augustine

Teamwork Word Map (Creative Commons https://www.epictop10.com/)

Introduction

In Brooks’ book, ‘The Mythical Man-Month[1] he makes many wise observations about teams working on large, complex systems. Once of the key observations he makes is the paradox that assigning more people to a task to speed things will typically result in slowing things down. This phenomenon arises from two factors. First, there is a steep learning curve for new workers. Those new workers could take many months to become productive and they invariable end up distracting the core team. Second, communication becomes far more challenging with a greater number of workers.  Communication nodes expand by the following formula:

n(n-1)/2  (where ‘n’ is the number of people in a team):

Consequently, a team of six has 15 times more communication nodes than a team of two.  A reaction to this challenge is to pursue ‘small, self-organising, high performing teams’, better use of cooperative software systems, and use agile methods to effectively compartmentalise tasks. Despite these initiatives, large complex projects will invariably require large complex multi-disciplinary teams that often have disparate cultures, are geographically dispersed, and sometimes have widely varying goals and objectives.  Whilst agile methods and systems help alleviate some of these challenges, collaboration is key to value delivery.

The Challenge

All managers wish to have the ‘A-team’ under their control. The evidence shows that 80 percent of the work is often done by the 20 percent of top-performers.  Likewise, it is often the bottom 20 percent of workers that create 80 percent of the problems (especially from a human resource perspective). A highly skilled team though could be a Faustian Bargain, as illustrated by Gratton and Erickson:

Although teams that are large, virtual, diverse, and composed of highly educated specialists are increasingly crucial with challenging projects, those same four characteristics make it hard for teams to get anything done. To put it another way, the qualities required for success are the same qualities that undermine success. Members of complex teams are less likely—absent other influences—to share knowledge freely, to learn from one another, to shift workloads flexibly to break up unexpected bottlenecks, to help one another complete jobs and meet deadlines, and to share resources—in other words, to collaborate.[2] 

The authors explore how teams are far more likely to disintegrate into conflict where there is a greater proportion of experts.[3]  This needs to be carefully managed. Experts are often essential, but they should not be allowed to destroy value in an organisation.

Tips for Driving Collaboration in Teams

In our previous blog on intra-organisation collaboration https://collaborativecontracting.com.au/2021/02/06/intra-organisational-collaboration/ we explored the themes for creating an internal collaborative culture through:

  1. championing collaborative leaders,
  2. creating and reinforcing a shared vision, and
  3. connecting with the front lines and breaking down organisational barriers

As we have stated many times in out blogs, leadership commitment is essential; “at the most basic level, a team’s success or failure at collaborating reflects the philosophy of top executives in the organization.”[4] Developing these themes further, Gino recommends managers:

  1. Focus on relationships,
  2. Create connections, and
  3. Teach People to Listen, Not Talk.[5]

As stated by Peter Drukker “culture eats strategy for breakfast”.  Creating a collaborative culture is essential to realise our vision.  As leaders, we need to make sure the culture is complementary to our strategy. This involves the recruiting function, remuneration and reward structures, and the general way of ‘doing business’ in an organisation. Employee engagement is essential here[6] from two perspectives. First, leaders need continual feedback on how the culture is tracking (which will often vary between business units and teams); and second, leaders get the opportunity to shape the culture within the organisation by being engaged.

Conclusions

Conflicts, disputes, and misaligned goals provide ample opportunity to erode value between organisations, and the same applied within organisations.  For the larger and more complex projects, we need to recognise that small, high performing, self-organising teams are mainly effective if their tasks can be compartmentalised. Large teams are often required for such complex projects and this means we need a collaborative culture and appropriate support systems to achieve common goals. High performing individuals are needed in such endeavours but beware of prima-donnas who cannot collaborate.  Where you find a high performing person or team that is effective in collaborating then make sure you promote and retain such skills and do whatever you can to ‘contaminate’ the rest of your organisation with such attributes.


[1] F. Brooks, “The Mythical Man-month – Essays on Software Engineering” (1974).

[2] Lynda Gratton and Tamara J. Erickson “Eight Ways to Build Collaborative Teams” Harvard Business Review (November 2007)

[3] Ibid.

[4] Ibid.

[5] Francesca Gino “Six new tools for training people to work together better” Harvard Business Review (December 2019)

[6] Rob Cross, Mike Benson, Jack Kostal, and RJ Milnor “Collaboration Overload Is Sinking Productivity” Harvard Business Review, (September 2021).

Creating a Collaborative Environment – Focussing on Value Creation

“Aquila non capit muscas – The eagle does not hunt for flies” Queen Christina of Sweden (1626 –1689)

M.M.Hassan “Eagle, rabbit, hunt, wildlife” Creative Commons

Introduction

The Pareto Principle (or 80/20 rule) “asserts that a minority of causes, inputs or effort usually lead to a majority of the results, outputs or rewards.”[1]  In the commercial space, this means we should focus our efforts on the top twenty percent of items that drive value to our organisation.  Therefore, contract negotiations, meeting agenda, commercial terms, and all other contract matters should focus on these top issues, but is this case in practice?

Successful collaboration requires all parties to focus on common goals, seek win-win outcomes, and champion continuous improvement.  Sadly, many collaborative relationships falter because they get bogged down in trivial issues that ultimately have little or no impact on the joint objectives.  The adage “don’t sweat the small stuff”[2] should be at the forefront of everyone’s thinking so we are not distracted by issues or risks that are inconsequential.   In this month’s blog, we explore strategies that allow us to focus on value creation and not get side-tracked by meaningless issues.

Focus on the Purpose

In our previous blogs, we emphasised the need for a clear and shared vision of success.  Our vision should be our North Star that steers us to success.  With a common purpose, we should be far less distracted by trivial issues and matters.  This is precisely the point Malnight, Buche and Dhanaraj make in their paper; Put Purpose at the Core of Your Strategy, where the authors identify that high performing companies “let purpose be their guide”.[3] All decisions and interactions must keep this principle in mind so that we focus on value creation and do not waste time on administrivia.  Where issues do arise then parties should simply ask the question ‘so what’?  If an issue has no tangible impact on the delivery of the purpose or vision, then we should not be expending resources on this issue. 

Adopt a Collaborative Attitude

Quite often disputes and issues arise because of a lack of trust, a lack of understanding of counterparties’ views, and cultural momentum whereby we are locked into out traditional black letter law way of doing business.  For successful collaborative ventures we need to be open-minded and recognise that all parties want mutual success.

This is the theme of Gino’s paper, Cracking the Code of Sustained Collaboration, where she observes that:

In successful collaborations, each person assumes that everyone else involved, regardless of background or title, is smart, caring, and fully invested. That mindset makes participants want to understand why others have differing views, which allows them to have constructive conversations.[4]

With such an attitude, we are far less likely to be suspicious and cynical of each other’s motives.  This means that trivial issues will not become the focus of discussions and we can devote our energies to more productive endeavours.  Of course, this approach will only work if we have the right team who are committed to collaboration. This means we must be very careful in our selection process from both the buy side and sell side.

Craft an Effective Commercial Framework

Many commercial frameworks introduce unnecessary checks and balances that add no value.  Countless boilerplate contracts demand detailed reports, plans, and weekly meetings that are often unnecessary.  These should be avoided for the following reasons:

  1. The cost of reporting can be high. It is the customer that ultimately pays this cost;
  2. Reporting diverts critical resources away from the core objective of delivering outcomes; and
  3. Where errors occur in reports, reports are delivered late, or they omit contractually agreed content then corrective action must occur.  Contract managers must intervene, otherwise they may waive rights under the contract.  This is a catalyst for disputes and adversarial relationships.

We should therefore craft a commercial model that minimises the reporting effort, encourages shared systems (with a single source of truth), and embrace a disputes and issues resolution process that encourages resolution at the lowest level possible.  Similarly, we need a remuneration model that does not allow cash flow to be jeopardised to suppliers for inconsequential acts or omissions.

This does not mean we abandon all reporting under our contracts. Accurate and timely reporting is essential for many items, especially where we use Performance Based Contracts with Key Performance Indices linked to profit.  Rather we need be very careful we do not ask for information that will never be used.  An effective strategy here is to specify a minimum level or reporting (preferably with real time access using shared systems) and then identify desirable information.

In addition to ensuring only the essential information is required in our contracts, we also need to make sure our contracts are:

  1. Simple and unambiguous so we do not waste resources with interpretation issues;
  2. Under tight configuration management so there is no confusion on what the contact baseline is;
  3. Outcomes based, and do not specify how the work needs to be done; and
  4. Flexible so that change can be implemented quickly and fairly.[5]

Conclusions

Consistent with the Pareto Principle, we need to focus our efforts on the value drivers.  Associated with this, we need to filter out the noise in our contract relationships by ensuring; all parties share a common vision of success, we approach the relationship with the right attitude, and we have a commercial framework that eliminates noise or mitigates distractions. 


[1] R. Koch, The 80/20 Principle: The Secret of Achieving More with Less (1997) p 4.

[2]Richard Carlson, ‘Don’t Sweat The Small Stuff – and it’s all small stuff’ (1997).

[3] Thomas W. Malnight, Ivy Buche, and Charles Dhanaraj “Put Purpose at the Core of Your Strategy” Harvard Business Review (September – October 2019).

[4] Francesca Gino “Cracking the Code of Sustained Collaboration: Six new tools for training people to work together better” Harvard Business Review (November–December 2019)

[5] World Commerce and Commercial “Ten Pitfalls to Avoid in Contracting” (2015).

Delivering Enterprise Outcomes Through Collaboration

The world is full of gizmos and gadgets that people don’t want, don’t need, and certainly don’t want to pay for.”  – Kimberly Wiefling ‘Scrappy Project Management’ (2007).

Benefits Realisation Map – New HR System[1]

‘Benefits maps provide a visual description that illustrates the links between outputs and objectives. Benefit maps allow us to create a shared vision of success, craft effective Enterprise Performance Measures, and ensure Performance Management Frameworks are fit for purpose’

Introduction

Successful projects or programmes focus on benefits realisation and the delivery of enterprise objectives.  Traditional contract approaches attempt to ‘compartmentalise’ contract scope and allocate liabilities to suppliers in an arms-length manner. In such circumstances, suppliers can deliver 100 percent on time, on cost and to A1 specification[2] yet the customer may fail to realise any expected benefits despite the supplier’s success.  In Andrew Jacopino’s blog on performance based contracting, he highlights the problem with the watermelon effect. This arises where all suppliers can report their performance as fully compliant or ‘green’, yet the customer is not being provided with any tangible value and hence, the customer score is in the ‘red’. A reaction to this problem was the introduction of third generation performance-based contracts. These contracts incorporate Enterprise Performance Measures (EPMs) to drive all parties to a ‘shared destiny’.[3] Implementing EPMs to achieve a shared destiny though is a significant challenge.  In this blog, I explore how we can use the Managing Successful Programmes benefits realisation mapping process to effectively integrate third generation, performance based contract frameworks. This will ensure all parties work collaboratively towards delivering enterprise outcomes.

Benefits, Objectives, and Outcomes

A benefit is defined as a “measurable improvement resulting from an outcome perceived as an advantage by one or more stakeholders, which contributes towards one or more organisational objective(s)”.[4]  Benefits contribute to corporate objectives as illustrated in Figure 1 below:

Figure 1: Mapping of Outputs, Capabilities, Outcomes, Benefits and Objectives[5]

As we have mentioned in previous blogs, it is rare that suppliers would be solely responsible for delivering the actual benefits or corporate objectives to a customer.  In most Performance Based Contracts, it is the outcomes that are often within the remit of suppliers.  The Australian Department of Defence Productivity and Performance Based Contracting Guide for ASDEFCON (Support) makes this point clear

“KPIs are Performance Measures that measure the contribution of the Contract in achieving  outcomes”[6]

KPIs by themselves may not deliver any benefits or objectives.  For example, we could have KPI’s that are linked to fleet availability, or repairable item turnaround time.  Achieving all these outcomes with 100 percent compliance may not result in any capabilities being available if the customer does not have people trained in the system, essential infrastructure, or other enabling systems necessary to realise benefits. In this situation, corporate objectives will not be achieved.  We must therefore ensure that there is a clear picture of what outcomes need to be delivered collectively to ensure benefits and objectives are achieved. An effective tool to achieve this is through benefits mapping.

Benefits Mapping

Benefits mapping illustrates the relationships between outputs, capabilities, outcomes, benefits and objectives.[7] Benefit maps allow us to clearly identify project or program interdependencies and identify the relevant importance of each output. When we craft a benefits map, we start at the right (objectives) and work towards the left (outputs). This ensures that all activities are focussed on delivering the organisations’ objectives.  In Peppard’s paper ‘A Tool to Map Your Next Digital Initiative’, he provides a useful illustration of a benefits dependency map, reproduced below:

J. Peppard ‘A Tool to Map Your Next Digital Initiative’ Harvard Business Review (June 2016).

Benefits maps such as the above, provide us with substantial value, including:

  1. Visibility of all activities needed to achieve corporate objectives;
  2. Assurance that all projects/outputs deliver ‘fit for purpose’ outcomes,
  3. Identification of the relative importance of each output in the program (for example, where a single output can contribute to more than one benefit);
  4. A clear picture of interdependencies of outcomes;
  5. A means to clearly identify ‘Enterprise Performance Measures’; and
  6. A process for providing defensible business cases, whereby every project can be shown to contribute to corporate objectives.

Crafting a benefits map, such as the above, requires a holistic view of all the outcomes required to deliver objectives.  There is a temptation to simply focus on technological outputs or ‘mission systems’ but this ignores the many other critical outputs, capability, and outcomes necessary to delivery objectives.  The Australian Department of Defence uses the term, Fundamental Inputs to Capability (FIC) to refer to all the additional outputs necessary to deliver capabilities. These include[8]

  1. Organisation,
  2. Command and Management,
  3. Personnel,
  4. Collective Training,
  5. Major Systems,
  6. Facilities and Training Areas,
  7. Supplies,
  8. Support, and
  9. Industry.

In summary, a benefits map needs to clearly identify all interdependent outputs and capabilities needed to deliver benefits and objectives.

Industry Engagement

The benefits map should be crafted as early as possible and well before we engage with industry. Nonetheless, as the benefits map matures (and we move from solution independent to solution dependent needs), the benefit map needs input from key stakeholders.[9] Industry engagement is therefore of critical importance in ensuring our benefits map is optimised for the following reasons:

  1. Validation of outputs. Industry is far more likely to have a grasp on what outputs can be delivered in their core business areas. This includes realistic estimates on performance outcomes, cost, and schedule.
  2. Efficiency. Several outputs can be bundled together and allocated to a single contractor in the interests of efficiency. Industry input is required to explore these opportunities.
  3. Crafting a Shared Vision. With co-development of the benefits map, buyers and suppliers are far more likely to buy into a shared vision of success.
  4. Developing Effective Key Performance Indices. Where we have full visibility of all outputs, capabilities, and outcomes required to deliver benefits and objectives, then our performance management framework will be far more robust.
  5. Enterprise Performance Measures.  Where customers and suppliers have an agreed and transparent benefits map, then all parties can progress to developing effective enterprise performance measures and work towards delivering the enterprise outcomes.

Industry engagement in this process will of course introduce some challenges with ‘contamination’ of solution independent needs with proprietary solutions and associated probity risks.  Likewise, with multiple industry participants, challenges may arise with how bundling outputs will be managed as there is an inherent motivation for suppliers to grab as much work as possible.  Nonetheless, where we engage with suppliers who have an affinity to collaboration, such issues should be manageable.

Conclusions

Benefit maps are powerful tools that clearly show what output and capabilities are required to deliver enterprise outcomes.  Benefit mapping will be more effective if we engage a wide variety of key stakeholders, including industry.  The benefit map will ensure we have a clear understanding of what success looks like, will inform our enterprise performance measures, and ensure the broader performance management framework is fit for purpose.


[1] Axelos “Managing Successful Programmes” 4th Ed (2011) Fig 7-7.

[2] T. Lendrum “Building High Performance Business Relationships” (2011) p81.

[3] A. Jacopino ‘Mastering Performance Based Contracts: From Why to What to How’ (2018).

[4] Axelos “Managing Successful Programmes” 4th Ed (2011) p75

[5] Ibid, p83.

[6] Australian Department of Defence ‘Productivity and Performance Based Contracting Guide for ASDEFCON (Support)’ V4.0, p1

[7] Axelos opcit, p83.

[8] Australian Department of Defence “Capability Life Cycle Manual’ v2.1 (2020), p2.

[9] Axelos, opcit [7.4.1]

Early Supplier Engagement

“When you talk, you are only repeating what you already know. But if you listen, you may learn something new.”- 14th Dalai Llama.

Group Collection by Justin Blake (Creative Commons)

Introduction

In the procurement lifecycle many organisations engage with their suppliers to seek information on the supplier’s ability to deliver and at what cost.  This is normally achieved with the release of a request for tender or request for quote.  Such strategies may be suitable where the customer has a very clear idea of what is needed, what market conditions are like, and where procurement risks are modest. When we move to more complex and riskier procurement activities, early supplier engagement is vital. This month’s blog explores why we need to engage early with industry and how to do so.

Smart Buyer Perspectives

A ‘smart buyer’ recognises that they will not always have all the answers. Vann’s framework explores the following questions that should always be asked from a smart buyer:

  • Why buy,
  • What to buy,
  • When is it needed,
  • How much should we pay,
  • How to buy,
  • Who to buy from, and
  • What was bought?[1]

Even for the most mature organisations with substantial internal capability and capacity, these critical questions cannot be effectively answered without engaging with the market.  At what stage though should we engage with industry? The Canadian Government Smart Buyer Procurement framework lists early engagement as one of their four essential pillars or procurement and recognises that early engagement ‘should begin as early as the needs identification stage.’[2] A smart buyer recognises that early engagement can reap benefits but what are these benefits?

Benefits of Early Engagement

Early engagement offers immense opportunities to explore the art of possible, ensure expectations are realistic, motivate[3] and prepare suppliers, and ensure business cases are credible.  The following list (though not exhaustive) explores these themes:

  1. Reduce asymmetry of Information.  Customers are not omnipotent and do not have a complete understanding of what the market can or cannot provide.  Early engagement allows for industry to inform requirements, identify opportunities, and validate critical assumptions.
  2. Promote realistic expectations. Optimism bias is rife in complex projects.[4] Unless we engage early with our suppliers then our initial business cases will be devoid of realistic cost, schedule and performance estimates.
  3. Reduce Bid Preparation Effort.  Transactional approaches to procurement often involve the release of a request for tender (typically the week before Christmas) that invariable comes as a complete surprise to industry.  Early engagement allows industry to inform the customer, prepare and respond faster to the RFT, and with more credibility.
  4. Reduced negotiation effort. Where contract requirements and conditions are developed unilaterally, with no industry engagement, expect negotiations to be protracted and adversarial.  Ensuring industry can provide feedback on requirements and commercial terms will take a substantial amount of pain out of negotiations.

Pursuing early engagement with industry also sets the tone of the future relationship. In such circumstances, the customer is highlighting that they value industry input, are seeking reciprocity, and are focused on delivering value rather than seeking the lowest price.  This is far more likely to promote the collaborative behaviours we need for successful delivery.

Strategies for Early Engagement

The Canadian government offers some useful examples of early engagement, including:

  1. Requests For information (RFIs);
  2. industry days;
  3. informal discussions;
  4. online questionnaires;
  5. online collaboration tools;
  6. focus groups; and
  7. one-on-one supplier consultations.[5]

More resource intensive and interactive strategies include:

  1. Design Competitions,
  2. Exploring and trading off requirements through Cost as an Independent Variable (CAIV),
  3. Funding rapid prototypes, and
  4. Engaging in collaborative project definition studies

These latter approaches normally require engagement with industry through some form of contract prior to entry into a head contract once requirements, budgets and schedules have been set. There are no limitations on who can be engaged here and funding multiple suppliers in a competitive early development phase may be valid.  

We are not limited to just selecting one of the above strategies.  We can choose more than one to help us converge on a solution. We need to remind ourselves that the solution is not just based on requirements but also the, “terms and conditions, pricing structure, performance metrics, evaluation criteria, and contract administration matters”. [6]  For example, we may exploit design competitions, CAIV, and rapid prototypes to define requirements, then use one-on-one discussions, questionnaires and industry days to refine commercial terms. 

Challenges with Early Engagement

Early engagement can introduce probity risks, resource challenges, and competition risks.  Probity risks arise where we are dealing with multiple suppliers and there is a great risk of ‘bid contamination’.  Similarly, customers need to be wary of adopting proprietary solutions that can hinder future competition.  Resource challenges arise as funds need to be available very early in the procurement lifecycle. The UK Government makes this point clear, “with early engagement though comes the requirement for early investment.”[7] There must be a compelling argument for engaging resources early in a program.  Competition issues may arise where we need to focus our efforts on a small cadre of suppliers rather than every participant in the market.  Where we are investing in rapid prototypes, CAIV approaches, or project definition studies a decision must be made as to who will be invited to participate. This will likely involve selection on ‘non-price’ criteria which opens the selection process up to criticism. 

Conclusions

Early engagement will pay substantial dividends if managed correctly.  Suppliers are far more likely to have a thorough understanding of business practices, technologies, and market trends in their core business when compared to customers.  Early engagement allows for early adoption of innovative solutions and value creation.  Developing a suite of contracts, commercial models, specifications, and requirements in isolation to your strategic suppliers will only erode value.


[1] Vann ‘Institutional Dimensions of the Government’s “Smart Buyer” Problem: Pillars, Carriers, and Organizational Structure in Federal Acquisition Management’ (2011).

[2] Canadian Government, Public Services and Procurement Canada ‘Smart Procurement’  https://buyandsell.gc.ca/initiatives-and-programs/smart-procurement/about-smart-procurement#Engagement

[3] UK Defence Procurement Policy Research paper 03/78 (2003).

[4] Bent Flyvbjerg, Nils Bruzelius, and Werner Rothengatter “Megaprojects and Risk: An Anatomy of Ambition” (2003).

[5] Canadian Government Opcit.

[6] Cohee, et al ‘Early Supplier Integration in the US Defense Industry’ Journal of Defense Analytics and Logistics Vol. 3 No. 1, (2019).

[7] Gansler et al ‘UMD FINAL Report LMCO An Analysis of Through-Life Support – Capability Management at the UK’s Ministry of Defense’ June 2012.

My Strategic Supplier is Making Abnormal Profits – So What?

Your profits reflect the success of your customers.” – Ron Kaufman

Money Bag – Creative Commons licence v4.0

Introduction

In many transactional, fixed price contracts, customers are often oblivious to their supplier’s actual profit margins. However; with many collaborative contracts, we often use open book financial reporting. In these circumstances, we can see where the money goes and how much profit is being made.  Commercial managers may be alarmed when they see suppliers make abnormal profits, but we should never over-react to such revelations.   On the contrary, abnormal, or high profits may be a symptom of a high performing team that is driving innovation for the benefit of the customer.  This blog explores these themes where we focus on value rather than price.

Are Profits Really Abnormal?

Effective commercial managers on the buy side possess the commercial acumen to understand the supplier’s business. Effective relationships demand mutual understanding as described in the Automotive Industry by Liker and Choi

“Unlike most companies we know, Toyota and Honda take the trouble to learn all they can about their suppliers. They believe they can create the foundations for partnerships only if they know as much about their vendors as the vendors know about themselves.”[1]

Not all industries are equal and profit margins are highly variable.  The Australia Department of Defence in their Profit Principles recognise three elements of the contract profit rate, comprising:

  • Return for Contractual Risk. For example, firm fixed price contracts are far riskier to suppliers than cost reimbursement contracts.  A higher profit margin would therefore be expected in fixed price arrangements.
  • Return for Activity Risk. Complex, developmental activities carry far greater risk than simple, commercial off the shelf activities.  Suppliers will factor in additional profit for the risky developmental tasks.
  • Return for General Business Risk.  Profit is to be expected on shareholder returns, general and administrative activities, managing sub-contractors, and general resource management.[2]

Included in the contractual risk profit provisions will inevitably be a supplier’s factor for relationships.  With a proven track record of positive relationships with their customer, a supplier may abate their profit margins, knowing that their commercial partner will act reasonably and fairly if things go wrong.  Conversely, if a supplier is dealing with a difficult customer, then they may load up their profit margin (or add contingency) to cater for the drama of working with a troublesome counterparty (or even worse, refuse to do business with that customer).  The following examples illustrate this point:

“In my opinion, [Ford] seems to send its people to ‘hate school’ so that they learn how to hate suppliers. The company is extremely confrontational.”[3]   – Supplier Executive Manager

“Starve before doing business with the damned Navy. They don’t know what the hell they want and will drive you up a wall before they break either your heart or a more exposed part of your anatomy.” – Kelly Johnson, Vice President at Lockheed Martin[4]

Even if you consider yourself a ‘perfect customer’ and suspect supplier profits are high (taking into account contract risk, activity risk, and business risk), there may be no real cause for alarm. The next step is to ask yourself, why are profits are high?

Cause and Effect

All highly competent people continually search for ways to keep learning, growing, and improving. They do that by asking WHY” – Benjamin Franklin

Perceptions of price can be important as the price itself.[5]  A cynical manager who is exploring high supplier profits would immediately assume that the supplier is acting opportunistically and gouging the customer.  This is a very dangerous starting point to adopt (even if the premise could be true). A useful starting point is to explore why profits are high by asking the following questions:

  • Are the profits high in the long term or are they cyclical? Depending on the project or business lifecycle, profit margins can vary widely over the medium to long term.
  • Is the supplier reinvesting profits into their business?  Where a supplier is investing in the relationship, seeking innovative ways of doing business, and adding future value then this should be encouraged.
  • Are you, as the customer, gaining ‘abnormal value’ from the relationship? So long as the customer’s strategic needs are being met and value is being delivered then we should not be too fussed about supplier profits.

If, after the exploring the issues above, it is revealed that value is not being delivered and suppliers are not investing in the relationship then a recalibration of the relationship may be required.  This does not mean that price becomes the only consideration. Do not let the pendulum swing too far in the other direction.

Driving value

The collaborative commercial model should be designed so that all parties win, or all parties lose.  There are a myriad of remuneration and non-price mechanisms we can use to achieve this. In addition to the commercial model, we also need to foster a collaborative culture and operate as one team.  Kanara goes further to state that customers should “treat your vendors like employees.”[6] If we are truly engaged in a collaborative model then customers should “learn to love their supplier’s profits”[7].  The caveat of course is to ensure the relationship continues to deliver value to both parties.  In addition to the remuneration strategy, we can also look at other ways to enhance the profit pool for both buyers and suppliers such as:

  • Initiate a continuous improvement and innovation fund where some of the savings can be distributed to each parties’ profit pool and the remainder used to fund additional continuous improvement and efficiency initiatives (thus creating future savings).
  • Encourage suppliers to reinvest in their business by increasing their scope of work within the customer’s organisation and offer longer term contracts.

Conclusion

High supplier profits may not necessarily be a bad thing.  So long as customers are provided with value then it may be a very positive sign to see high supplier profits, especially where customers and suppliers work together collaboratively to jointly create value.  Ideally, we should craft a commercial model where parties seek to continuously innovate and pursue excellence.  Nevertheless, there is also an important message for suppliers in this discussion. Never turn up to a customer meeting or contract negotiations driving a Maserati.[8]


[1] Jeffrey Liker and Thomas Y. Choi “Building Deep Supplier Relationships” Harvard Business Review (December 2004).

[2] CASG Profit Principles v1.0 (2017) p2.

[3] Liker et al, opcit. 

[4] Rich & Janos “Skunk Works: A Personal Memoir of My Years of Lockheed” (2013).

[5] Sandeep Heda, Stephen Mewborn and Stephen Caine “How Customers Perceive a Price Is as Important as the Price Itself” Harvard Business Review (January 2017).

[6] Ken Kanara “Rethink Your Relationship with Your Vendors” Harvard Business Review (March 2020).

[7] Anon.

[8] Quote attributed to Andrew Pyke https://www.linkedin.com/in/andrewpyke/

Collaboration and Chaos

Chaos is found in greatest abundance wherever order is being sought.  It always defeats order, because it is better organised.” – Terry Pratchett

M. Grandjean, Social Network Analysis Visualisation (2014)

Introduction

Ashby’s law of requisite variety tells us that if we want to control a system, then we must control at least as many states as the system we wish to control. In other words, ‘variety can destroy variety’.[1]  In the contracting domain, Ashby’s law creates significant challenges. We often look to the contract as a tool for formalising and implementing control but how effective are such tools in complex environments?  For simple, short term procurement activities there may be little variety or states of the system for us to manage or influence. In such circumstances, simple transactional contracts may offer sufficient input variety to deal with modest change and emergence.  When we move to more complex, long term arrangements with multiple, influential stakeholders then the quantum of variety in the system can increase exponentially. In such cases, crafting a contract with a repertoire of responses to deal with all these possible states or variety becomes a Herculean task.  This is where we need to look towards collaboration and new ways of delivering outcomes.

The Illusion of Contractual Protection

We like to think of our contracts as ‘iron clad’ mechanisms to protect our commercial positions, limit (or eliminate) liability, and clinically transfer risks to other parties.  Such notions though are illusory for many reasons.  Flydlinger, Hart, and Vitasek observe that contracts often create economic ‘hold-up’ behaviours where parties are unwilling to optimise outcomes:

The fact that virtually all contracts contain gaps, omissions, and ambiguities—despite companies’ best efforts to anticipate every scenario—only exacerbates hold-up behaviour.[2]

Such gaps and omissions will only increase in complex environments where we must deal with long term horizons, and multiple parties.  The variety associated with complex programs makes the so called ‘iron clad’ contract a myth. This is precisely what Ashby was talking about in the following statement (emphasis added):

               When the variety or complexity of the environment exceeds the capacity of a system                (natural or artificial) the environment will dominate and ultimately destroy that system.[3]

Whilst we would not allow circumstances to completely ‘destroy our systems’, we often destroy commercial value through:

  1. Excessive and inefficient contract change proposals,
  2. Wasted time in negotiations,
  3. Increased disputes and issues management,
  4. Sub-optimal delivery mechanisms,
  5. Increased and unnecessary contract contingency fees, and
  6. Under and over-insurance.

We also need to recognise there are very long preparation times and high development costs for these complex contracts. Many of these complex contracts are unfit for purpose.  Attempting to deal with all possible end-states or variety is not the answer. What we can do though is attack the problem from two perspectives. Firstly, we can limit variety within the system and secondly, we can increase our repertoire of responses (input variety).

Limiting Variety in the System

There are many ways we can limit variety in the systems we are attempting to control. In the commercial space we can do this by changing jurisdictions, removing the influence of stakeholders, and limiting the scope (and risk) of what we are trying to achieve.  In our previous blog on agile procurement, we also explored how we can aim for incremental delivery rather than a ‘big bang approach’.  Keeping our options open and not getting locked into a specific solution also helps us keep variety in check.  This includes the promotion of open architectures[4] and avoiding proprietary systems. 

Collaborative approaches also constrains variety in our systems. Where buyers and suppliers work collaboratively towards common goals then diverging interests are far less likely to create challenges.  In other words, where the parties focus on the question “what is in it for we”[5] then the focus is on fixing the problem and not the blame.  This means there is far less ‘noise’ in the system that would normally create unnecessary distractions. By default, we are limiting variety in the system or limiting the influence of that variety.

Increasing Our Span of Control

Maslow’s observation that, “if all you have is a hammer, everything looks like a nail” [6] is an axiom that regularly applies to contract lawyers.  The lawyer’s toolbox of responses is typically to claim that a breach has occurred and enforce damages. Black letter lawyers may also claim that the other party has repudiated the contract, they may threaten or seek termination, or pursue other similar legal sanctions to control that other party.  These control levers are limited in their application, are often ineffective, and carry great risks should they be used.  Contrast this approach to collaborative contracts that bring buyers, suppliers, and critical stakeholders inside the tent. In such circumstances, we have a far great range of responses that include working together to deliver mutually beneficial outcomes.  No longer do we need to rely on the sticks of control[7]  as all parties are working cooperatively towards common goals. We now have a combined range of responses that is far greater than that of any one individual organisation.  Implementing such approaches though requires leaders to possess the necessary mental agility and flexibility to deal with variety in our complex systems, as observed by Goss et al:

Applying the law of requisite variety to leadership in the implementation of change implies that leadership sources must have a repertoire of responses that can successfully deal with the variety of situations they encounter during implementation.[8]

Conclusions

We often rely on contracts to control outcomes but in complex environments, ‘black letter law’ control systems are often ineffective and are often constrained by Ashby’s law of requisite variety. Furthermore, control kills invention, learning, and commitment.[9]  To deal with complexity, collaborative approaches can both constrain variety in our systems and offer us a far greater range of responses when compared to transactional, arms-length contracts.


[1] Ashby, W.R. An Introduction to Cybernetics (1956), p 206.

[2] David Frydlinger, Oliver Hart, and Kate Vitasek ‘A New Approach to Contracts How to build better long-term strategic partnerships’ Harvard Business Review (Sep–Oct 2019).

[3] Ashby, opcit.

[4] Santiago J ‘Applicability of the Law of Requisite variety in Major Military System Acquisition’ (2017) p 60,76 at https://apps.dtic.mil/dtic/tr/fulltext/u2/1046519.pdf

[5] David Frydlinger, Oliver Hart, and Kate Vitasek ‘A New Approach to Contracts How to build better long-term strategic partnerships’ Harvard Business Review (Sep–Oct 2019).

[6] A Maslow, Psychology of Science (1966).

[7] I Ayers, Carrots and Sticks (2010).

[8] Tracy Goss, Richard T. Pascale, and Anthony Athos ‘The Reinvention Roller Coaster: Risking the Present for a Powerful Future’ Harvard Business Review (1993).

[9] Ibid.

Ethics and Collaboration

Relativity applies to physics, not ethics” – Albert Einstein

Image Courtesy of Nick Youngson (creative commons)[1]

Introduction

When we embark on collaborative ventures, there are inherent features that drive us towards more ethical behaviours.  For example, when we collaborate, we are more likely to empathise with out counterparts, power may be diffused with joint decision-making, and our ways of thinking and doing business may be more diverse.  All of these features help us avoid ethical lapses, but we must be alert to some of the risks associated with collaboration.  In this blog we explore some of the temptations that can arise in collaborative ventures and offer strategies to ensure all parties work together ethically to achieve enterprise outcomes.

Winning at Any Cost?

In Ron Carucci’s paper, ‘Why Ethical People Make Unethical Choices’, he makes the following observation:

“organizations set themselves up for ethical catastrophes by creating environments in which people feel forced to make choices they could never have imagined.”[2]

The literature is clear that unrealistic goal setting will encourage people to make compromising choices and as Carucci observes, this pushes people to breach ethical standards in two ways.  First, they may compromise and cut corners to reach goals and secondly, they will under-report or lie about what progress has actually being achieved.[3] Similarly, if we create a reward system that is too enticing, we can encourage ‘justifed neglect[4] whereby the temptation to cheat is too great (especially if the risks of getting caught are low).

When we set up collaborative frameworks, we must be sensitive to setting realistic goals and ensure no one is set up to fail.  Similarly, where failures can occur, then we must ensure that the consequences of such failures are not catastrophic. If the cost of failure is too high for an individual, then there is a clear invitation to deceive and mislead. Setting realistic goals will solve one key part of the puzzle to help use drive ethical behaviours but what else can we do to drive an ethical, collaborative culture?

Ethics at the Forefront

If we fail to discuss or place a value on ethical behaviours, then we are less likely to see such ethical behaviours. That is, we must put ethics at the forefront of our ways of doing business. Simply relying on value statements, code of conducts, and the obligatory online, annual ethical training programs though is not enough.  Incentivising ethical behaviour is far more effective, as observed by Epley and Kumar:

“It is a boring truism that people do what they’re incentivized to do, meaning that aligning rewards with ethical outcomes is an obvious solution to many ethical problems.”[5]

The challenge of course, it to balance commercial incentives with ethical incentives. An organisation that is haemorrhaging money but is working at the pinnacle of ethical standards would not be a successful organisation. The converse is also true (for example; Enron, Volkswagon, and the News of the World to mention but a few), but we are not faced with a binary choice here. We can be both commercially successful and behave ethically. If we craft our commercial model right, drive the right culture, and ensure leadership is committed then all these elements will self- reinforce to drive us towards a high performing ethical team, delivering enterprise outcomes.

Language and Framing

The language we use and how we frame our agreements is also of paramount importance. If we focus people’s thinking towards enterprise outcomes and not just personal self-interest, then we are less likely to see unethical behaviours.  We therefore need to craft our approach to market, commercial agreements, and ways of doing business in terms of joint or collaborative approaches. Language such as “we will work together collaboratively”, or “the team will operate jointly to deliver the joint objectives” should be used. This is in stark contrast to traditional or adversarial contract language such as “the contractor shall…” or “the principal shall…”. Epley and Kumar illustrate the importance of language and framing in the following case study (emphasis added).

70% of participants playing an economic game with a partner cooperated for mutual gain when it was called the Community Game, but only 30% cooperated when it was called the Wall Street Game. This dramatic effect occurred even though the financial incentives were identical.[6]

Substance though is far more important than form, hence we must make sure that our actual commercial models and leadership approaches are aligned to our desired collaborative outcomes. This then leads us to a very important aspect of our blog, ‘leadership’. In our previous blog on leadership we observed that leaders set the tone at the top and are instrumental to reinforcing the organisations’ culture (good or bad).  No amount of goal alignment, balanced incentive structures, correctly framed collaborative relationships, and well crafted, equitable commercial models will drive ethical behaviours if our leaders are setting a bad example.

Conclusions

Collaboration can inherently reduce some of the risks associated with ethical lapses by incorporating joint decision making, transparency and a culture where everyone is incentivised to achieve mutual, enterprise goals.  Nonetheless, we need to be careful we do not set unrealistic targets. More importantly, we must ensure that individuals or teams never face catastrophic consequences where they fail to meet targets or goals. In such circumstances the temptation to cross ethical lines may be too great. Consistent with collaborative contract principles, we should always focus on ‘fixing the problem and not the blame’.


[1] https://www.thebluediamondgallery.com/wooden-tile/e/ethics.html

[2] Ron Carucci ‘Why Ethical People Make Unethical Choices’ Harvard Business Review (Dec 2016).

[3] ibid.

[4] Merete Wedell-Wedellsborg  ‘The Psychology Behind Unethical Behavior’ Harvard Business Review ( April 2019).

[5] Nicholas Epley and Amit Kumar ‘How to Design an Ethical Organization: A behavioral approach’  Harvard Business Review (May 2019).

[6] ibid.

Intra-Organisational Collaboration

ISO44001 – Collaborative Business Relationships Figure 1

Introduction

We have spent a lot of time in previous blogs discussing the value of collaboration between organisations to achieve superior outcomes, but we also need to recognise that intra-organisational collaboration can also deliver substantial benefits to organisations. ISO 44001 Collaborative Business Relationships illustrates this point noting that the standard exists to, “…improve business relationships in and between organizations of all sizes.”[1] More and more organisations are realising that stovepipe approaches to delivery erode value through unnecessary duplication, conflicting goals, and inefficient allocation of resources. By improving internal collaboration we are more likely to get; higher profitability, greater resilience to external shocks, and greater flexibility.[2] We are now seeing more organisations placing a greater focus on internal collaboration to reap organisational benefits.

A Duty to Collaborate and Cooperate?

In the contract law domain, we know that there is an implied duty to cooperate in commercial dealings[3], but what duties drive us to collaborate internally? Some public sector jurisdictions mandate collaboration and cooperation. For example:

  1. Under the United Kingdom Health Act, there is a duty to collaborate with other entities;[4]
  2. The United Kingdom police, fire and rescue and emergency ambulance services now have a duty to collaborate under the Policing and Crime Act;[5]  and
  3. In Australia, Commonwealth entities must encourage officials of the entity to cooperate with others to achieve common objectives, where practicable.[6]

Collaborative behaviours are also finding themselves being introduced into organisational values and behaviours. For example, the recently released Australian Defence Values emphasises the following behaviour:

Collaborate and be team-focused[7]

We also see this theme manifest itself in private sector ‘values’ that demand teamwork.[8] Coca cola, for example, specifically include collaboration as a core values as follows, “Collaboration: Leverage collective genius.”[9]

Putting collaboration at the forefront of an organisation’s mission, values, and behaviours will go a long way to help realise the full raft of collaborative benefits internally but this will only be successful if everyone in the organisation knows what collaboration means and what the common purpose is.

Turning Strategy into Tactics

Having Collaboration embedded in your mission and values will only go so far. Everyone in the organisation must understand what collaboration means to the way they work, think, and behave.  Word pictures such as the following will help embed a collaborative culture:

‘I will actively engage with others inside and outside Defence, and work to create a high- performing team environment that is always seeking to improve our enterprise.’[10]

‘To fully embrace collaboration, we must:

  1. embrace opinions and diversity of thought in order to avoid group-think or narrow perspectives
  2. proactively collaborate, and in a time-conscious manner, in order to ensure a meaningful result
  3. ensure that decisions or advice being progressed have been genuinely reviewed, and all comments have been captured and documented as appropriate to inform                          decision-makers, rather than as a ‘tick in the box’
  4. embed and embrace exemplary practices for communication, media management and advice to government at all times.’[11]

Collaborative principles may also be embedded in employee position descriptions such as the following which appear in the ‘work level standards’ for the Australian Public Service:

“Engage and collaborate with key stakeholders to identify opportunities, achieve outcomes and facilitate cooperation.”[12]

“Drive, manage and coordinate cross-agency collaboration initiatives, activities and relationships”[13]

Even with behavioural standards and values focussing on collaboration, an organisation must have a clear and unified strategy that is understood by everyone in the organisation.  Similarly, leaders must clearly demonstrate and reinforce collaborative behaviours.

Tips for Leaders

Gardner and Matviak offer the following tips to promote collaboration within an organisation:

Connect with the front lines. Make direct contact with people down the hierarchy so you have unfiltered information about people’s actions and states of mind.

Champion collaborative leaders. While recognizing individual effort, also acknowledge the team that helped make the person a hero by calling out the specific actions it took to provide support and the ways all of its members accomplished a goal together.

Reinforce the business’s purpose and goals frequently. A belief that their work fulfills a higher purpose motivates people to think and act in a more collective fashion.’[14]

In summary, leaders need to ‘sell the benefits’ of collaboration to achieve a common purpose and be seen as a role model in collaboration.

Conclusion

The benefits for collaboration are legion, not just between organisations but within organisations as well.  We are seeing more organisations recognise teamwork and collaboration as part of their values and behaviours.  As leaders, we need to ensure our ways of working, thinking, and leading are aligned to realise these collaborative values. 


[1] ISO 44001 p vii

[2] Heidi K. Gardner and Ivan Matviak “7 Strategies for Promoting Collaboration in a Crisis”, Harvard Business review July 2020.

[3] Mackay v Dick (1881) 6 App Cas 251, 263

[4] Health Act 1999 (UK) [26] [27].

[5] Policing and Crime Act 2017 (UK) [1]

[6] Public Governance Performance Act 2013 (Cth) [17].

[7] https://www1.defence.gov.au/about/values

[8] Rio Tinto values https://www.riotinto.com/en/sustainability/people#:~:text=Our%20five%20values%20%E2%80%93%20safety%2C%20teamwork,we%20work%20with%20our%20partners.

[9] Coca Cola values https://www.coca-cola.com.sg/our-company/mission-vision-values

[10] Defence Transformational Strategy (2020) p 29. https://www1.defence.gov.au/sites/default/files/2020-11/Defence-Transformation-Strategy.pdf

[11] ibid., p73.

[12] Work level standards for the Australian Public Service (March 2018) https://www.apsc.gov.au/work-level-standard-executive-level-1

[13] Work level standards for the Australian Public Service (March 2018) https://www.apsc.gov.au/work-level-standard-executive-level-2

[14] Gardner and Mitnik, opcit.